1
Master Thesis
Does Basel III Impact Banks’ Growth?
Evidence from the EU
E.W.H. van Werven
S2210037
Vorchter Enkweg 3, 8193 KM Vorchten
06-48001312
e.w.h.van.werven@student.rug.nl
Supervisor: V.A. Porumb
Word count: 7642
Date: 20-06-2016
2 Abstract
I use a sample of banks from 19 European countries to investigate whether the 2014 adoption of CRD IV affects the association between remuneration and bank growth. CRD IV aims to modify the structure of managers’ remuneration in order to reduce risk taking and assure banks’ growth. My results show that total remuneration is positively associated with bank growth. However, I do not find significant evidence that this association is weakened by the implementation of CRD IV. I further show a positive association between variable remuneration and bank growth. However, I do not find significant evidence for the association between fixed remuneration and bank growth. This means that the implementation of CRD IV did not change the incentives of managers that are associated with banks’ growth.
1. Introduction
On 16 April 2013, the European Parliament approved the implementation of the Capital Requirements Directive IV (CRD IV) for all listed firms in the European Union (EU). CRD IV, which in essence represents the implementation of Basel III in the EU, has January 1st 2014 as starting date. The main goal of the CRD IV is to reduce risk-taking and to strengthen the resilience of the European banking sector. In this way, banks will be able to better absorb economic setbacks whilst ensuring that they continue to finance economic activity and growth (CFA Institute, 2013). The most controversial rule introduced by CRD IV is connected to remuneration (CFA Institute, 2013). Specifically, the variable remuneration of bank executives is capped to 100 percent of fixed remuneration. Nonetheless, this limit can be raised to a maximum of 200 percent of fixed remuneration, with the approval of shareholders (CFA Institute, 2013).
Before the adoption of CRD IV, many European banks used a compensation policy which included high remuneration pay-outs for the top managers (efinancialcareers.com, 2015). Jensen and Murphy (1990a) argue that the remuneration policy is one of the most important factors in organisational success. Consequently, banks may be reluctant to adopt a new remuneration policy that fits the rules of CRD IV. A reason for resisting the implementation of the rules of CRD IV might be that banks cannot easily grow, because they cannot take that as much risk as before (CFA Institute, 2013). Previous research has documented the direct connection between executive remuneration and firm growth (Tervio, 2008; Frydman and
3
Saks, 2010). Given the strong impact of CRD IV on remuneration practices, this paper comes to study how the new regulation affects the growth of European banks.
Extant research examines the relationship between the remuneration of CEOs and firm growth (Lucas, 1978; Rosen, 1981, 1982; Tervio, 2008; Frydman and Saks, 2010). However, there is no research conducted on the effect of the implementation of CRD IV on this relationship. Therefore, this paper is timely and comes to fill a very important gap in the literature. Moreover, extant research studying the relationship between remuneration and firm growth uses only cross-sectional correlation (Frydman and Saks, 2010). In this research, the relationship will be examined over a period of time by using panel data. This will give a better view if the relationship also correlates over a longer period.
In order to test my expectations, I draw on a sample of 76 European banks operating in 19 countries. The data about remuneration is collected from Capital IQ and the financial data is collected from BVD Bankscope. I test if the CRD IV adoption is associated with changes in the relationship between remuneration and bank growth.
My results show that total remuneration is positively associated with bank growth. However, this research does not find significant evidence that this association is weakened by the implementation of CRD IV. Moreover, this research shows a positive association between variable remuneration and bank growth. However, this research does not find significant evidence for the association between fixed remuneration and bank growth. So far, this means that CRD IV is not a factor that explains the bank growth.
This paper brings important contributions to the banking literature. First, it offers new insights to regulators regarding the effects of changes in remuneration policy. This study also brings important insights regarding the applicability of CRD IV. Second, my findings help banking regulators to improve their remuneration policies and better compensate CEOs according to their performance. Overall, this paper documents if the remuneration rules of CRD IV add value to European banks through increased performance.
The rest of this paper is structured as follows. In section 2, the background literature of CRD IV, remuneration and the agency theory are described. In section 3, the hypotheses are derived from the literature. In section 4, the sample selection is described. In section 5, the research
4
method and models are described. Besides, the variables that define the dependent and independent variables are elaborated. In section 6, the statistical results are presented. Finally, section 7 concludes with a summary and discussion, limitations of this research, and ideas for further research.
