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The FDICIA and Bank CEOs’
Pay–Performance Relationship:
An Empirical Investigation
by Ying Yan

FEDERAL RESERVE BANK

OF CLEVELAND

Working Paper 9805
THE FDICIA AND BANK CEOs’ PAY–PERFORMANCE RELATIONSHIP:
AN EMPIRICAL INVESTIGATION
by Ying Yan

Ying Yan is a visiting economist at the Federal Reserve
Bank of Cleveland. This paper is based on a chapter of the
author’s Ph.D. dissertation. The author is especially grateful
to James Thomson for his generous advice. The author also
thanks Jocelyn Evans, Joseph Haubrich, Larry Lang, Inmoo
Lee, Bing Liang, Ranga Narayanan, William Osterberg,
Peter Ritchken, Calvin Siebert, Ajai Singh, seminar
participants at the Southern Finance Association in
Baltimore, Bowling Green State University, Case Western
Reserve University, the Federal Reserve Bank of
Cleveland, and John Carroll University for their helpful
comments. The research assistance of Sunaina Kilachand
and the editorial assistance of Michele Lachman are
gratefully acknowledged.
Working papers of the Federal Reserve Bank of Cleveland
are preliminary materials circulated to stimulate discussion
and critical comment. The views stated herein are those of
the author and are not necessarily those of the Federal
Reserve Bank of Cleveland or of the Board of Governors of
the Federal Reserve System.
Federal Reserve Bank of Cleveland working papers are
distributed for the purpose of promoting discussion of
research in progress. These papers may not have been
subject to the formal editorial review accorded official
Federal Reserve Bank of Cleveland publications.
Working papers are now available electronically through
the Cleveland Fed’s home page on the World Wide Web:
http://www.clev.frb.org.
February 1998

Abstract

Banking problems in the 1980s led to passage of the FDICIA (1991). The purpose of this
legislation was to improve market and regulatory discipline of banks’ performance
through changes in incentive structures. This paper looks at how the FDICIA changes
bank CEOs’ pay–performance relationship. It finds that the FDICIA improves healthy
banks’ growth opportunities, making their CEOs’ tot al compensation less sensitive to
performance. Meanwhile, the FDICIA restricts unhealthy banks’ growth opportunities,
making their CEOs’ total compensation more sensitive to performance. These results
support the agency-cost-of-debt theory developed in John and John (1993). This paper
shows that since enactment of the FDICIA, CEOs’ compensation structure has become
more incentive-based for both healthy and unhealthy banks. At the same time, the main
components of CEOs’ compensation, salary and bonus, have become more sensitive to
accounting earnings, while stock-based compensation has become more responsive to
stock returns.

The FDICIA and Bank CEOs’ Pay-Performance Relationship:
An Empirical Investigation∗

Ying Yan**
January 1998

ABSTRACT
Banking problems in the 1980s led to the passing of the FDICIA (1991). The purpose of this
legislation was to improve market and regulatory discipline of bank performance through
changes in incentive structures. This paper looks at how the FDICIA changes bank CEOs’
pay-performance relationship. It finds that the FDICIA improves healthy banks’ growth
opportunities, making their CEOs’ total compensation less sensitive to performance.
Meanwhile, the FDICIA restricts unhealthy banks’ growth opportunities, making their CEOs’
total compensation more sensitive to performance. These results support the agency-cost-ofdebt theory developed in John and John (1993). The CEOs’ compensation structure is found
to be more incentive-based for both healthy and unhealthy banks after the enactment of the
FDICIA. The main components of CEO compensation, salary and bonus, became more
sensitive to accounting earnings, while stock-based compensation became more responsive to
stock returns after the FDICIA was enacted.

∗

This paper is based on a chapter of the author’s Ph.D. dissertation. The views expressed herein
are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or its
staff. The author is especially grateful to James Thomson for his generous advice. The author
wants to thank Jocelyn Evans, Joseph Haubrich, Larry Lang, Bing Liang, Inmoo Lee, Ranga
Narayanan, William Osterberg, Peter Ritchken, Calvin Siebert, Ajai Singh, seminar participants
at the Southern Finance Association in Baltimore, Bowling Green State University, Case
Western Reserve University, Federal Reserve Bank of Cleveland for their helpful comments.
The research assistance of Sunaina Kilachand and the editing assistance from Michele Lachman
are gratefully acknowledged. Any remaining errors are the author’s responsibility.
**
Ying Yan, Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland,
OH 44101-1387, Voice: (216) 579-2417 Fax: (216) 579-3050 E-mail: ying.yan@clev.frb.org

1. Introduction
Due to the dramatic increase in the number of failed banks in the late 1980s, Congress
passed the Federal Depository Insurance Corporation Improvement Act (FDICIA) in
December 1991. The FDICIA provides a new statutory framework for bank supervision that
details early intervention and prompt corrective action by bank regulators in dealing with
troubled banks. In particular, Section 131 concerning prompt corrective action classifies
banks into five categories depending upon their risk-based capital ratios. Bank regulators can
take supervisory actions on the basis of these categories. While banks above the highest
threshold are considered well-capitalized, increasingly severe statutory restrictions and
penalties are applied to banks in the three lowest categories, because their capital ratios fall
below the clearly specified thresholds. For the troubled banks, these prompt corrective actions
restrict activities and investment opportunities.
Meanwhile, bank regulators have begun to recognize that decision making ultimately
rests with bank managers, whose actions are influenced by their compensation. Recognition
of the important incentive effects of management compensation is codified in the FDICIA,
giving federal bank regulators the authority to regulate managerial compensation in the
banking industry. The FDICIA also mandates bank regulators to provide guidelines for senior
management compensation structures at federally insured commercial banks, especially those
that are undercapitalized. Although the economic theories of agency and optimal contracts
have offered some explanations about the phenomena of managerial compensation, the effects
of bank regulations on CEOs’ pay, performance, and the pay-performance relationship are
little understood. The FDICIA legislation necessitates more research concerning the
regulations’ effects on bank CEOs’ compensation, a gap that this paper seeks to fill.
There is an extensive body of literature on how CEOs’ compensation is related to their
performance.1 Jensen and Murphy (1990) show that a CEO’s wealth changes $3.25 for every
$1,000 change in shareholder wealth and conclude that overall pay-performance sensitivity is

1

See Jensen and Murphy (1990), Murphy (1985, 1986), Rosen (1990), Joskow, Rose, and Shepard (1993), and Rose
and Shepard (1994).

1

very low. Their work also suggests that not cash but equity-based compensation gives
managers the correct incentive to maximize firms’ value. However, there is little empirical
evidence on whether corporations whose executive compensation is more equity-based
actually perform better. Murphy (1986) finds that pay-performance sensitivity is negatively
influenced by CEO experience. This phenomenon is also confirmed by Barro and Barro
(1990), using a sample of commercial banks. Houston and James (1993) compare bank
CEOs’ pay-performance sensitivity with that of non-bank CEOs.

