Academic journal article Global Business and Management Research: An International Journal

The Influence of the Board of Directors on the Executive Compensation in the Banking Industry

Academic journal article Global Business and Management Research: An International Journal

The Influence of the Board of Directors on the Executive Compensation in the Banking Industry

Article excerpt

1 Introduction

It is important to understand corporate governance and the degree of alignment of the manager's interests with those of the stakeholders. In recent years, researchers have attached particular importance to the framework of corporate governance as well as to the executive's compensation (John and Senbet, 1998; Shleifer and Vishny, 1997). The governance of the banking industry and financial institutions has not been a subject of debate, although literature is increasingly focusing on the aspects of the corporate governance industry in the United States and elsewhere.

The mechanism of corporate governance coincides with the alignment of the executives' interests with those of the shareholders, (Murphy, 1999; Shleifer and Vishny, 1997). Banks differ from industrial companies on several points. Indeed, they are institutions regulated to a greater degree than industrial companies. More precisely, in the case of the Bank, several studies described its specificity (Macey and O'Hara, 2003; Adams and Mehran, 2003; Levine, 2003; Caprio and Levine 2002) claim than some of its features, such as regulation, supervision, capital structure, risk, trust relationships, property, deposit insurance, make the banking business specific and its corporate governance problem unique compared to other industries.

As a result, the boards of Directors in banks are larger and more independent. They meet more often and tend to have more committees than their counterparts in the industrial sector (Adams and Mehran, 2003). In addition, and contrary to the key results for other industries, this large-sized Board of Directors is likely to have a positive effect on the remuneration of the CEO (Holthausen and larder, 2005). However, despite being more independent and busier, the Board of Directors seems to have a lower disciplinary role and its independence has a positive effect on the remuneration of the CEO (Lambert et al., 1993; Cordeiro and Veliyath, 2003; Ozkan, 2007; Mishra and Nielsen, 2000). However, the accumulation of the executive functions (Chief Executive Officer : CEO) and control (Chairman) proves that the Director has more authority to review the decisions of the Council by raising the remuneration of the CEO (Cyert et al, 2002; David et al., 1998; Core et al., 1999; St Onge et al., 2001). However, the activity of the Board seems to have an unexpected impact on the remuneration of the CEO (Vafea, 1999).

The Executive compensation research started as soon as the 1990s. Pioneers have focused on the study of the sensitivity of the CEO's remuneration to the performance of the firm (Coughlan and Schmidt, 1985; Murphy, 1985, 1986; Jensen and Murphy, 1990). The objective of this paper is to identify the effect of the attributes of the Board on the compensation of the CEO in the European banking sector and verify the pay-performance relationship. To achieve this, a study was conducted on a sample of thirty banks in four European countries.

This research suggests studying the contribution of the Board of Directors' attributes and Bank performance in the remuneration of the Bank's CEO. It focuses, in particular, on the European context and therefore complements the other studies that dealt with the study of other countries, of which we can cite that of Doucouliagos et al (2007) for the Australian context, Chen et al. (2006) for the USA and Broye and Moulin (2010) for the French one. In fact, we study the impact of size, independence and activity of the Board and leadership structure on the remuneration of the banks' CEO on a sample of European banks in the euro zone.

To achieve these objectives, we have used a newly built database containing financial information and variables from the Board of Directors and from the cash remuneration of the CEO on 30 banks in four European countries (France, Germany, Belgium, Finland) covering the period from 2004 to 2009. The data are extracted from annual reports downloaded through the AMF site and through the banks' private sites. …

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