An Empirical Examination of Economic Determinants of Financial CEO Compensation: A Comparative Study on Pre and Post Financial Crisis Periods

Inadequate risk monitoring and the executive incentive system of US financial institutions are considered to be significant factors in exacerbating the 2008 financial crisis, and regulators attempted to reform the executive compensation system in the post-crisis period. In this study, we conduct a comparative analysis of the economic determinants of the compensation for chief executive officers (CEOs) between the pre- and post-financial crisis periods, using data from US financial service institutions, since this is the sector that has been most affected by the financial crisis. We find that the mean values of total compensation and its incentive components, including cash bonus and long-term compensations, decreased significantly in the post-crisis period. While the proportion of fixed salary to total compensation increased, the bonus decreased significantly during the pre- to post-crisis period. In the pre-crisis period, total compensation was determined by stock performance, accounting profit, long-term growth and business leverage, whereas in the post-crisis period stock returns and leverage are the major economic factors influencing total compensation. We also find that leverage is positively associated with total compensation and that a firm’s leverage negatively influences the sensitivity of the pay for performance in both the preand post-crisis periods. But the influence of leverage on pay for performance is weaker in the postcrisis period compared to the pre-crisis period. The Dodd-Frank Act, enacted in 2011, empowered shareholder influence on CEO pay. This encourages CEOs to focus on short-term stock returns to satisfy the scrutiny of empowered shareholders. Disregarding other economic factors and narrowing the focus on stock returns for determining executive compensation in the post-crisis period might have unintended consequences, deterring firms to take wider forward-looking approaches for their long-term sustainability