They find that pay-

performance sensitivity is lower for bank CEOs than for non-bank CEOs. Smith and Watts’
(1992) comparison of regulated firms (including banks) and unregulated firms finds that those
with greater investment opportunities employ more skilled executives who have higher pay
and a more pronounced pay-performance relationship. According to Garen (1994), CEOs’
pay-performance sensitivity is negatively related to firm size, and the empirical evidence that
CEO compensation is consistent with the principal-agent model is not strong. Crawford,
Ezzell, and Miles (1995) and Hubbard and Palia (1995) document that permitting interstate
banking raises bank CEOs’ pay-performance sensitivity.2 So far, however, little is known
about how the FDICIA has affected bank CEOs’ pay-performance sensitivity and pay
structure.
This paper extends the prior literature by distinguishing the regulation’s direct effect
from its indirect effect (the investment opportunity change). It is important to know whether
the FDICIA has changed CEO pay-performance sensitivity and, if so, whether its effects are
direct or indirect. The important factor that the regulation affects first is the firms’ growth
(investment) opportunity. Smith and Watts (1992) suggest that greater growth opportunities
are associated with a stronger pay-performance relationship; they refer to this as the
contracting hypothesis because they assume managers have private information about the
firm’s investment opportunities. As this information asymmetry grows, boards of directors
have greater difficulty evaluating managers’ success in choosing among investments.

2

Crawford, Ezzell, and Miles (1995) define pay-performance sensitivity as the regression coefficient between the
change in CEO pay and the change in shareholder wealth, while Hubbard and Palia (1995) define it as the regression
coefficient between CEO pay and shareholder wealth.

2

Therefore, firms with larger growth opportunities should make compensation more sensitive
to performance and use more stock-based compensation to increase managerial incentives. If
banking deregulation (or non-regulated industries) could be interpreted as having a more
competitive environment and higher growth opportunities, Crawford, Ezzell and Miles
(1995), Hubbard and Palia (1995), Houston and James (1993), and Joskow, Rose, and
Shepard (1993) all appear to support the contracting hypothesis. However, none of these
papers really check how deregulation affects investment opportunities or how investment
opportunities differ between regulated and unregulated industries. In this respect, their
empirical evidence is not fully explained.
By examining how the FDICIA affects banks’ growth opportunity, I hope to offer a
more complete story about the effect of regulation. If the FDICIA did change banks’
investment opportunities, then the evidence presented in this paper can be considered as the
consequence of those banks’ adjustments to investment opportunity changes. However, if the
banks’ investment opportunities are not affected by the FDICIA, then the empirical evidence
presented might only be due to the special content of the FDICIA. Since the FDICIA’s
purpose is to solve the problems of troubled banks, making CEO compensation more
performance-based is one way to get better bank performance, even if banks' investment
opportunities are not affected. Thus, the hypothesis that bank CEOs’ pay-performance
sensitivity increases without any change in the banks’ investment opportunities is referred to
as the FDICIA hypothesis.
However, the agency cost of debt theory offers another story. Myers (1977) points out
that firms with more growth opportunities borrow less and suffer from a greater
underinvestment problem. To reduce underinvestment, optimal managerial compensation in a
leveraged firm should have low pay-performance sensitivity as a precommitment device to
minimize the agency cost of debt (John and John [1993]). The reason is that if managers have
strong incentives to maximize the value of equity, debt holders will demand a higher risk
premium for supplying capital, fearing that managers will pursue excessively risky investment
projects that transfer wealth from debt holders to equity holders. Thus, when a firm has a
higher growth opportunity, its board of directors might find it optimal to lower the managers’
3

pay-performance sensitivity in order to reduce the expected underinvestment problem. This is
referred to as the agency cost hypothesis, and its prediction will be contrary to that of the
contracting hypothesis.
Following Smith and Watts (1992), Gaver and Gaver (1993), and Yermack (1995), I
use Tobin’s Q (measured by market-to-book value of total assets) as the proxy for growth
opportunities. Since the FDICIA emphasizes solving the problems of the troubled banks, it is
necessary to separate the unhealthy banks from the healthy ones if we are to distinguish the
different effects across groups. I find that the FDICIA is associated with an improvement in
healthy banks’ growth opportunities but a reduction in unhealthy banks’. This is consistent
with the results on how banks’ stocks responded to passage of the FDICIA (Liang, Mohanty,
and Song [1996]). They find that shareholders of well-capitalized banks benefited from the
FDICIA, while shareholders of undercapitalized banks suffered. For unhealthy banks, the
negative stock response to the FDICIA comes from the mandatory and discretionary
corrective actions towards them. The positive stock response of healthy banks may arise from
relief, because the empirical evidence shows that healthy banks held excess cash flow while
waiting for the new regulation to unfold.3 According to the contracting hypothesis, since
investment opportunities are increased for healthy banks but decreased for unhealthy ones,
enactment of the FDICIA should increase healthy banks’ CEOs’ pay-performance sensitivity,
and decrease unhealthy banks’. The agency cost hypothesis, however, predicts the opposite.
My empirical evidence supports the agency cost hypothesis. I find that the FDICIA made
healthy banks’ CEOs’ total compensation less sensitive to performance, and unhealthy banks’
more sensitive. Thus, the FDICIA did affect various bank groups’ investment opportunities
differently, inducing the pay-performance sensitivity change.
Along with these results, my study contributes to the literature by analyzing how both
total compensation and the compensation structure relate to performance. Mehran (1995)
points out that it is the structure of compensation, not its level, that motivates managers. He

3

When capital ratio (leverage ratio) is included as a control variable in the regression, I find the CEOs’ total
compensation is negatively related to capital ratio, and those estimated coefficients dropped significantly after the
enactment of the FDICIA.

4

finds that firm performance is significantly related to the percentage of a CEO’s
compensation that is equity based, when growth opportunity is one of the control variables.
However, his paper focuses on the general relationship among compensation structure, board
composition, and firm performance.

It does not address the question of how growth

opportunity change could affect pay-performance sensitivity or the issue of compensation
structure change. I find that, after enactment of the FDICIA, the ratio of equity-based
compensation increased significantly for all banks. However, cash compensation, consisting
of salary and bonus, is still the main component of CEOs’ compensation package (over 70
percent on average). I also find that after the enactment of the FDICIA, cash compensation
became more sensitive to accounting earnings, while equity-based compensation became
more sensitive to stock returns.
This paper is organized as follows. The next section reviews the FDICIA regulation.
Section 3 describes the data and the details of the sample selection procedure. Section 4
explains the variables and model specification. Section 5 presents the empirical results, and
section 6 summarizes them.

