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When Incentives Misfire

Popovski, Isak LU ; Hummelgren, Filip LU and Dunér, Carl LU (2025) IBUH19 20251
Department of Business Administration
Abstract
The intended purpose of this study is to investigate the relationship between CEO compensation and long-term firm performance within the American banking sector. Restricted stock awards as a proportion of total calculated compensation (RSA%) are used to measure the degree of equity compensation, while return on equity (ROE) and net interest margin (NIM) act as proxies for firm performance. The deductive approach was utilised, analysing shareholder theory, agency theory, and other past literature, to formulate two hypotheses suggesting positive relationships. To empirically test these hypotheses, the study analyses a sample of 108 banks for the period 2019-2024 using cross-sectional data implemented in two separate OLS regressions. The... (More)
The intended purpose of this study is to investigate the relationship between CEO compensation and long-term firm performance within the American banking sector. Restricted stock awards as a proportion of total calculated compensation (RSA%) are used to measure the degree of equity compensation, while return on equity (ROE) and net interest margin (NIM) act as proxies for firm performance. The deductive approach was utilised, analysing shareholder theory, agency theory, and other past literature, to formulate two hypotheses suggesting positive relationships. To empirically test these hypotheses, the study analyses a sample of 108 banks for the period 2019-2024 using cross-sectional data implemented in two separate OLS regressions. The regressions reveal a statistically insignificant relationship between RSA% and long-term ROE, and a statistically significant negative association between RSA% and long-term NIM. These findings do not support the use of restricted stock awards as an incentive alignment tool for future performance in the U.S. banking industry. Moreover, this is particularly true for the negative relationship, since in economic downturns, equity compensation might make CEOs prioritise short-term objectives at the expense of long-term performance. (Less)
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author
Popovski, Isak LU ; Hummelgren, Filip LU and Dunér, Carl LU
supervisor
organization
course
IBUH19 20251
year
type
M2 - Bachelor Degree
subject
keywords
CEO compensation, firm performance, restricted stock awards, return on equity, net interest margin, banking sector, incentive alignment, equity-based compensation, agency theory, shareholder theory.
language
English
id
9203254
date added to LUP
2025-06-19 15:15:50
date last changed
2025-06-19 15:15:50
@misc{9203254,
  abstract     = {{The intended purpose of this study is to investigate the relationship between CEO compensation and long-term firm performance within the American banking sector. Restricted stock awards as a proportion of total calculated compensation (RSA%) are used to measure the degree of equity compensation, while return on equity (ROE) and net interest margin (NIM) act as proxies for firm performance. The deductive approach was utilised, analysing shareholder theory, agency theory, and other past literature, to formulate two hypotheses suggesting positive relationships. To empirically test these hypotheses, the study analyses a sample of 108 banks for the period 2019-2024 using cross-sectional data implemented in two separate OLS regressions. The regressions reveal a statistically insignificant relationship between RSA% and long-term ROE, and a statistically significant negative association between RSA% and long-term NIM. These findings do not support the use of restricted stock awards as an incentive alignment tool for future performance in the U.S. banking industry. Moreover, this is particularly true for the negative relationship, since in economic downturns, equity compensation might make CEOs prioritise short-term objectives at the expense of long-term performance.}},
  author       = {{Popovski, Isak and Hummelgren, Filip and Dunér, Carl}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{When Incentives Misfire}},
  year         = {{2025}},
}