Ben Z. Schreiber

Pay at the executive suite: How do US banks compensate their top management teams?

This study examines how a large sample of US banks compensates their top management teams (i.e., the top four to five highest ranking executives in each bank). We observe two tiers of compensation in the executive suite: the Chief Executive Officer (CEO) and the rest of the top management team. CEOs receive not only greater pay in absolute dollar, but are also rewarded more in relation to performance, as manifested in having a larger portion of their pay in performance contingent compensation. Below the CEO, top executives have similar compensation structure and pay to performance elasticities. The results are robust to a significant size effect, and alternate measures of performance. 2002 Elsevier Science B.V. All rights reserved.

Internal monitoring, regulation, and compensation of top executives in banks

Abstract This paper examines the relation between incentive pay, monitoring, and regulatory requirements in banks. Using a one-period model with asymmetrical information between the bank owner and the top management team, as well as within the team itself, we show that (1) incentive pay increases the mutual-monitoring activity among top executives; (2) senior executives, especially the CEO, collect more incentive pay than their subordinates; and (3) bank regulations, such as capital adequacy (CAD) requirements, reduce the absolute amount of incentive pay granted to executives.

The Owner-Manager Conflict in Insured Banks: Predetermined Salary vs. Bonus Payments

This article examines the incentive of a banks owners and manager to increase the level of assets risk if bank deposits are insured. The model consists of three players: a public insurer (e.g., the FDIC), the banks owners, and its manager. Empirical evidence has shown that the management of risk (e.g., credit and interest rate risk) and a low level of audit and control can be instrumental in causing banks to fail or get into financial difficulties. In the model, the form of compensation to the manager plays a crucial role in determining the level of asset risk. The article shows under which conditions and form of compensation banks owners and manager have an incentive to raise the risk level. The model is run first under the assumption that the information between the bank and the insurer is symmetrical, and then under the assumption that it is asymmetrical for two forms of pay: a predetermined salary; and bonus payments whose value is not known at the time the contract between the owners and the manager is signed. The article also examines whether there is a Pareto-optimal contract between the owners and the manager as regards the risk level, given the two forms of pay. This question is important because the absence of such a contract could indicate the existence of a source of instability in the banking system.

Herding, Heterogeneity, and Momentum Trading of Institutional Investors Across Asset Classes

This paper examines herding, heterogeneity, and momentum trading of institutional investors in Israel across a broad variety of financial assets. While previous studies typically focus on stocks only, we examine herding patterns, heterogeneity, and momentum trading of institutional investors in five asset classes. We find that during the sample period (1/2002 – 12/2011) large investors tended to herd more than medium and small-size investors. In contrast, small investors used momentum trading patterns more than medium and large-size investors. Homogeneity was found among large investors, especially pension funds, and during the first half of the 2000s, when investors purchased corporate bonds at the expense of government bonds. This phenomenon ended upon the beginning of the subprime crisis and against the backdrop of the financial difficulties of the bond issuers. In those years, panicked investors withdrew funds from the most liquid institutions (study funds), while infusing funds to pension and provident funds due to legally binding arrangements. We attribute some of the heterogeneous trading of the institutional investors, to those factors

Uncovered Interest Parity (UIP) in the Mean and Variance of the ILS/USD Exchange Rate

This paper examines the simultaneous short-term relationships between the ILS/USD exchange rate and domestic interest rates, the foreign interest rates and the interest-rate differentials along the term structure of interest rates. The test is performed using the ARCH (autoregressive conditional heteroskedasticity) procedure of two variables with a bi-variate threshold ARCH (BV-TARCH) that incorporates a set of equations describing the short term relationship between the exchange rate and interest rates. This procedure enables us to analyze the effect of each of the variables on the other, both the first moment, i.e., the expectation, and the second moment, the conditional variance. It also enables us to identify asymmetry in the effects of shocks and their autoregressive effects. The second section of the paper examines the Uncovered Interest Parity (UIP) hypothesis along the interest-rate differential term structure. The analysis of the results of the procedure used on weekly data for the years 1999-2005 shows that in the mean equation the exchange rate has a positive effect on the long-term domestic interest rates and on the interest-rate differential, but the reverse relationship does not hold. On the other hand, in the conditional variance equation, no cross-relationship was found between the exchange rate and the interest rates or the interest-rate differential. The conditional correlation of the error matrix of these variables and its level of significance rose with the term structure. Examination of the UIP during the sample period shows that changes in the interest-rate differential, particularly for the long term, predicted the changes in the exchange rate better than did the differential itself. These findings can be explained by the significant contraction of the interest-rate differential that occurred during the sample period compared with the small depreciation reflected by the ILS/USD exchange rate in that period.