5

2. The FDICIA Regulation Due to the dramatic increase in regulatory forbearance
associated with bank and thrift failures in the 1980s, Congress passed the FDICIA on
December 19, 1991. Its intent was to revise bank capital requirements, emphasize the
importance of capital, and authorize early regulatory intervention and supervision of senior
management compensation in problem institutions. Two of its key provisions were designed
to reduce the cost of bank failures. First, the FDICIA’s provision for early closure allowed
bank regulators to close failing institutions with a positive level of capital. Such a policy has
been advocated to prevent excessive losses to the deposit insurance fund, as discussed by
Kane (1983), and to solve the moral hazard problem created by fixed-rate deposit insurance,
as noted by Buse, Chen, and Kane (1981).

The FDICIA explicitly limits use of the too-

big-to-fail doctrine in order to reduce the FDIC’s losses. An exception to the least-cost
provision is the systemic risk exemption, invoked when it is determined that the failure of a
large bank would “have serious adverse effects on economic conditions or financial stability.”
To invoke the systemic risk exemption requires the approval of a two-thirds majority of both
the Board of Governors of the Federal Reserve System and the directors of the FDIC, as well
as the approval of the Secretary of the Treasury. Under the FDICIA, the FDIC is also
precluded from extending de facto guarantees to any uninsured liabilities of the bank. The
FDICIA limits the Federal Reserve’s incentive to provide solvency support through the
discount window by requiring the Fed to share in the FDIC’s losses if Fed lending to a closed
bank increases the resolution costs.

The FDICIA’s second key provision involves bank

regulators’ early intervention in problem banks. While prompt corrective action was intended
to supplement existing supervisory activities, the FDICIA legislated both mandatory and
discretionary interventions for problem banks to save them from becoming insolvent. The
FDICIA divides banks into the following five categories: 1) well-capitalized; 2) adequately
capitalized; 3) under-capitalized; 4) significantly undercapitalized; and 5) critically
undercapitalized. The bank categories are defined by three capital ratios: the total risk-based
capital ratio (total capital/total risk-weighted assets),4 the Tier 1 risk-based capital ratio (Tier
4

The components used and their weights (in parentheses) are as follows: noninterest-bearing balances and currency
and coin (0); interest-bearing balances (0.25); short-term U.S. Treasury and government agency debt securities

6

1 capital/risk-weighted assets),5 and book capital ratio (Tier 1 capital/ total assets). To be
considered adequately (well) capitalized, a bank must maintain a total risk-based capital ratio
of at least 8 (10) percent; a Tier 1 risk-based capital ratio of at least 4 (6) percent; and a book
capital ratio of at least 4 (5) percent. If a bank fails to meet the minimum thresholds for
adequate capital ratios, it becomes undercapitalized, and the mandatory restrictions on its
activities become increasingly severe as the bank’s capital ratios deteriorate below additional
thresholds. Undercapitalized banks--those with total risk-based capital ratios less than 8
percent, Tier 1 risk-based ratios less than 4 percent, and Tier 1 leverage ratios less than 4
percent--are subject to a multitude of restrictions.6 In the extreme case, when a bank’s
tangible equity ratio falls to 2 percent or less, it is considered to be critically undercapitalized
and faces the appointment of conservatorship (receivership) within 90 days. The purpose of
the prompt corrective action is to limit regulatory forbearance, common in the past, in which
regulators did not immediately impose any sanctions on undercapitalized banks.
The FDICIA intended to resolve the principal-agent conflict between depository
institution regulators and taxpayers by establishing incentive-compatible contracts for
regulators. If successful, the FDICA should have an effect on private contracts such as the
compensation of bank CEOs. In this study, I empirically investigate how the FDICIA affects
bank CEOs’ pay-performance sensitivity and pay structure. I also seek indirect evidence on
whether the FDICIA has reduced the too-big-to-fail phenomenon.
3. Data Sources and Sample Selection
The sample used in this study consists of banks held by bank holding companies
(BHCs), with stock information from the Center for Research in Security Prices (CRSP) from

(0.10); long-term U.S. government and agency debt securities (0.25); state and local government securities (0.50);
bank acceptances (0.25); standby letters of credit and foreign office guarantees (0.75); loan and lease financing
commitments (0.25); commercial letters of credit (0.50); and all other assets (1.00).
5
Tier 1 capital includes common stockholders’ equity, qualifying cumulative and noncumulative perpetual preferred
stock, and minority interest in common equity accounts of consolidated subsidiaries.
6
The mandatory and discretionary provision for the undercapitalized banks includes the ability to suspend dividends
and management fees; require approval for acquisitions, branching, and new activities; restrict interaffiliated
transactions; restrict deposit interest rates; prohibit brokered deposits; restrict the pay of officers; suspend payment
on subordinated debt; and restrict certain other activities.

7

1989 to 1994. This provides us with roughly three years of data before and after enactment of
the FDICIA to observe the legislation’s effect. Data constraints precluded the use of a longer
time period.
Balance sheet and income data for bank subsidiaries are taken from the Federal
Financial Industry Examination Council Reports of Income and Condition (henceforth, call
reports). Those variables include the bank’s book value of total assets, book value of equity,
net income, rate of return on assets (ROA = net income/total asset), total risk-based capital
ratio, Tier 1 risk-based capital ratio, and leverage (book capital) ratio. The ratios at the bankholding-company level are calculated by aggregating individual bank data at that level when
constructing the capital ratios.
Two groups of banks are selected from the call reports. The first consists of banks
with total assets that exceeded $0.5 billion by the end of 1994. In addition, these banks
maintained a leverage ratio of 5.5 percent or higher throughout 1989-91, and their risk-based
capital ratios fitted into the “adequately capitalized” or “well-capitalized” categories
throughout 1992-94.7 Then the highest level of bank holding companies for those bank
subsidiaries are found, using the bank code of the call report. This yields the healthy group
with 125 BHCs.8
The second group consists of all banks in the call report that failed to meet the healthy
criterion at a certain point in time but recovered by the end of 1994 (that is, they either had a
leverage ratio lower than 5.5% at a certain point in time during the 1989-91 period or their
total risk-based capital ratio is lower than 8%, or their Tier 1 risk-based capital ratio is lower
than 4%, or their leverage ratio was lower than 4% at some point during the 1992-94 period).9
The highest BHCs of those bank subsidiaries are found as well. The final unhealthy group
7

A further investigation of bank supervision and regulations shows that a 5.5% leverage ratio is more appropriate
than the 7% cut-off ratio used in Shrieves and Dahl (1992), since drawing the line at 7% made some healthy banks
fall into the unhealthy group.
8
There are 18 BHCs with bank subsidiaries that belong to the healthy and the unhealthy group at the same time.
However, after calculating the capital ratios weighted by banks assets held by different groups, I find that all 18 of these
BHCs belong to the healthy group.

