CEO Pay Gaps and Bank Risk-Taking

Shams Pathan, Mamiza Haq, Jacob Morgan

Research output: Contribution to journalArticlepeer-review

Abstract

Bank executives’ substantial compensation is seen as one of the factors that contributed to the risk-taking that led to the 2008–2009 financial crisis. We test whether and how pay disparities between CEO and non-CEO executives—the so-called CEO pay gap—influences risk-taking at publicly traded commercial banks in the U.S. We find strong evidence that larger CEO pay gaps are associated with lower risk levels, improved financial performance, and greater information transparency. Our findings are unique to banks and are consistent with the CEO power proposition. We corroborate this proposition by linking larger pay gaps to increased CEO power and low CEO turnover-performance sensitivity. Our results imply that placing absolute limits on bank CEO pay would likely result in increased bank risk-taking.
Original languageEnglish
Pages (from-to)935-964
Number of pages30
JournalEuropean Accounting Review
Volume32
Issue number4
Early online date20 Apr 2022
DOIs
Publication statusPublished - 1 Sep 2023
Externally publishedYes

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