Boston University School of Law


Bank CEOs, Inside Debt Compensation, and the Global Financial Crisis

Frederick Tung
Boston University School of Law

Xue Wang
(Goizueta Business School, Emory University)

Bank executives’ compensation has been widely identified as a culprit in the Global Financial Crisis, and reform of banker pay is high on the public policy agenda. While Congress targeted its reforms primarily at bankers’ equity-based pay incentives, empirical research fails to show any correlation between bank CEO equity incentives and bank performance in the Financial Crisis. We offer an alternative analysis, hypothesizing that bank CEOs’ inside debt incentives correlate with reduced bank risk taking and improved bank performance in the Crisis. A nascent literature shows that inside debt may dampen CEOs’ risk taking incentives. Unlike the industrial firms that have been the main focus of this literature, however, banks are subject to pervasive regulatory oversight to constrain risk taking. Therefore, the transmission of risk taking incentives through executive pay structure may not be straightforward and cannot be taken for granted. Nevertheless, we find evidence consistent with our hypotheses. Our empirical evidence provides a rationale for the use of inside debt compensation in structuring executive compensation in the banking context.

Number of Pages in PDF File: 52

Keywords: banks, financial crisis, banking regulation, CEO compensation, inside debt, corporate governance, agency costs of debt, Moral Hazard, Financial Institutions

JEL Classifications: G28, G38, G21, G30, G20, K23, K22, J33

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Suggested Citation:

Frederick Tung , "The Puzzle of Independent Directors: New Learning ," 91 Boston University Law Review 1175 (2011), B.U. Law Working Paper No. 11-33 (July 22, 2011); SSRN Paper No. 1882903

Contact Information

Frederick Tung
Professor of Law

Boston University School of Law
765 Commonwealth Avenue
Boston, MA 02215

Phone: (617) 358-6184

Contact Information

Xue Wang
Assistant Professor of Accounting
 Emory University - Goizueta Business School
 1300 Clifton Road
 Atlanta, GA 30322-2722
 United States
 404-727-7538 (Phone)