8

consists of 36 BHCs.10 The names of the BHCs in the healthy and unhealthy groups are listed
in Appendices A and B.11
Compensation for CEOs is collected from the annual proxy statements filed by banks
with the Securities and Exchange Commission (SEC). The collected data include salary,
bonus, restricted stock awards, options amount granted, options exercise price, and other
compensation (such as life insurance, travel subsidies, and perquisites). Note that the SEC
proxy statement filing format changed in 1993. Before that date, each firm reported only the
current year’s compensation, and CEOs’ bonus and salary information were grouped together
as “total cash compensation.” Most of the firms did not report (or grant) restricted stock
awards and/or options. Since 1993, proxy statement filing has required reporting CEOs’
compensation for the previous three years. The reporting of bonuses, restricted stock awards,
and options has also become standard. Therefore, compensation data with the new standard
filing format can be traced back to 1990.12 The salary and bonus in 1989, reported as “cash
compensation,” cannot be separated.
BHCs’ stock market information is obtained from the CRSP monthly data files. These
variables include stock price, number of shares outstanding, and stock return. The stock
dividends and the variances of the stock return are also derived from CRSP. The stock return,
dividends, and stock variance are annualized and used in the Black-Scholes (1973) formula to
evaluate the options. The market value of equity is calculated by multiplying the stock price
and the shares outstanding at the end of each year. Tobin’s Q is constructed as the ratio of
market value to book value of the total assets. The market value of total assets is derived by
using the book value of total asset minus the book value of equity plus the market value of
9

There are 14 BHCs that failed to recover by the end of 1994. However, because few of them have compensation
data available, they are not included in the sample.
10
The unhealthy group has also been divided into two smaller groups by their recovery date, either before or after
FDICIA. However, further research shows that there is no significant difference between them.
11
Compensation data are collected for six additional BHCs. However, because these companies failed in 1992 and
1993, the post-FDICIA data are not sufficient to form a group. Hence, these BHCs were deleted from the sample.
They are listed in Appendix C.
12
All of the results are recalculated using only 1990 and 1992 data for the pre-FDICIA and post-FDICIA periods, to
make sure that the reporting change does not bias the result. The conclusion remains the same.

9

equity. The three data sets--compensation data, banks’ accounting data, and stock market
data--are merged together according to the BHCs.
4. The Variables and Model Specification
Compensation policy uses many mechanisms to provide value-increasing incentives that
improve CEOs’ performance. Performance-based dismissal is one of them. Jensen and Murphy
(1990) find a negative relationship between net-of-market firm performance and the probability of
managerial turnover. Their findings suggest that managers are more likely to leave after bad years
than after good years and are disciplined by a credible threat of dismissal. However, I find only a
very few CEO turnovers for banks. This is probably due to the regulated nature of the banking
industry, where dismissal does not seem to serve as a credible threat for bad performance.
Therefore, the pay-performance relationship study here focuses on the pecuniary pay of the CEOs
and excludes the threat of dismissal as an influencing factor.
Pecuniary compensation can be classified into two categories, cash and stock-based. Cash
compensation consists of salary and bonus. Both of them are related to only short-term
performance. They are inseparable in 1989 due to the historic reporting format of SEC filings.
Stock-based compensation, which consists of options and restricted stock awards, provides an
incentive for good managerial performances in the long run. The value of options held at the end of
year T is valued by applying the Black-Scholes (1973) valuation formula, which allows for
continuously paid dividends (Murphy [1985], Jensen and Murphy [1990]) as follows:
C = N [S e-dT Φ(Z)-X e-rT Φ (Z-σ T )]
[ln(S / X) + T (r - d + σ 2 / 2)]
where Z=
, where
σ T
C is the award value of the stock options;
N is the number of shares covered by awards;
S is the common stock price from CRSP;
X is the option exercise price from the proxy statement;
r is the continuous risk-free interest rate, which is proxied by the market yield on 5-year
Treasury bonds in year t (see the Federal Reserve Bulletin);
10

Φ (.) is the cumulative standard normal distribution function;
T is the time of options expiration, with 10 years used as the proxy, following Houston and
James (1992), and Hubbard and Palia (1995);
d is the continuous dividend yield defined as ln (1 + dividend per share/closing stock
price)/12 of the previous year; and
σ is the standard deviation of the stock return of the previous year.
Both the cash and stock-based compensation are scaled by total compensation, which is the
sum of salary, bonus, restricted stock awards, options, and other compensation. This is consistent
with Mehran (1995), who finds that the compensation structure, not the level, of compensation
motivates managers. Total compensation is scaled by the market value of equity at the end of that
year.
The level of risk that banks take can be highly influenced by CEOs’ compensation structure.
When a large fraction of CEOs' compensation is tied to performance, they might have a good
incentive to accept more risk than CEOs whose pay is insensitive to performance. The bank’s risk,
which is proxied by the standard deviation of the stock return of that year, is also included as a
control variable.
A number of empirical studies (see Ciscell and Carroll [1980] for a survey) have found a
positive relationship between firm size and salary, and this phenomenon is confirmed in my
analysis of banks. Rosen (1990) explains it using the firm as a hierarchical control structure. He
finds that the competitive labor market allocates the more talented CEOs to larger firms, since the
marginal productivity of their actions is magnified across the lower levels of the hierarchy.
However, how the compensation structure is related to firm size is not yet known. Thus, I include
the log transformation of a bank’s total assets (LNTOTAST) as the size variable to control for that
factor.
Whether the accounting-based variable or the stock-based variable is a more appropriate
proxy for performance is still a controversial issue. Some papers, like Crawford, Ezzell, and Miles
(1993), Houston and James (1993), Murphy (1985, 1986), and Jensen and Murphy (1990), use
stock return as the proxy for performance. They find that CEO wealth change is quite insensitive to
stock return. However, there is also a significant amount of research documenting the extensive use
11

of accounting earnings as a basis for CEO compensation. Slaon (1993), Paul (1992), and Lamber
and Larcker (1987) argue that because stock returns are heavily influenced by the overall economy,
they reflect lots of systematic risk instead of a firm’s individual performance. The majo part of the
stocks’ movement is beyond the CEOs’ control. Thus, it is uncertain how many managerial
contracts are based on market performance rather than accounting performance. Following Barro
and Barro (1990), I include both stock returns (RET) and accounting earnings (ROA) as
performance proxies, because each is important in determining the CEO compensation structure
and their correlation is low.
The ordinary-least-squares regression is used to observe the relationship between CEOs’
compensation structure and performance.13 The following equation is used for the regression:
compensation ratio = a + b1 LNTOTAST + b2ROA + b3 RET+ b4 RISK+ ε.
I pool together cross-section and time-series observations and do the regressions for preFDICIA, post-FDICIA, and entire sample periods. Missing observations for the compensation data
leave us with a total of 675 observations, 510 for the healthy group and 165 for the unhealthy
group. The analyses are focused on the comparison between pre- and post-FDICIA periods across
groups. Recall that all the hypotheses are related to banks’ growth opportunity, which is measured
by market-to-book value of total assets (see Yermack [1995] and Smith and Watts [1992]). The
book value of total assets is used as a surrogate for assets in place. The firm with a lower proportion
of assets in place will have better chance to grow. The FDICIA might affect banks' growth
opportunities by putting more restrictions on problem banks’ investment activities and it may
influence healthy banks’ investment opportunities as well.
5. Empirical Results
The regression estimates for total compensation are provided in table 1. They are
divided into three panels to facilitate comparison between the unhealthy and the healthy
group; the healthy group in the pre-FDICIA period versus the post-FDICIA period; the
unhealthy group in the pre-FDICIA period versus the post-FDICIA period. The comparison
result of compensation structure change is provided in table 2, which also includes Tobin’s Q,

