Regulator Scrutiny and Bank CEO Incentives

This study analyzes the effects of monitoring intensity on compensation and turnover for CEOs of publicly-traded banks. Using a sample of banks from 1992 to 2004, I find that monitoring intensity plays a significant role in compensation levels, pay-for-performance sensitivity, and CEO turnover. The results show that CEOs from highly-rated institutions receive smaller pay than CEOs from competing institutions, and that monitoring intensity, as proxied by CEO age, influences the relationship between market performance and executive incentives. These findings suggest that regulatory ratings and CEO age impact optimal bank governance structure by varying incentive sensitivity to market performance.