Governance, CEOs' Compensation, and Risk Management

This study tests the causal relations of bank governance structure, CEO compensation, and bank risk-taking investments. The empirical results show that CEO incentive compensation is higher when the CEO is also the board chair; the CEO's ownership stake is bigger; and the number of outside blockholders is larger. The managerial incentive compensation is a decreasing function of CEO tenure and the percentage held by outside blockholders. Furthermore, the results show that CEO incentive compensation is positively related with bank risk, security underwriting, mortgage investment, and total loan write-offs. These findings suggest that the weightings of the board and ownership variables in the compensation equation are related to the effectiveness of banks' investment strategies and performance.