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

Round 1

Reviewer 1 Report

The manuscript itself is unnecessarily lengthy. On the one hand, it seems more a mathematical demonstration theorem than an academic and research paper. On the other, it has a non-traditional structure that creates confusion. For instance, there are some boxes, i.e. Fig. 1, pag. 2, and mathematical equations that even though they are interesting, they may deviate the attention of readers.

The author need to give a clear distinction between the abstract and the introduction (since they report the same sentences lines 31 to 33). The introduction should also clearly state the conversation this manuscript wants to participate.  Perhaps, the authors should dive deeper into previous literature by identifying a common theoretical framework; otherwise, that literature may be disparate and chaotic. This possible limitation is also observed throughout a lack of research questions, propositions or hypotheses.

In order to model bank default risk, among other variables related to banker's long-term compensation, the authors did not consider the nature of different bank risks. Especially after the last financial crisis which highlighted the problem of liquidity management and credit risk. Defining the conditions for a long-run financial stability requires an in-depth investigation on literature part. Indeed, Galletta and Mazzù (2019) made a Liquidity Mismatch Index based on the loan-to-deposit ratio on a European sample. Moreover, taking into account former studies on bank risk would improve the literature review part.  Pelizzon et al., (2016) investigated the dynamic relation between credit risk and liquidity finding that the long-term refinancing operations of the ECB weakened the sensitivity of market makers’ liquidity provision to credit risk, highlighting the importance of funding liquidity measures as determinants of market liquidity. Imbierowicz and Rauch (2014) investigated the relationship between the two major sources of bank default risk: liquidity risk and credit risk, and how this relationship influences banks’ probabilities of default (PD).  

Did the authors provide any robustness check for their results? For example adding a set of control variables?
The conclusion section must be analyzed more, so as to provide a detailed description of the contribution of this study (eg. express better how they “close theoretical gap” referred).

I recommend the following references to the authors:

- Galletta, S.; Mazzù, S. Liquidity Risk Drivers and Bank Business Models. Risks 2019, 7, 89

- Pelizzon, L., Subrahmanyam, M. G., Tomio, D., & Uno, J. (2016). Sovereign credit risk, liquidity, and European Central Bank intervention: Deus ex machina?. Journal of Financial Economics, 122(1), 86-115.- Douglas W. Diamond, Debt Maturity Structure and Liquidity Risk, The Quarterly Journal of Economics, Volume 106, Issue 3, August 1991, Pages 709–73

- Imbierowicz, Björn, and Christian Rauch. 2014. The Relationship between Liquidity Risk and Credit Risk in Banks. Journal of Banking & Finance 40: 242–56

- Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of financial economics, 93(2), 259-275.

Author Response

Thank you very much for reading our manuscript and reviewing it, which will help us improve it to a better scientific level. We revised our manuscript, and quite a lot of changes have taken place. So we have sent the revised manuscript.

There is a thing to tell you here. In the original major revision version it contained all the changes to be visible which is red because of the function of “ track changes”. However, after we have major revised the article, we sent it to MDPI English Editing System to edit, after finishing editing in this morning, the final version they sent to me only contain the changes they made, so you could not see our changes clearly in the final version. Since I can’t upload two versions of the article, I have sent the final version to you and send both to the Editor. But you can still see the changes through this response because I have described the location of the content which have been changed.

The main corrections are in the manuscript and the responds to the reviewers’ comments are as follows (the replies are highlighted in red).

Please see the attachment.

Author Response File: Author Response.pdf

Reviewer 2 Report

The topic is quite interesting and it is commendable that you devised a method that tries to correlate the level and structure of executive compensation with bank risks and bank performances. It is also commendable that you tried to express the differences given by CEO's age and the variation of compensation structure according to age.

The compensation of bank executives is approached in a sound manner (mathematically and statistically), though I would prefer to hear something about the fiscal implications of a certain structure of compensation package.

I would suggests to grant more attention to the economic side of the research, as to explain whether and how the structure of executive compensation could actually influence bank systemic risk, since this item holds a very low weight into both total bank assets and total or operating expenditures.

Also, maybe you should try to evidence the fiscal implications of the executive compensation structure, i.e. does the bank obtain any fiscal gains from a certain structure of executive compensation as compared to another possible structure (for example Cash salary plus inside equity against cash salary plus inside equity plus inside debt/liability). Or if from altering the structure in favour of inside debt could generate any fiscal gain as compared to existing structure of compensation?

Also I would recommend paying attention to the values from table 3. As you state "All values are reported in millions of dollars as of December 31 of each year". That would imply that the CEO received 41 billion Dollars in 2010 and 50 billion Dollars in 2015?? Also it means that total equity of Wells Fargo was of 171,576 Billion Dollars??

In the conclusions part it would be recommended to mention how your findings concur or differ from existing similar studies.

My recommendation is to refocus the research upon executives' compensation and its fiscal implications and maybe the implications upon the motivation and performances of bank executives. 

Author Response

Thank you very much for reading our manuscript and reviewing it, which will help us improve it to a better scientific level. We revised our manuscript, and quite a lot of changes have taken place. So we have sent the revised manuscript.

There is a thing to tell you here. In the original major revision version it contained all the changes to be visible which is red because of the function of “ track changes”. However, after we have major revised the article, we sent it to MDPI English Editing System to edit, after finishing editing in this morning, the final version they sent to me only contain the changes they made, so you could not see our changes clearly in the final version. Since I can’t upload two versions of the article, I have sent the final version to you and send both to the Editor. But you can still see the changes through this response because I have described the number of line which have been changed.

The main corrections are in the manuscript and the responds to the reviewers’ comments are as follows (the replies are highlighted in red).

Please see the attachment.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

The paper has been improved and so it can be accepted in the revised form.

Author Response

Dear Reviewer,

Thank you very much for reading our manuscript and reviewing it, which will help us improve it to a better scientific level.

Thank you very much for your constructive comments and suggestions which would help us both in English and in depth to improve the quality of the paper.

 We are so grateful and happy to hear that.

Best wishes!

Ma Tianyi

Reviewer 2 Report

Dear Authors,

You responded to most of my observations and made the necessary improvements. That is commendable and makes your research close to the requirements of publishing in such a reputable journal.

However, due to many changes it seems you need to have an overall view upon the current stage of the paper.

In the paper there are some unclear aspects as this one:

Table 2 lists the annual compensation and other financial data for perhaps one of the most famous CEOs in American banking business, John G. Stumpf of Wells Fargo and Co. The variables of the first six columns in Table 2 are related to the compensation received by John G. Stumpf, CEO of Wells Fargo and Co, between 26 June 2007 and 12 October 2016. All values are reported in dollars, except for the last column, the total equity value, which is scaled in thousands of dollars in Table 2 of Ma (2020) [27] as of December 31 of each year. Stumpf retired in October of 2016, thus, his compensation that year was not a full 12 months. The same applies for his starting year in 2007.

Table 2 currently refers to a whole different thing!

Also, try to add to the economic explanation of the paper...

I would need a clean corrected version of the paper after you solve these aspects.

After these steps the paper could be published.

Author Response

Thank you very much for reading our manuscript and reviewing it, which will help us improve it to a better scientific level. We revised our manuscript, and quite a lot of changes have taken place. So, we have sent the revised manuscript, and a version containing all the changes to be visible.

The main corrections are in the manuscript and the responds to the reviewers’ comments are as follows (the replies are highlighted in red).

Please see the attachment.

Author Response File: Author Response.pdf