The relationship between CEO pay and company success continues to exercise politicians and shareholders alike. In finance, we know something about how bank performance influences CEO compensation. But what is missing is insight on the effect of changes in CEO pay on bank performance.
Roman Matousek and Nickolaos G Tzeremes take a sample of US banks and apply an innovative methodological framework to investigate the effect of CEO salary and bonuses on bank efficiency. Contrary to previous studies, they discover a non-linear relationship. For example, there seems to be a threshold level for salaries below which there is negative effect on efficiency, and above which bank efficiency improves. Higher bonuses, particularly when they are related to riskier investments, actually have the unintended consequence of reducing bank performance.
Matousek, R. and Tzeremes, N. G. 2016. CEO compensation and bank efficiency: An application of conditional nonparametric frontiers. European Journal of Operational Research, 251(1), 264-273. http://dx.doi.org/10.1016/j.ejor.2015.10.035.