2. Theoretical background
There are multiple theories that explain the relationship between remuneration and firm growth. Lucas (1978) and Rosen (1982, 1992) used the theory of span of control. Rosen (1981) also used the theory of superstars. Gabaix and Landier (2008); and Tervio (2008) used the theory of competitive assignment of CEOs to heterogeneous firms. All these studies conclude that there is a positive association between the remuneration of the CEO and firm growth (Frydman and Saks, 2010). In structuring my current study I choose to build on agency theory, as it is particularly relevant given my setting. My study is in line with Gomez-Mejia et al. (2010), which consider agency theory as one of the most important theories in the sphere of management remuneration.
2.1 Agency theory
The agency theory analyses the relationship that emerges when a shareholder (the principal) delegates his or her decision competencies to someone else (the agent), and let this person act in the name of the shareholder (Jensen and Meckling, 1976). However, the agent acts rational and could pursue his or her own interests, even though these interests are contrary to the interests of the principle (Jensen and Meckling, 1976). The agency theory beholds the problem between the shareholders (principles) and the managers (agents).
Shareholders are not able to observe all the actions that are performed by the managers (Jensen and Murphy, 1990b). Besides, managers tend to have more information about the organisation than the shareholders, which is known as information asymmetry (Jensen and Murphy, 1990b). This information asymmetry allows the managers to withhold information for the shareholders. This allows managers to act in their own interests while the shareholders are not able to detect these actions of the managers (Jensen and Murphy, 1990b). According to Jensen and Meckling (1976), information asymmetry is caused by two problems: adverse selection and moral hazard.
5
The moral hazard problem is explained in the principal-agent model of Kaplan and Atkinson (1998). This framework describes the moral hazard problem as follows. In the most standard situation, a risk-neutral principal offers a risk-free wage to a risk-averse agent to perform a productive effort. The agent accepts the offer as long as the wage adequately compensates him for the effort. When the agent accepted the offer, however, the agent prefers to shirk and provide less than the agreed-upon level of effort. This happens because of the assumption that the agent is risk-averse and morally insensitive (Kaplan and Atkinson, 1998). A reason of this behaviour could be that the agent is opportunistically self-interested (Kaplan and Atkinson, 1998). This potential for moral hazard failure on the part of the agent gives rise to a moral hazard problem when effort is unobservable. When the principal pays a salary under conditions in which the agent’s input cannot be verified, there will be created a situation called moral hazard wherein the manager is motivated to renege on the contractual terms (Kaplan and Atkinson, 1998).
Adverse selection is the second aspect that refers to information asymmetry between the principal and the agent (Akerlof, 1970). Adverse selection problems evolve from the principal’s uncertainty regarding the agent’s willingness and ability to perform tasks associated with system performance (Dahlstrom and Ingram, 2003). Dahlstrom and Ingram (2003) came up with a simple example to illustrate this problem. A machine tool producer has limited ability to assess whether a prospective representative has the ability to make cold calls and close sales. According to Dahlstrom and Ingram (2003), trading partners (like the agent and the principal are in sharing information) that encounter asymmetrical information experience pre-contractual uncertainty that jeopardizes efforts to establish efficient exchange relationships.
2.2 Remuneration
Remuneration policies for executives of financial institutions (e.g. banks), whose professional activities have material impact on the risk profile of the financial institution, shall ensure that the remuneration is consistent with sound and effective risk management and provides an incentive for prudent and sustainable risk taking (EBA, 2016). Therefore, it is important for banks to give their executives a good amount of remuneration, so that they will be incentivised to perform in line with the strategy of the bank.
6
Nowadays, most CEO’s receive their remuneration in different forms, which we can refer to as an executive remuneration package. In general, an executive remuneration package could contain the following components: annual salary, annual bonus, medium-term bonus, values of long-term incentive plans (LTIPs) and employee share options (ESOs) (Shiwakoti, 2012). LTIPs and ESOs are performance shares which the executives will receive when they are measured (Shiwakoti, 2012).
