Does “Long-Term Compensation” Make CEOs Think Long-Term? A Study of CEO Compensation in the Commercial Banking Industry

The issue of CEO compensation has become a controversial staple of media dialogue and academic pondering, especially after a crisis such as the 2007 mortgage market meltdown. CEOs, through stock options, stock grants, and cash bonuses, are supposedly paid to maximize long-term shareholder value. This desired result, however, often fails to come to fruition. In this study, from a sample of twenty-seven US commercial banks, I look for a correlation between the share of a CEO’s compensation that is designated “long-term” and two metrics of effective long-term strategy. I find no statistically significant evidence to suggest that the long-term portion of a CEO’s pay is correlated with the percentage change in either a bank’s net income or its allowance for loan losses, taken as a percentage of total loans. Nevertheless, I do find some evidence that long-term compensation plans that incorporate preset performance goals may improve the chances of long-term stability.