Cash Salary, Inside Equity, or Inside Debt?—The Determinants and Optimal Value of Compensation Structure in a Long-term Incentive Model of Banks

Tianyi Ma, Minghui Jiang and Xuchuan Yuan
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Tianyi Ma: School of Management, Harbin Institute of Technology, Harbin City 150000, China
Minghui Jiang: School of Management, Harbin Institute of Technology, Harbin City 150000, China
Xuchuan Yuan: School of Business, Singapore University of Social Sciences, Singapore 599494, Singapore

Sustainability, 2020, vol. 12, issue 2, 1-24

Abstract: The design and optimization of executive compensation structure to reduce the risk-taking of banks is one of the core topics of corporate governance theory. Especially after the 2008 global financial crisis, due to the characteristics of banks, such as systemic risk, this issue has become more important. However, though widely concerned, the determinants and design principles of compensation are not thoroughly understood. Based on our previous work, the setup of a banker’s long-term total compensation model, we continue our research by setting up a theoretical model between total compensation, bank default risk, and the structure coefficient by simulating the result using data from Wells Fargo and Co. to draw the function image. We are the first to find out the determinants of structure, that is, the working time, current age, and tenure. What is more important is that we find that increasing the weight inside debt in the total compensation is not only helpful for the reduction of the bank’s default risk, but also an increase of the banker’s total compensation. We also illustrate the influence of a number of periods. We expect our findings to offer help regarding the formulation of policies for pay contracts.

Keywords: structure coefficient; long-term incentive model; bank default risk; determinants; total compensation; cash salary; inside debt; inside equity (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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