Short-term compensation contracts and executive expenditure decisions: the case of commercial banks

This paper examines the associations between the adoption of a short-term compensation contract and changes in executive expenditure decisions for a sample of major commercial banks. In particular, the analysis concentrates primarily on changes in executive expenditures on discretionary items (expenditures preferred more by the manager than by shareholders). The results indicate that the adoption of a short-term compensation plan is associated with modest decreases in the ratio of discretionary expenditures to current operating revenue and the ratio of discretionary expenditures to managerial compensation for banks making the contractual change. These results are consistent with the conclusion that the mix of discretionary expenditures and effort selected by the manager changes with the adoption of a short-term compensation contract.