In this paper I use the differentiation made by Madhani (2011) regarding fixed and variable remuneration. Fixed remuneration does not vary according to performance or results that are achieved and is non-discretionary in nature. Variable remuneration, however, changes directly with the level of performance or results that are achieved. Variable remuneration mostly is a one-time earning that must be re-established and re-earned each performance period.
2.2.1 Short-term remuneration
According to Madhani (2011), variable remuneration can be divided in short-term and long-term variable remuneration. Short-long-term variable remuneration is intended to focus and reward performance of executives over a period of one year or less (Madhani, 2011). Short-term variable remuneration includes the base salary and any bonus based on last year’s performance (Goergen and Renneboog, 2011). According to Goergen and Renneboog (2011), the base salary is set by the compensation committee, who takes into account the specific tasks and challenges of the executives, their seniority and experiences as well as the salaries earned by peers which operate in the same industry. The annual bonus of executives is determined via the similar procedure as the determination of the base salary (Goergen and Renneboog, 2011). Besides, the annual bonus can be structured according to three basic components: performance measures, performance standards, and the sensitivity of the pay-for-performance relationship (Goergen and Renneboog, 2011).
2.2.2 Long-term remuneration
Long-term variable remuneration is intended to focus and reward performance of executives over a period longer than one year (Madhani, 2011). Long-term variable remuneration can include stock options, restricted stock, and long-term incentive plans (Goergen and Renneboog, 2011). Stock options are an important part of executive remuneration and they have accounted for an increasingly larger percentage of executive remuneration (Frydman and Saks, 2010).
7
The premise behind the conferment of stock options is to address the risk aversion of managers and to incentivize them to undertake investments they would otherwise avoid, in order to increase the shareholders’ wealth (Goergen and Renneboog, 2011). Stock options are usually issued at the money, which means that their exercise price equals the stock price on the date that they are granted to the executives (Goergen and Renneboog, 2011). The maturity of stock options mostly is ten years, and they normally become exercisable after three years (Goergen and Renneboog, 2011). Restricted stock consists of shares whose ownership is transferred to the executive after the executive has met certain conditions (Goergen and Renneboog, 2011). An example of a condition is a vesting period of mostly three to five years, which means that the restricted stock becomes exercisable for the executive after the agreed period (Goergen and Renneboog, 2011).
The third component, from which long-term remuneration could consist of, is the long-term incentive plans (LTIPs). Buck et al. (2003) defined LTIPs as grants of cash or shares with performance conditions. LTIPs became popular since the publication of the Greenbury Report of Directors’ Remuneration, which is a code of best practice in corporate governance that discouraged the use of stock options (Goergen and Renneboog, 2011). LTIPs only pay out in the event of good performance, whereby the performance will be compared with a peer group (benchmarking) (Conyon and Schwalbach, 2000). According to Pepper et al. (2013), LTIPs have two primary objectives. The first objective is to align the interests of the executives and shareholders in order to minimise both agency risk and the associated costs. The second objective is to recruit, retain and motivate executives to maximise their effort and give high performance towards the company they work for. Furthermore, Fenn and Liang (2001); and Hermalin and Wallace (2001) provide a lens through which to analyse developments in executive remuneration such as LTIPs. From this prospective, shareholder principals control their management agents, and this includes the design of their remuneration packages. Executive rewards that are linked to a firm’s share price are now seen as a means of more closely aligning the objectives of salaried managers with those of residual claiming shareholders concerned with firm value.
2.3 The overview of the Basel Capital Accords 2.3.1 Basel I
Basel I was introduced in 1988 by the Basel Committee on Banking Super Supervision (BCBS) and is a framework of minimum capital standards (BCBS, 1988). It was designed to
8
increase the safety and soundness of the international banking system and to set a level playing field for regulation in the banking sector (BCBS, 1988). For such enterprises that operate in that sector, Basel I equipped those enterprises with a minimum capital requirement rule (BCBS, 1988). The capital requirement rule requires banks to hold a minimum capital level as a function of their risk level (BCBS, 1988).