12

the most important factor for the hypotheses testing. The cash compensation results are shown
in table 3, while the stock-based compensation results are in table 4.
5.1 Total compensation
Healthy banks’ growth opportunity, proxied by Tobin’s Q, is found to increase
significantly, from 1.17 in the pre-FDICIA period to 1.28 in the post-FDICIA period (t=2.12).
However, Tobin’s Q of the unhealthy group (see table 2) dropped from 1.38 to 1.10 (t=1.36).
This is consistent with the results of Liang, Mohanty, and Song (1996). Since the FDICIA did
change the banks’ investment opportunities, the FDICIA hypothesis does not apply in this
study.
Table 1 presents the results for total compensation regressions. Panel A compares the
results of the unhealthy versus the healthy group. It is found that the healthy group’s total
compensation is tied more to stock returns than that of the unhealthy group.14 The difference
of their coefficient estimation is significant at the 1 percent level. However, the total
compensation of the unhealthy group is more closely tied to accounting earnings than is that
of the healthy group, with a coefficient difference that is significant at the 10 percent level.
The healthy group’s sensitivity of total compensation to risk is much lower than the unhealthy
group’s, with a coefficient difference that is significant at the 1 percent level. The size effect
of the healthy group is also significantly lower than that of unhealthy group. Thus, the acrossgroup comparison shows that the healthy group’s total compensation is more associated with
market performance and has less to do with bank stock risk and bank size, while the
unhealthy group’s total compensation is more closely associated with accounting earnings.
Panel B compares the regression results of total compensation for the healthy group
across periods. The data show that the relationship of total compensation to performance has
changed dramatically. The coefficient estimates of total compensation to ROA and RET
changed from positive in the pre-FDICIA period to negative in the post-FDICIA period, and
13

For the stock-based compensation regressions, the Tobit model is used. Those results are not substantially
different from OLS and thus are not reported here.

13

the coefficient differences are significant for both ROA and RET at the 1 percent level. Recall
that Tobin’s Q increased significantly for the healthy group between the pre-FDICIA to the
post-FDICIA period. Thus, total compensation’s becoming less sensitive to performance in
the post-FDICIA period is consistent with the agency cost hypothesis and contradicts the
contracting hypothesis.
Panel C compares the regression results of the unhealthy group across periods. It is
found that the total compensation of the unhealthy group is less related to size in the postFDICIA period, and the coefficient differences are significant at the 5 percent level. This
signals the positive effect of restricting usage of the too-big-to-fail policy. On the payperformance relationship, it is found that the sensitivity of total compensation to stock return
has dramatically increased across periods, from an estimation coefficient of -123.27 to 40.61,
over weighting the decreased sensitivity of total compensation to accounting earnings (from 0.009 to -2.3003). Recall that Tobin’s Q for the unhealthy group dropped from 1.38 to 1.10
from pre- to post-FDICIA. Thus, the dominance of total compensation’s increased sensitivity
to stock returns is also consistent with the agency cost hypothesis. Since the unhealthy
groups’ average total assets are larger in the post-FDICIA period than that in the pre-FDICIA
period, this phenomenon differs from Garen (1994), who finds that CEOs’ pay-performance
sensitivities are negatively related to firm size. This difference reflects the substantial
influence of the FDICIA regulation.
As a whole, with the change in Tobin’s Q and in pay-performance sensitivity, the
empirical evidence is clearly consistent with the agency cost hypothesis. For the healthy
group, with increasing growth opportunity, the pay-performance sensitivity has been reduced
after enactment of the FDICIA, while pay-performance sensitivity has grown for the
unhealthy group with the decrease in growth opportunity.
5.2 The Compensation Structure Change

14

Although the level of total compensation is positively correlated with ROA and RET (not reported here), the total
compensation scaled by the market value of equity is sometimes negatively related to ROA or RET. This is probably
due to the disproportional change in CEOs’ total compensation and the market value of equity.

14

It is interesting to see how FDICIA regulation affects CEOs’ compensation structure
across groups and across periods. The comparison of changes in compensation structure is
shown in table 2.
Panel A shows the compensation structure change of the healthy group across periods.
Between pre- and post-FDICIA, the salary ratio dropped from 67.7% to 52.3%, while the
bonus ratio increased from 16.6% to 18.4%, the restricted stock awards ratio increased from
4.5% to 7.1%, and the options increased from 20.8% to 36%. All the above changes are
significant at the 5 percent level or higher, except the bonus. Notice that only the salary ratio
is significantly lower in the post-FDICIA period; almost all the weights of incentive-based
compensation for the healthy group are significantly higher. This means that the
compensation structure became more incentive-based for the healthy group in the postFDICIA period.
The same trend is observed for the unhealthy group (panel B), for which the salary
ratio dropped significantly, from 77.8% to 59.1% from the pre-FDICIA period to the postFDICIA period. The bonus ratio increased significantly from 8.3% to 14.4%, while the
options' ratio increased significantly from 12.4% to 21.3%. The only insignificant change
occurred in the restricted stock ratio, which increased from 2.2% to 4.0% with t =1.19. Thus,
for both the healthy and the unhealthy group, the compensation structure became more
incentive-based. It is important to notice that the FDICIA’s impact on compensation structure
change did not differ between the healthy and the unhealthy group.
Panel C of table 2 lays out the average compensation structure difference between
these two groups. It shows that the compensation structure of the healthy group is much more
incentive-based than that of the unhealthy group. For the healthy group, the salary ratio is
59.3%, significantly lower than the unhealthy group’s 67.8%. The bonus ratio of the healthy
group (17.8%) is significantly higher than that of the unhealthy group (11.7%). The restricted
stock ratio of healthy group (6.0%) is also significantly higher than that of the unhealthy
group (3.2%). In addition, the healthy group has a significant higher option ratio (27.6%) than
the unhealthy group (17.2%). The average of the stock returns for the healthy group is 1.19,
15

