Executive Compensation in the US Financial Industry: An Empirical Analysis of the Differences in CEO Compensation between the Financial and Non-financial Industry and the Impact of the Dodd-Frank Act on Such Differences

Hannah Gabriella Heier & Lærke Lissau Lund-Sørensen

Student thesis: Master thesis


Following the financial crisis, executive remuneration has been on top of the agenda for the public, regulators and politicians. This thesis analyzes whether there are any differences in the executive compensation of financial firms relative to non-financial firms in the period 2007-2016, and whether these potential differences have changed with the Dodd-Frank Act of 2010. The analysis applies a deductive research approach. With a solid foundation in relevant and acknowledged research, a number of pooled OLS regressions are performed to examine whether there is statistical evidence for the proposed hypotheses. We find a number of significant differences between CEO compensation in financial firms relative to non-financial firms. The results indicate that CEOs of financial firms have a lower level of total compensation relative to CEOs of non-financial firms. In terms of pay structure, we the results suggest that financial firm CEOs receive an overall higher fraction of cash compensation and a lower fraction of options. Additionally, we find that financial firm CEOs have a similar level of pay-performance sensitivity (delta) but a lower level of pay-risk sensitivity (vega) relative to non-financial firm CEOs. Finally, the results indicate a higher vega following the implementation of the Dodd-Frank Act. However, there are no signs that the regulation has magnified or weakened the relative differences between CEO compensation in financial and non-financial firms. Our findings imply that CEOs of financial firms may pursue strategies that are less risky relative to CEOs of non-financial firms. Also, it appears that debtholders are less relevant than expected for compensation committees of financial firms in the design of pay packages. Moreover, our results suggest that following the Dodd-Frank Act, shareholders have a bigger say on compensation matters, in line with one of the overall regulation goals. Finally, we acknowledge that our study has certain limitations. First, the focus on large, public firms make the results apply only to firms with similar characteristics. Second, the findings cannot be generalized to other top executives as we restrict the study to CEOs. Third, the lack of complete data availability can implement biases in our findings.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2018
Number of pages144
SupervisorsAleksandra Gregoric