TITLE

CEO and Chairperson Compensation: The Impact of the Financial Crisis

AUTHOR(S)
Staljon Bührer, Marika
PUB. DATE
October 2010
SOURCE
University of St. Gallen, Business Dissertations;10/26/2010, p1
SOURCE TYPE
Dissertation
DOC. TYPE
Article
ABSTRACT
This study presents a timely research into the compensation of CEOs and chairpersons and the lessons that could be learned from the financial crisis. The determinants of CEO and chairperson compensation in two large, publicly-listed banks in Switzerland - Credit Suisse and UBS - are studied over the period from 2002-2009. The dissertation investigates whether the level and mix of compensation granted and the changes to these factors were linked to performance, and whether the level of compensation has been fair or has rather been based on individual greed. Despite numerous research articles investigating CEO and board compensation, there is a lack of broad conceptualization that considers both the CEO and the chairperson in order to provide an integrated overview. This dissertation attempts to close this gap. Little has been studied on the financial crisis in Switzerland up to now. Given the recent actions undertaken in the market, however, there can be no doubt that such a study is essential. The initial framework is based on a literature review and Martin Hilb's New Corporate Governance framework (2006), taking agency and stakeholder theory into account. In this behaviour-driven concept, the focus is on the reward value created for shareholders, employees, customers and the public, taking the factors of internal, external and corporate equity into account. The empirical study of CEO and chairperson compensation was conducted as case study research in Switzerland with the data being collected from the financial statements of the banks studied and the stock market during 2002-2009, complemented with semi-structured interviews and makes use of OLS regression analysis. The difference in pay between CEOs, chairpersons and average employees increased dramatically during the last decade, and based on previous research, was due to equity compensation. The role of annual bonuses has also been significant in the banking industry. There is robust evidence that the ratios for both CEO and chairperson pay increased substantially at the start of 2000, but decreased during the financial crisis, only to recover again during 2009. Before the crisis in 2006, the ratios in Credit Suisse were 266 for the CEO and 255 for the chairperson. The respective ratios in UBS were 267 for CEO and 353. Compensation ratios decreased significantly in UBS in 2007, and, in the year 2008 reached 25 and 33 in the UBS, and 40 and 28 in Credit Suisse. The crisis was caused by the collapse of the subprime market, and was blamed on the stimulation based on compensation paid out with little clarity on how to compensate the new, unregulated activities in the banking sector. The findings suggest that compensation practices were based on historical, lagging performance instead of current or long term performance and did not have a holistic view of the benefits to the different stakeholders. The study suggests a holistic view on compensation, rather than restricting compensation levels and fine-tuning existing methods, which may not be a sustainable solution and may create issues in the future.
ACCESSION #
82754943

 

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