while for the unhealthy group it is 0.22. They are significantly different from one to another at
the 1 percent level (t=10.23). The average of accounting earnings of the healthy group (-0.31),
is also significantly different from that of the unhealthy group (-1.10). The results in this panel
provide evidence that banks whose CEO compensation structure is more incentive-based
perform better than banks whose CEO compensation structure is less incentive-based. This
finding is consistent with the argument in Jensen and Murphy (1990) that equity-based
compensation rather than cash compensation gives managers the correct incentive to
maximize their firms’ value.
5.3 Cash Compensation
How cash compensation is related to bank performance, risk, and size is also an
interesting issue. Mehran (1995) only addresses the issue of how the ratio of equity-based
compensation responds to performance, without considering the ratio of cash compensation.
Barro and Barro (1990), Hubbard and Palia (1995), and Smith and Watts (1992) examine how
the level of cash compensation is related to performance, but not how the ratio of cash
compensation relates to performance.
Results on the ratio of cash compensation are reported in table 3. The across-period
change for the healthy group is reported in panel A, while panel B shows the results for the
unhealthy group in both periods. For the healthy group, the ratio of cash compensation is
negatively related to bank size significantly in both periods. This means that for a bigger
healthy bank, the CEO’s cash compensation will be less important than for a smaller bank.
Notice that there are no significant coefficient changes for the cash compensation ratio related
to bank size across periods for the healthy group. However, this change is significant for the
unhealthy group. In panel B, although the cash compensation ratio is not significantly related
to size in the pre-FDICIA period, it is significant at the 1 percent level in the post-FDICIA
period. This means that among unhealthy banks, CEO compensation structure is more
incentive-based for larger banks than for smaller ones. This could be interpreted as a positive
effect of restricting the use of the too-big-to-fail policy.

16

With regard to the relationship between the cash compensation ratio and performance,
I find that the cash compensation ratio is only significantly related to stock return negatively
for the unhealthy group. This means that unhealthy banks’ CEO compensation is more
incentive-based for the banks whose stock returns are higher. This is also consistent with
Jensen and Murphy (1990).
The other interesting phenomenon I find is that, for both healthy and unhealthy
groups, the cash compensation ratio is tied more to accounting earnings and less to stock
returns in the post-FDICIA period. The coefficient difference of this change is significant for
both healthy and unhealthy groups. Notice that in the post-FDICIA period, the ratio of cash
compensation decreased for both groups. As CEOs’ total compensation became more
incentive-based, with increased weight on restricted stock and options for both groups, cash
compensation became more sensitive to accounting earnings, thus balancing the overall
change. This shows that although stock returns play a more important role as the emphasis on
equity-based incentives increases, accounting performance is still important. Because cash
compensation is still the main portion of CEOs’ compensation package (77.1% for the healthy
group and 79.3% for the unhealthy group), accounting earnings still serve as the basic
benchmark of performance. This phenomenon really provides some insight into the CEO payperformance relationship. Lots of literature documents firms’ increased use of equity-based
incentives for CEO compensation, but it does not point out the fact that the major part of
CEOs’ compensation, usually over 60 or 70 percent of the total, became more sensitive to
accounting performance. It might be misleading to ignore this phenomenon and think that
accounting performance is no longer important.
5.4 Stock-based Compensation
The regression results for stock-based compensation are reported in table 4. In
contrast to my results for cash compensation, for both healthy and unhealthy groups, stockbased compensation became more sensitive to stock returns and less sensitive to accounting
earnings in the post-FDICIA period. Panel A shows that for the healthy group, stock-based
compensation to accounting earnings changes from positively significant in the pre-FDICIA
17

period to negatively insignificant in the post-FDICIA period. However, its coefficient to
stock return changed from positively insignificant in the pre-FDICIA period to 2.1451, which
is significant at the 5 percent level, in the post-FDICIA period. The coefficient differences, for
both ROA and RET, are significant at the 1 percent level across periods.
The same trend shows up for the unhealthy group (see panel B). The coefficient of ROA is
positively significant in the pre-FDICIA period but became insignificant in the post-FDICIA. The
coefficient of RET changed from 1.1008 (significant at the 5 percent level) in the pre-FDICIA
period, to 2.1097 (significant at the 10 percent level) in the post-FDICIA period. The coefficient
differences of ROA and RET are also significant across periods.
The results in table 4 should be considered in conjunction with the results of tables 2
and 3. Although the equity-based compensation increased in the post-FDICIA period for both
groups, the share of equity-based compensation on average is still not the major part of
compensation, being 20.4% for the unhealthy group and 33.6% for the healthy group in the
full sample period. Thus, when interpreting the increased sensitivity of equity-based
compensation to stock returns, one should keep the whole picture in mind. It is true that the
ratio of equity-based compensation increased across periods’ becoming more sensitive to
stock returns and less sensitive to accounting earnings. However, the facts that cash
compensation is still the main component of the overall compensation package and that it
became more sensitive to accounting earnings should not be ignored.
For the unhealthy group, the ratio of stock-based compensation is significantly
positively related to bank size only in the post-FDICIA period. This shows that larger banks’
CEO compensation structure became more stock-based in the post-FDICIA period. This fact,
like the results in table 3, shows the positive effect of limiting the use of the too-big-to-fail
policy.
Overall, I find that the sensitivity of total compensation to performance is associated
with banks’ growth opportunities. The empirical evidence in this paper supports the agency
cost hypothesis: After the FDICIA was enacted, the pay-performance sensitivity of healthy
banks decreased, while their growth opportunities increased; the unhealthy banks’ pay18

performance sensitivity increased, while their growth opportunities decreased. The CEOs’
compensation structure became more incentive-based for both bank groups after enactment of
the FDICIA. Cash compensation, which on average is still over 70 percent of the
compensation package, became more sensitive to accounting earnings, while stock-based
compensation became more sensitive to stock returns for both groups after enactment. For the
unhealthy group, the empirical results show that CEOs’ compensation structure is more
incentive-based for the larger banks in the unhealthy group. This is consistent with limiting
use of the too-big-to-fail policy.
6. Conclusion
The FDICIA has improved growth opportunities for healthy banks and restricted
growth opportunities for unhealthy ones. Correspondingly, this study’s empirical results
support the agency cost theory predicting that CEOs’ compensation should have lower payperformance sensitivity to reduce the agency cost of debt and ease the underinvestment
problem when the firms have higher growth opportunities. I find that after enactment of the
FDICIA, total compensation became less sensitive to performance for CEOs of healthy banks
and more sensitive for CEOs of unhealthy banks. This result contrasts with the contracting
hypothesis of Smith and Watts (1992), which predicts that higher growth opportunities should
be associated with firms’ higher growth opportunities due to the increased information
asymmetry between the manager and shareholders.
I also find that the CEOs’ compensation structure became more incentive-based for
both groups after the FDICIA was enacted. Cash compensation, the main component of CEO
compensation, became more sensitive to accounting earnings in the post-FDICIA period,
while equity-based compensation became more sensitive to stock returns. For the unhealthy
group, the empirical results show that CEOs’ compensation structure is more incentive-based
for larger banks after the FDICIA. This evidence is consistent with the FDICIA limiting use
of the too-big-to-fail policy.

