CEO COMPENSATION AND BANK RISK - IS COMPENSATION IN BANKING STRUCTURED TO PROMOTE RISK-TAKING

This paper examines whether executive compensation in banking is struc tured to promote risk taking. We find that, on average, bank CEOs rece ive less cash compensation, are less likely to participate in a stock option plan, hold fewer stock options, and receive a smaller percentag e of their total compensation in the form of options and stock than do CEOs in other industries. Cross-sectional differences in the structur e of compensation contracts within banking are also examined. We find a positive and significant relation between the importance of equity-b ased incentives and the value of the bank's charter. This result is in consistent with the hypothesis that compensation policies promote risk taking in banking.