2.3.2 Basel II
Although the new capital requirement rule of Basel I is praised for achieving its initial goals, it has been bitterly criticised, because the low risk sensitiveness of its capital requirements may lead to greater risk taking and regulatory capital arbitrage practices by banks (BCBS, 1999; Jones, 2000). Therefore the Committee introduced a revised framework in 2004, which is called Basel II (BIS, 2004). The successor of Basel I aims to build a solid foundation of prudent capital regulation, supervision, and market discipline, and to enhance further risk management and financial stability (BIS, 2004). In order to attain those goals, the framework of Basel II relies on three pillars to attain the safety and soundness of the financial system (BCBS, 2004). The three pillars that are described are minimum capital requirements, supervisory review and market discipline (BCBS, 2004). Although Basel I already incorporates some limited degree of risk sensitivity, the minimum capital requirements of Basel II (which is the first pillar) significantly increases the risk sensitivity of the capital rule (Elizalde, 2007). So according to Elizalde (2007), the capital requirements rule of Basel II is more risk-sensitive than the rule of Basel I. Besides the more comprehensive minimum capital requirements (the first pillar), Basel II also includes two additional requirements, which are described in the second and third pillar (BCBS, 2004). The second pillar, which describes the supervisory review process, seeks to strengthen and reinforce the role that national supervisors play to guarantee the effectiveness of the accord (BCBS, 2004). Through this pillar, the BCBS seems to head the supervisory review process to a more risk-sensitive role (Elizalde, 2007). The third pillar describes the market discipline. The purpose of this pillar is to complement the minimum capital requirements (pillar 1) and the supervisory review process (pillar 2) (BCBS, 2004). With this pillar, the BCBS aims to encourage market discipline by developing a set a disclosure requirements which will allow market participants to assess important information on the scope of application, capital, risk exposures, risk assessment processes, and hence the capital adequacy of the organisation (BCBS, 2004).
9
So Basel II represents an increase in the risk sensitivity of banking regulation and supervision. As a consequence of the implementation of this framework, it reduces banks’ risk taking incentives and supervision costs (Elizalde, 2007).
2.3.3 Basel III
During the financial crisis that started in 2007, many banks were undercapitalised and this led to bailouts with tax money (Kinateder, 2015). Therefore, there was a broad consensus that the Basel II framework must be thoroughly revised. In 2010, the BCBS enacted new guidelines, under the name of Basel III (BCBS, 2010). The Committee came with new rules to prevent another financial crisis (BCBS, 2010). First of all, Basel III provides a more restrictive definition of what counts as bank capital. Second, the risk weight of several assets in the banking book has been increased and the new framework introduced capital buffers. Third, the new accord set up a recommended and potentially obligatory leverage ratio. At last, Basel III outlines international rules on liquidity management. Altogether, the new rules that are included in Basel III increase the proportion of capital that must be of proven loss absorbing capacity over the Basel II requirements. Although the Basel III accord is an agreement between national regulators gathered in the BCBS, hence it has to be implemented into national or European legislation in order to become legally binding (Howarth and Quaglia, 2013).
2.3.4 CRD IV
Basel III is enacted into EU law through the Capital Requirements Directive (CRD) IV, whose implementation started at 1 January 2014 (CFA Institute, 2013). The main goal of the CRD IV is to strengthen the resilience of the European banking sector so that it will be better absorb economic setbacks whilst ensuring that banks continue to finance economic activity and growth (CFA Institute, 2013). The most controversial rule of CRD IV is connected to remuneration, because this rule is the first of its kind in terms of remuneration policy. Specifically, the variable remuneration of bank executives should not be superior to 100 percent of the fixed remuneration (CFA Institute, 2013). Nonetheless, the bonus can be raised to a maximum of 200 percent of the fixed remuneration, with the approval of shareholders (CFA Institute, 2013).
10 3. Hypotheses development
3.1 Remuneration and the agency theory
Looking through the framework offered by the agency theory, the biggest concern is the information-asymmetry between the agent and the principal (Jensen and Meckling, 1976). According to Jensen and Meckling (1976), this information-asymmetry is caused by moral hazard and adverse selection. In order to mitigate the risks of moral hazard and adverse selection, the owners of the company need to rely on contracting. According to Goergen and Renneboog (2013), the level and the mix of the remuneration package are important means to incentivise executives and to align their interests with those of the shareholders. So the owners of the company connect remuneration of the executives by the performance of the company, in order to mitigate the risks that are derived from the agency theory.