19

Table 1: Total Compensation
Total
compensation#

Intercept

lntotast

ROA

RET

RISK

N

165

Panel A
Unhealthy
T-Stat
Healthy
T-Stat

70.1774
(4.86)***
21.7996
(6.35)***

-4.1227
(-3.97)***
-1.2803
(-5.47)***

-0.8657
(-0.86)
-0.1239
(-0.31)

-5.5846
(-0.14)
0.1094
(0.34)

0.3601
(0.82)
0.0030
(0.07)

T for coeff.
diff.

(9.04)***

(-7.58)***

(-1.75)*

(7.95)***

(3.89)***

510

Panel B
Healthy-pre
T-stat
Healthy-post
T-stat

25.0298
(2.87)***
19.4921
(9.50)***

-1.5499
(-2.62)***
-1.1191
(-8.03)***

1.0114
(0.79)
-0.3295
(-1.49)

0.154
(0.31)
-3.819
(-0.44)

-0.0486
(-0.30)
0.0172
(0.72)

T for coeff.
diff.

(1.61)

(-1.84*)

(3.39)***

(12.19)***

(-1.46)

198
312

Panel C
unhealthy-pre
T-stat
unhealthy-post
T-stat

43.2308
(2.35)**
75.4149
(3.60)***

-2.3891
(-1.85)*
-4.4507
(-2.91)***

-0.0009
(0.00)
-2.3003
(-1.18)

-123.269
(-2.57)***
40.612
(0.63)

2.04712
(3.50)***
-0.3414
(-0.55)

T for coeff.
diff.

(-2.23)**

(1.98)**

(2.29)**

(-4.18)***

(5.45)***

# Total compensation is scaled by market value of equity.
*** Significant at the 1 percent level.
** Significant at the 5 percent level.
* Significant at the 10 percent level.

20

69
96

Table 2. Compensation Structure Change

Tobin’s Q
Salary Ratio
Bonus Ratio
Restricted Stock Awards
Ratio
Options Ratio
Total Compensation

Tobin’s Q
Salary Ratio
Bonus Ratio
Restricted Stock Awards
Ratio
Options Ratio
Total Compensation

Panel A: The Healthy Group
Pre-FDICIA
PostMean
FDICIA
Mean
1.17
1.28
67.7%
52.3%
16.6%
18.4%
4.5%
7.1%
20.8%
3.92

36%
2.73

Panel B: The Unhealthy Group
Pre-FDICIA
PostMean
FDICIA
Mean
1.38
1.10
77.8%
59.1%
8.3%
14.4%
2.2%
4.0%
12.4%
13.27

21.3%
14.23

Panel C: The Cross-Group Comparison
Unhealthy
Healthy
Salary Ratio
Bonus Ratio
Restricted Stock
Awards Ratio
Options Ratio
Total Compensation
ROA
RET

T-Stat for mean
difference
(2.12)**
(7.72)***
(1.38)
(2.04)**
(6.98)***
(2.28)**

T-Stat for mean
difference
(1.36)
(4.72)***
(2.98)***
(1.19)
(2.42)**
(0.27)

67.8%
11.7%
3.2%

59.3%
17.8%
6.0%

T-Stat for mean
Diff
(3.67)***
(5.04)***
(2.89)***

17.2%
13.8%
0.22
-0.31

27.6%
3.26%
1.19
-1.10

(4.72)***
(5.92)***
(10.23)***
(2.135)***

21

Table 3. Cash Compensation
Cash
Compensation #

Intercept

lntotast

ROA

RET

RISK

N

130

Panel A
Healthy-pre
T-stat
Healthy-post
T-stat

1.7188
(5.69)***
1.6475
(10.09)***

-0.0628
(-3.11)***
-0.0640
(-5.77)***

-0.0589
(-1.15)
-0.0028
(-0.16)

-0.0066
(-0.48)
-1.0451
(-1.51)

0.0054
(0.91)
0.0014
(0.74)

T-stat for coeff.
diff.

(0.50)

(0.12)

(-3.40)***

(81.01)***

(2.19)**

312

Panel B
Unhealthy-Pre
T-Stat
Unhealthy-Post
T-Stat

1.0353
(4.07)***
1.5929
(8.17)***

-0.0154
(-0.85)
-0.0611
(4.27)***

-0.0189
(-1.40)
0.0078
(0.43)

-1.1638
(-1.89)**
-1.8895
(-3.16)***

-0.0063
(-0.86)
-0.0021
(-0.37)

T-stat for coeff.
diff.

(-3.62)***

(4.08)***

(-2.52)**

(1.79)*

(-0.95)

# Cash-compensation, the sum of salary and bonus, is scaled by total compensation.
*** Significant at the 1 percent level.
** Significant at the 5 percent level.
* Significant at the 10 percent level.

22

62
94

Table 4. Stock-based Compensation
Stock-Based
Compensation #

Intercept

lntotast

ROA

RET

RISK

N

109

Panel A
Healthy-pre
T-stat
Healthy-post
T-stat

-1.0879
(3.52)***
-0.0907
(-0.45)

0.0848
(4.05)***
0.0342
(2.55)**

0.1174
(2.16)**
-0.0349
(-1.19)

0.0080
(0.59)
2.1451
(2.36)**

-0.0064
(-1.07)
0.0006
(0.16)

T-stat for coeff.
diff.

(-5.33)***

(4.02)***

(5.49)***

(171.38)***

(-2.04)**

128

Panel B
Unhealthy-Pre
T-Stat
Unhealthy-Post
T-Stat

-0.1098
(-0.44)
-0.7188
(3.06)***

0.0214
(1.19)
0.0666
(3.77)***

0.0239
(1.79)**
-0.0124
(-0.67)

1.1008
(1.80)**
2.1097
(3.49)***

0.0056
(0.80)
0.0022
(0.39)

T-Stat For
Coef.Diff.

(3.61)***

(3.63)***

(3.44)***

(-2.50)**

(0.78)

# Stock-based compensation, the sum of restricted stock awards and options, is scaled by total
compensation.
*** Significant at the 1 percent level.
** Significant at the 5 percent level.
* Significant at the 10 percent level.

