The Response of Commercial Banks to Compensation Reform

This study assesses changes in the executive compensation policy of 94 commercial banks following the SEC's expanded compensation disclosure rules and revisions in the Internal Revenue Code regarding deductibility of compensation expense. During the period from 1989–1997, commercial banks experience a significant decline in the number of insiders serving in executive compensation committees. Following compensation reform, banks seem to substitute non-cash for cash compensation, and exhibit a somewhat stronger pay-for-performance relationship. Further, board structures are statistically indistinguishable among banks that were acquired compared to surviving banks, and between banks and a sample of electric utilities. Taken together, our analysis suggests that compensation reform, rather than deregulation or corporate control, led commercial banks to change their governance structures and provides limited evidence that such changes enhanced the incentive effects of compensation contracts.