The Impact of Bank Merger Growth on CEO Compensation

We examine the impact of bank mergers on chief executive officer (CEO) compensation during 1992–2014, a period characterised by significant banking consolidation. We show that CEO compensation is positively related to both merger growth and non-merger internal growth, with the former relation being higher in magnitude. While CEO pay–risk sensitivity is not significantly related to merger growth, CEO pay–performance sensitivity is negatively and significantly related to merger growth. Collectively, our results suggest that, through bank mergers, CEOs can earn higher compensation and decouple personal wealth from bank performance. Furthermore, we document a more severe agency problem in CEO compensation as a consequence of bank mergers relative to mergers in industrial firms. Finally, we find that the post-financial crisis regulatory reform of executive compensation in banks has limited effectiveness in curbing the merger–pay links.

Keywords: CEO compensation, incentives, bank mergers, financial crisis

JEL Classification: G12; G15; G32

Suggested Citation: Suggested Citation

Chen, Zhian and Hung, Wing-Yee and Li, Donghui and Xing, Lu, The Impact of Bank Merger Growth on CEO Compensation (May 24, 2017). Journal of Business Finance & Accounting, 2017, DOI: org/10.1111/jbfa.12263, Available at SSRN: https://ssrn.com/abstract=2871254 or http://dx.doi.org/10.2139/ssrn.2871254