Do regulatory standards help align CEO compensation and banks performance association?

This study aims to assess the impact of APS 510 standard on CEO remuneration-performance association in Australian Authorized deposits taking institutions (ADIs). Using panel data GLS and dynamic GMM estimation models, a key objective of this research is to investigate the role of regulatory standards on the empirical association between executive compensation and firm performance. The research uses data from 45 listed Australian financial institutions for the period 2004-2015. We observe no statistically significant evidence to show that CEO cash bonus is excessive in banking sector as claimed by various financial press and business media. Further analyses reveal the differing but substantial functions of APS 510 in shaping the association between a firm’s CEO short-term incentives and corporate performance depending on the nature and characteristics of the firm (ADIs vs non-ADIs). As the regulatory standard is legally binding for all ADIs and not necessarily for non-ADI companies, CEO’s annual variable remuneration for the ADI category is somehow lower. This implies that the standard plays a critical role in reducing the level of CEO short-term incentives in the ADI group of firms. Empirical results show no significant statistical influence of the standard in shaping the relationship between CEO long-term incentive and market based performance of the Australian banking system. Our findings here are consistent with prior studies in developed countries such as the US. Policy-wise, we conclude that regulators should encourage corporate board of firms to increase long-term incentives in CEO remuneration in order to align managements’ actions and shareholders interest of enhancing firm value.