Board Independence and Compensation Policies in Large Bank Holding Companies

Abstract

We use a sample of large bank holding companies to empirically examine the association between financial performance and organizational structure. We regress firm accounting performance on measures of board independence, CEO pay-performance sensitivity, the product of board independence and CEO pay-performance sensitivity, and other organizational features and control variables. We find that both CEO pay-performance sensitivity and the relative tenure of independent outside directors have a positive effect on accounting performance. Their interactive effect tends to be negative. Thus, the marginal value of each mechanism for accounting performance declines as the use of the other mechanism increases. These results are robust in a simultaneous equations framework that accounts for endogeneity issues. We also find a positive relation between the percentage of independent outside directors and CEO pay-performance sensitivity.