Bank Efficiency and Executive Compensation

We investigate whether handsomely rewarding bank executives’ realizes superior efficiency by determining if executive remuneration contracts produce incentives that offset potential agency problems and lead to improvements in bank efficiency. We calculate executive Delta and Vega to proxy executives’ risk-taking following changes in their compensation contracts and estimate their relationship with alternative profit efficiency. Our study uses novel instruments to account for the potentially endogenous relationship between efficiency and Delta and Vega whilst controlling for the structure of executive compensation, board structure, and bank-level characteristics. Our main results demonstrate that shareholders use executive Vega to incentivise executives into taking risks that improve bank efficiency, and also that executive perquisites can be used to attract and retain executives which ex post deliver efficiency gains.