Unified analysis of executive pay: the case of the financial sector

Talmor, E and Wallace, J S (2001) Unified analysis of executive pay: the case of the financial sector. Working Paper. London Business School Accounting Working Paper.

Abstract

This study examines executive compensation determits in the US ficial services sector. Multiple theories of executive pay are discussed and tested using a relatively homogenous sample. We perform an indepth look at the corporate goverce and ownership structure of the companies selected. The analysis is conducted for the ficial sector as a whole and for each of three subgroups: commercial banks, brokerage and other nondepository institutions, and insurance companies. Variables that proxy for managerial strategic discretion and task complexity are found to best explain CEO compensation. Corporate goverce, including board characteristics and external ownership, is the second leading determit of pay variation, while firm performance and CEO specific characteristics seem to play the least role. We explore the simultaneous relationship between compensation, firm performance, and board strength and find evidence that the board of directors provides a monitoring function and that a strong board appears to be a substitute with incentive compensation for aligning incentives. These findings, when viewed with subsequent firm performance, support an efficient contracting argument.