3.2 Remuneration and bank growth
According to Stenholm et al. (2016) it is challenging to explain firm growth, because there is no hard-and-fast rule for defining firm growth. Chan et al. (2006) define firm growth as an outcome of organisational development, which is often affected by the internal and external contexts in which the firm growth is investigated.
Extant research examines the direct relationship between the remuneration of CEOs and firm growth (Lucas, 1978; Rosen, 1981, 1982; Tervio, 2008; Frydman and Saks, 2010). Walker (2010) also researched the relationship between remuneration and firm growth and came with the conclusion that remuneration is positively associated with firm growth. Wyatt (2008) argued that investments in human capital are an increasingly important source of value-creation for firms. Wyatt (2008) describes human capital as the skills, knowledge, and experience that are possessed by an individual or population and are viewed in terms of their value or cost to an organisation.
However, Webster (1999) argued that the heterogeneous nature of human capital assets as well as the restrictions on property rights over human assets can be problematic. Executive remuneration contracts can mitigate these problems by providing incentives that aid in attracting, retaining and motivating the employees (Walker, 2010). Therefore Walker (2010) expected that the executive remuneration contracts will address the incentive problems within the organisation. Furthermore, the use of remuneration structures to induce value-maximising
11
behaviour is well established (Walker, 2010). According to the agency theory, the incentive portion of executive remuneration is intended to align the incentives of the executives with those of the shareholders by controlling agency costs (Goergen and Renneboog, 2013). Hutchinson and Gul (2004) also find that executives who receive more remuneration are more likely to work towards improving firm growth.
Concluding from the researches that describe the relationship between remuneration and firm growth, it can be stated that this relationship is positive. In other words, if an organisation increases the remuneration of their executives, this will improve the alignment with interests of the shareholders full stop. This means that an increase of executive remuneration will lead to an increase of the banks’ growth. Based on these facts, the following hypothesis can be formulated:
Hypothesis 1a: Total remuneration is positively associated with bank growth.
3.2.1 Variable remuneration and bank growth
Stroh et al. (1996) state that variable remuneration is directly associated with firm performance. In their research, they found that a higher proportion of variable remuneration is associated with higher firm performance. Jensen and Murphy (1990b); and Leonard (1990) also found that the use of variable remuneration is positively associated with firm performance. Lun et al. (2010) documents that firm size is positively associated with firm performance. In other words, larger firms attain better performance. They found that larger firms are associated with a greater level of capacity expansion. So their study indicates that firm growth is positively associated with firm performance. Based on this finding, increased performance leads to more firm growth. Moreover, under the framework of the agency theory, variable remuneration has been found the main contracting tool available to shareholders (Jensen and Meckling, 1976). Elaborating by attaining certain performance thresholds, managers can benefit from increased variable remuneration.
So the use of more variable remuneration leads to more firm performance, which leads to more firm growth. This indicates that there could be a positive association between variable remuneration and bank growth. Based on these finding, the following hypothesis can be formulated:
12
Hypothesis 1b: Variable remuneration is positively associated with bank growth.
3.2.2 Fixed remuneration and bank growth.
The other component of total remuneration is fixed compensation. Given the cap of variable remuneration that is introduced in CRD IV (CFA Institute, 2013), it is uncertain what happens with fixed remuneration after the adoption of CRD IV. In the case that banks compensate the reduction in variable remuneration through increased fixed remuneration (which means that the total remuneration remains equal), this may have an effect on bank growth. Consequently, the following hypothesis can be formulated:
Hypothesis 1c: Fixed remuneration is positively associated with bank growth.
3.3 Remuneration, bank growth and CRD IV
The remuneration policy that is described in CRD IV is the biggest difference in the comparison of Basel II and Basel III. Specifically, the variable remuneration of bank executives should not be superior to 100 percent of the fixed remuneration (CFA Institute, 2013). Nonetheless, the bonus (variable remuneration) can be raised to a maximum of 200 percent of the fixed remuneration, with the approval of shareholders (CFA Institute, 2013). This new legislation will have an impact on the remuneration policy of organisations. Because of the restrictions that CRD IV impose on the total remuneration of executives, there will be created capped variable component of the total remuneration (CFA Institute, 2013). By the creation of this bonus cap, there is a possibility that some executives will earn less remuneration because organisations are abided by the law and regulation of CRD IV. If executives receive less remuneration than there are used to receive, then there could be a possibility that executives are less likely to work towards improving the firm’s growth (Hutchinson and Gul, 2004; Walker, 2010).
