The Relationship between Corporate Compensation Policies and Investment Opportunities: Empirical Evidence for Large Bank Holding Companies

This paper investigates whether the firm's set of investment opportunities drives the amount and type of executive compensation by conducting a detailed empirical analysis of the executive compensation plans of large bank holding companies. We examine intra-industry changes in compensation policy over a period of significant change in the investment-opportunity set, 1979 to 1985. Our empirical findings reveal that total real compensation and the ratio of incentive compensation-to-total compensation increased substantially at regional bank holding companies but remained stable at money-center bank holding companies. These results are consistent with the hypothesis that during the early 1980s financial innovation and deregulation created greater growth opportunities for regional bank holding companies than for money-center bank holding companies.