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Theory and Stylised Facts of Bank CEO Pay Consequences

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Abstract

If bank CEOs are special, as each bank is, do the characteristics of banks influence the ways that CEOs make complex and non-routine strategic decisions? Do CEOs leave their mark or have a personal style when making investment, financing and other strategic decisions? Moreover, given the incentives for risk-taking implicit in CEO remuneration contracts, how do these incentives interact with unobservable CEO characteristics? In this Chapter, we review the major theoretical and empirical findings of the literature, highlighting how different CEO characteristics (personal and acquired) contribute to performance and risk-taking. We present empirical evidence of the sensitivity of CEO pay to bank performance and risk in pre-crisis years, and the role it played in causing the recent financial crisis. We discuss contrasting findings, highlighting the debated relationship between pre-crisis CEO incentives to take risks and crisis-period bank performance. We then discuss the main regulatory interventions undertaken in response to this issue, and their suitability in light of recent banking CEO compensation models. We conclude this chapter with a description of CEO incentives in relation to strategic decisions, such as mergers and acquisitions and restructuring programs, and how these may influence bank performance and risk.

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