Concluding from these findings, it can be stated that CRD IV negatively moderates the relationship between remuneration and firm growth. In other words, the implementation of CRD IV will lead to less remuneration for the executives, which will lead to less bank growth. Based on these facts, the following hypothesis can be formulated:
Hypothesis 2: The association between total remuneration and bank growth will be weaker
13
In order to test my expectations regarding the formulated hypotheses, I draw on a sample of listed banks in countries that are part of the European Union. This will be described further in the next section, which is sample selection.
4. Sample selection
In this thesis I use a sample of 76 listed European banks from 19 countries that are part of the European Union. The period of time that the banks are investigated is spread over the 2012 to 2014 period. This time frame has been chosen because these years include two years before the implementation of CRD IV (2012 and 2013) and one year after the implementation of CRD IV (2014). Besides, this period of time is very recent which will provide more timely results. Furthermore, this research does not conduct more years of investigating. The reason behind this is that more previous years (e.g. 2011 and 2010) are irrelevant in the context of my study, because these are years of recovery through the financial crisis. Hereby, information about more recent years (e.g. 2015) is not available yet. In sum, the sample selection consists of 2.050 observations. Because some observations do not show all the information that is relevant, there will remain 499 observations for this research. These observations are received from 76 unique European banks. For this research, I used panel data that will be available from the Capital IQ and BVD Bankscope.
5. Method
5.1 Models
The determinants of firm growth have been studied intensively in the academic literature. Moreover, banking researchers have accessed it within the context of the financial industry. In line with the studies of Walker (2010); and Stenholm (2016), which examine firm growth as dependent variable, I test my hypotheses by using four different Models. In Model 1 I test my first hypothesis (hypothesis 1a), specifically the association between total remuneration and bank growth. In Model 2 I test hypothesis 2, specifically the association between total remuneration and bank growth after the implementation of CRD IV. In Model 3 I test hypothesis 1b, specifically the association between variable remuneration and bank growth. In Model 4 I test hypothesis 1c, specifically the association between fixed remuneration and bank growth. The Models are estimated by the following equations:
14 𝐆𝐫𝐨𝐰𝐭𝐡𝑖𝑐𝑡 = 𝛼0+ 𝛼1𝐂𝐑𝐃𝑖𝑐𝑡+ 𝛼2𝐑𝐄𝐌𝑖𝑐𝑡+ 𝛼3𝐒𝐈𝐙𝐄𝑖𝑐𝑡+ 𝛼4𝐑𝐎𝐀𝑖𝑐𝑡+ 𝛼5𝐘𝐄𝐀𝐑𝑖𝑐𝑡 + 𝛼6𝐂𝐎𝐔𝐍𝐓𝐑𝐘𝑖𝑐𝑡+ 𝜀𝑖𝑐𝑡 (𝟏) 𝐆𝐫𝐨𝐰𝐭𝐡𝑖𝑐𝑡 = 𝛼0+ 𝛼1𝐂𝐑𝐃𝑖𝑐𝑡+ 𝛼2𝐑𝐄𝐌𝑖𝑐𝑡+ 𝛼3𝐂𝐑𝐃𝑖𝑐𝑡∙ 𝐑𝐄𝐌𝑖𝑐𝑡+ 𝛼4𝐒𝐈𝐙𝐄𝑖𝑐𝑡+ 𝛼5𝐑𝐎𝐀𝑖𝑐𝑡 + 𝛼6𝐘𝐄𝐀𝐑𝑖𝑐𝑡+ 𝛼7𝐂𝐎𝐔𝐍𝐓𝐑𝐘𝑖𝑐𝑡+ 𝜀𝑖𝑐𝑡 (𝟐) 𝐆𝐫𝐨𝐰𝐭𝐡𝑖𝑐𝑡 = 𝛼0+ 𝛼1𝐂𝐑𝐃𝑖𝑐𝑡+ 𝛼2𝐕𝐀𝐑𝑖𝑐𝑡+ 𝛼3𝐂𝐑𝐃𝑖𝑐𝑡∙ 𝐕𝐀𝐑𝑖𝑐𝑡+ 𝛼4𝐒𝐈𝐙𝐄𝑖𝑐𝑡+ 𝛼5𝐑𝐎𝐀𝑖𝑐𝑡 + 𝛼6𝐘𝐄𝐀𝐑𝑖𝑐𝑡+ 𝛼7𝐂𝐎𝐔𝐍𝐓𝐑𝐘𝑖𝑐𝑡+ 𝜀𝑖𝑐𝑡 (𝟑) 𝐆𝐫𝐨𝐰𝐭𝐡𝑖𝑐𝑡 = 𝛼0+ 𝛼1𝐂𝐑𝐃𝑖𝑐𝑡+ 𝛼2𝐅𝐈𝐗𝑖𝑐𝑡+ 𝛼3𝐂𝐑𝐃𝑖𝑐𝑡∙ 𝐅𝐈𝐗𝑖𝑐𝑡+ 𝛼4𝐒𝐈𝐙𝐄𝑖𝑐𝑡+ 𝛼5𝐑𝐎𝐀𝑖𝑐𝑡 + 𝛼6𝐘𝐄𝐀𝐑𝑖𝑐𝑡+ 𝛼7𝐂𝐎𝐔𝐍𝐓𝐑𝐘𝑖𝑐𝑡+ 𝜀𝑖𝑐𝑡 (𝟒)
Where, for bank i, year t and country c, Growthict is operationalised by dividing the total
