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Cash Salary, Inside Equity, or Inside Debt?—The Determinants and Optimal Value of Compensation Structure in a Long-term Incentive Model of Banks

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School of Management, Harbin Institute of Technology, Harbin City 150000, China
2
School of Management, Harbin Institute of Technology, Harbin City 150000, China
3
School of Business, Singapore University of Social Sciences, Singapore 599494, Singapore
*
Author to whom correspondence should be addressed.
Sustainability 2020, 12(2), 666; https://doi.org/10.3390/su12020666
Received: 24 December 2019 / Revised: 15 January 2020 / Accepted: 16 January 2020 / Published: 16 January 2020
(This article belongs to the Section Economic, Business and Management Aspects of Sustainability)
The design and optimization of executive compensation structure to reduce the risk-taking of banks is one of the core topics of corporate governance theory. Especially after the 2008 global financial crisis, due to the characteristics of banks, such as systemic risk, this issue has become more important. However, though widely concerned, the determinants and design principles of compensation are not thoroughly understood. Based on our previous work, the setup of a banker’s long-term total compensation model, we continue our research by setting up a theoretical model between total compensation, bank default risk, and the structure coefficient by simulating the result using data from Wells Fargo and Co. to draw the function image. We are the first to find out the determinants of structure, that is, the working time, current age, and tenure. What is more important is that we find that increasing the weight inside debt in the total compensation is not only helpful for the reduction of the bank’s default risk, but also an increase of the banker’s total compensation. We also illustrate the influence of a number of periods. We expect our findings to offer help regarding the formulation of policies for pay contracts.
Keywords: structure coefficient; long-term incentive model; bank default risk; determinants; total compensation; cash salary; inside debt; inside equity structure coefficient; long-term incentive model; bank default risk; determinants; total compensation; cash salary; inside debt; inside equity
MDPI and ACS Style

Ma, T.; Jiang, M.; Yuan, X. Cash Salary, Inside Equity, or Inside Debt?—The Determinants and Optimal Value of Compensation Structure in a Long-term Incentive Model of Banks. Sustainability 2020, 12, 666.

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