The Determinants of CEO Cash Compensation in Commercial Banks: Evidence from Jordan

Abstract

Compensation paid to top executive managers is one of the sensitive areas in modern corporate finance. The objective of this paper is to investigate the determinants of the Chief Executive Officer and/or the Chairman of the board of directors’ cash compensation. It tests mainly the linkage between ownership concentration, role duality, financial performance, among other variables, and executives cash compensation for a sample of 8 commercial banks listed on Amman Stock Exchange during the period 2010-2013. By using panel data analysis, I find little evidence that highly concentrated ownership structures reduce Chairmen of the boards, but not CEOs, cash compensations. In addition, financial performance plays a major role in setting the Chairmen of the boards, but not CEOs, pay levels. Moreover, CEOs in larger banks are more compensated than others in smaller ones. Whereas, CEOs in high-risk banks are not provided with higher rewards. More importantly, the analysis fails to link executives cash compensation to role duality, suggesting that there is a small and negligible role for the separation of the positions of CEO and Chairman of the board of directors in determining CEO cash compensation. Overall, the results revealed that the factors influencing CEO cash compensation in banking industry are remarkably different of those influencing the Chairman of the board cash compensation. In summary, agency problem in Jordanian banks may not be that severe. Executives’ compensation contracts and ownership structures are, to some extent, effective mechanisms for alleviating the classical agency problem and aligning the interests of owners and managers. However, Jordanian CEOs are unjustifiably overcompensated as they fail to prove their worth, in light of such lamentable performance of the Jordanian banks, which raises questions about executives’ compensations determining mechanism, and the process of hiring CEOs in the first place.

Keywords: Agency theory, Cash compensation, CEO, Ownership structure, Role duality

DOI: 10.7176/RJFA/15-2-05

Publication date: January 31^st 2024