23

54
78

APPENDIX A
BANK HOLDING COMPANIES IN THE HEALTHY GROUP (125)
Company Name
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39

AMSOUTH BANCORPORATION
BANC ONE CORP
BANCORP HAWAII
BANK OF BOSTON CORP
BANKERS TRUST NEW YORK CORP
BANKNORTH GROUP INC
BARNETT BANKS INC.
BB&T FINANCIAL CORP
CAPITAL BANCORPORATION INC.
CATHAY BANCORP INC.
CB BANCSHARES INC.
CCB FINANCIAL CORP
CENTRAL JERSEY BANCORP
CHASE MANHATTAN CORP
CHEMICAL BANKING CORP
CITICORP
CITIZENS BANCORP/MD
CITIZENS BANCSHARES INC.
CITIZENS BANKING CORP
CNB BANCSHARES INC.
COBANCORP INC.
COMERICA INC.
COMMERCE BANCSHARES INC.
COMMUNITY BANK SYSTEM INC.
COMPASS BANCSHARES INC.
CVB FINANCIAL CORP.
DEPOSIT GUARANTY CORP.
EVERGREEN BANCORP INC
F&M NATIONAL CORP.
FIFTH THIRD BANCORP
FIRST BANK SYSTEM INC.
FIRST COMMERCIAL CORP.
FIRST FINANCIAL CORP/WI
FIRST FINL BANCORP INC/OH
FIRST INTERSTATE BNCP
FIRST MERCHANTS CORP.
FIRST MICHIGAN BANK CORP
FIRST SECURITY CORP.
FIRST UNION CORP.
24

40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88

FIRST VIRGINIA BANKS INC
FIRST WESTERN BANCORP INC.
FIRSTAR CORP.
FIRSTMERIT CORP
FLEET FINANCIAL GROUP INC
FORT WAYNE NATIONAL CORP/IN
FOURTH FINANCIAL CORP.
FRONTIER FINANCIAL CORP.
FULTON FINANCIAL CORP
GBC BANCORP
HANCOCK HOLDING CO.
HARLEYSVILLE NATIONAL CORP.
HERITAGE FINL SVCS INC
HUNTINGTON BANCSHARES CORP.
IMPERIAL BANCORP
JEFFERSON BANKSHARES
JP MORGAN & CO
KEYCORP
KEYSTONE FINANCIAL INC.
KEYSTONE HERITAGE GROUP
MAGNA GRUOP INC.
MASON-DIXIE BANCSHARES INC.
MELLON BANK CORP.
MERCANTILE BANCORPORATION INC.
MERCANTILE BANKSHARES CORP
MERCHANTS NEW YORK BANCORP INC.
MERIDIAN BANCORP INC.
MICHIGAN NATIONAL CORP.
MID AMERICA BANCORP/KY
NATIONAL CITY BANCORPORATION
NATIONAL CITY CORPORATION
NATIONAL COMMERCE BANCORPORATION
NATIONSBANK CORP
NBD BANCORP INC.
NBT BANCORP INC.
NORTHE RN TRUST CORP
NORWEST CORP
OLD KENT FINANCIAL
OLD NATIONAL BANCORP
ONBANCORP INC.
ONE VALLEY BANCORP/WV
PARK NATIONAL CORP.
PEOPLES FIRST CORP.
PIKEVILLE NATIONAL CORP.
PNC BANK CORP.
PROVIDENT BANCORP
REGIONS FINL CORP
SEACOAST BANKING CORP.
SECOND BANCORP INC.
25

89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125

SECURITY BANC CORP.
SHAWMUT NATIONAL CORP
SHORELINE FINANCIAL CORP.
SIGNET BANKING CORP.
SIMMONS FIRST NATIONAL CORPORATION.
SOUTHERN NATIONAL CORPORATION
SOUTHTRUST CORP.
SOUTHWEST NATIONAL CORP.
STAR BANC CORP
STATE BANCORP INC.
STERLING FINANCIAL CORP
SUFFOLK BANCORP
SUNTRUST BANKS INC
SUSQUEHANNA BANCSHARES INC
TEXAS REGIONAL BANCSHARES INC
TRANS FINANCIAL BANCORP INC.
TRICO BANCSHARES
TRUSTCO BANK CORP NY
TRUSTMARK CORP.
UMB FINANCIAL CORP
UNION PLANTERS CORP.
UNITED BANKSHARES INC/WV
UNITED CAROLINA BANCSHARES
UNITED COUNTIES BANCORP
UNITED NATIONAL BANCORP
USBANCORP INC.
VALLEY NATIONAL BANCORP
VALLICORP HOLDINGS INC.
VERMONT FINANCIAL SERVICES CORP.
VICTORIA BANKSHARES INC.
WACHOVIA CORP
WASHINGTON TRUST BANCORP INC.
WELLS FARGO & CO.
WESTAMERICA BANCORPORATION
WILMINGTION TRUST CORPORATION
WORTHEN BANKING CORP
ZIONS BANCORPORATION

26

APPENDIX B
BANK HOLDING COMPANIES IN THE UNHEALTHY GROUP (36)
Company Name
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36

ARROW FINANCIAL CORPORATION
BANK MARYLAND CORP.
BAYBANKS INC.
BNH BANCSHARES INC.
BROAD NATIONAL BANCORPORATION
CALIFORNIA BANCSHARES INC.
CAROLINA FIRST CORPORATION
CBC BANCORP INC
CENTRAL BANCORPORATION
CENTRAL FIDELITY BANKS INC.
CORNERSTONE FINANCIAL CORPORATION
CULLEN/FROST BANKERS INC.
FIRST CHICAGO CORP
FIRST EMPIRE STATE CORP
HIBERNIA CORPORATION
INDEPENDENCE BANCORP INC/NJ
INDEPENDENT BANKSHARES INC.
MID AM INC.
NATIONAL MERCANTILE BANCORP
NATIONAL PENN BANCSHARES INC
NORTH FORK BANCORPORATION INC.
PREMIER BANCORP INCORPORATED
PREMIER BANKSHARES CORPORATION
PROFESSIONAL BANCORP INC.
RAMAPO FINANCIAL CORPORATION
REDWOOD EMPIRE BANCORP
RIGGS NATL CORP WASH D C
SIERRA TAHOE BANCORP
SILICON VALLEY BANCSHARES
STATE STREET BOSTON CORP
SUBURBAN BANCSHARES INC.
SUMMIT BANCORPORATION the
SURETY CAPITAL CORPORATION
UST CORP.
VENTURA COUNTY NATIONAL BANCORP
WESTPORT BANCORP INC.

27

APPENDIX C
BANK HOLDING COMPANIES IN THE FAILED GROUP (6)
1
2
3
4
5
6

Company Name
BSD BANCORP, INC.
COLUMBIA BANCORP, INC.
CONNECTICUT BANCORP, INC.
INDEPENDENT BANKGROUP, INC.
METRO BANCSHARES, INC.
NEW ENGLAND BANCORP, INC.

28

REFERENCES
Baker, G. P., M. C. Jensen, and K. J. Murphy, 1988, Compensation and Incentives: Practice
vs. Theory, The Journal of Finance 43, 593-616.
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