CEO Remuneration and Bank Default Risk: Evidence from the U.S. and Europe

Finance

Further details

We investigate the link between the incentive mechanisms embedded in CEO remuneration contracts and the riskiness of banks. For a sample of U.S. and European banks, we employ the Merton distance to default model to show that banks with larger CEO cash bonuses display lower default risk, while banks which grant CEOs stock options display higher default risk. Further, we show that pay incentives are related to higher bank risk particularly in weak regulatory environments and at financially distressed institutions. Our results link compensation in banking to financial stability and caution that attempts to regulate executive pay need to tailor CEO incentives to regulatory regimes and the riskiness of banks.

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> JEL Classification: G21; G33; J33

> Keywords: banks; default risk; executive compensation