Compensation Vega, Deregulation, and Risk-Taking: Lessons from the US Banking Industry

Mohamed Belkhir, Abdelaziz Chazi

    Research output: Contribution to journalArticlepeer-review

    23 Citations (Scopus)

    Abstract

    This study examines three issues related to the sensitivity of bank CEO compensation to risk, or vega: (1) its relevance compared with CEO compensation vega in industrial firms; (2) its determinants; and (3) its effect on bank risk-taking. Using a sample of 156 US bank holding companies (BHCs) and a benchmark sample of 544 industrial firms over the period 1993-2006, we find that the vega of CEO compensation in banking is of a much smaller magnitude than the vega of CEO compensation in industrial firms, despite an effort by BHCs to increase it since the mid-1990s. We also find that larger BHCs with better investment opportunities and those that operate in a deregulated environment reward their CEOs with a compensation that has a higher sensitivity to risk. Finally, our analyses show that BHCs in which CEOs receive a higher compensation vega assume a higher risk.

    Original languageEnglish
    Pages (from-to)1218-1247
    Number of pages30
    JournalJournal of Business Finance and Accounting
    Volume37
    Issue number9-10
    DOIs
    Publication statusPublished - Nov 1 2010

    Keywords

    • Banking
    • Delta
    • Deregulation
    • Executive compensation
    • Risk-taking
    • Stock options
    • Vega

    ASJC Scopus subject areas

    • Accounting
    • Business, Management and Accounting (miscellaneous)
    • Finance

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