assets of the current year (ASSETS t) subtracted with the total assets of last year (ASSETS t-1) to the total assets of last year (ASSETS t-t-1) (Hamadi et al., 2015). Growthict is also
operationalised by dividing the market capitalisation of the current year (MARKCAP t) subtracted with the market capitalisation of last year (MARKCAP t-1) to the market capitalisation of last year (MARKCAP t-1). REMict is the total remuneration, operationalised
by using CTYPE18: total calculated compensation. FIXict is the salary that an executive
receive in a certain year (CTYPE1). VARict is the fixed remuneration (CTYPE1) subtracted
from the total remuneration (CTYPE18). CRDict is operationalised by making use of dummy
variables (0 and 1) (Hamadi et al., 2015). SIZEict is operationalised as the natural logarithm of
the total assets (LOG ASSETS) at the end of each year (Callen et al., 2010). ROAict is the
return on assets, which is operationalised by dividing the net income by the total assets (Swichtenberg, 1999). YEARict is operationalised by making use of dummy variables (0 and
1). COUNTRYict also is operationalised by making use of dummy variables (0 and 1). α0 is a
constant and ɛict is a residual (Hamadi et al., 2015). These variables will be further explained
in the next paragraphs. A summary of all the variables that are used is presented in Table 1.
5.2 Dependent variable
The independent variable is firm growth. According to Florence (1957), firm growth can be calculated by using total assets. So in this research, firm growth is operationalised by dividing the total assets of the current year (ASSETS t) subtracted with the total assets of last year (ASSETS t-1), to the total assets of last year (ASSETS t-1) (Hamadi et al., 2015). The
15
outcome of this measure will be a percentage (the growth rate of the assets), which makes no difference between small and big banks in terms of assets. The total assets of all banks are collected with BVD Bankscope.
Alternatively, Florence (1957) used another way to operationalise firm growth, which is market capitalisation. Market capitalisation is the market value of the outstanding shares of the organisation (Dias, 2013). The firm growth is operationalised by dividing the market capitalisation of the current year (MARKCAP t) subtracted with the market capitalisation of last year (MARKCAP t-1), to the market capitalisation of last year (MARKCAP t-1). The outcome of this measure will be a percentage (the growth rate of the market value of the outstanding shares), which makes no difference between small and big banks in terms of market capitalisation. The market capitalisations of all banks are collected with BVD Bankscope.
5.3 Variables of interest
The first independent variable is total remuneration, which consists of fixed remuneration and variable remuneration. The data of this variable is collected by the use of the Capital IQ, which describes the total remuneration as CTYPE18: total calculated compensation. So the total remuneration is operationalised by calculating the total calculated compensation (CTYPE18).
According to Frydman and Sacks (2010), fixed remuneration consists of salary. So the fixed remuneration is operationalised by taking the salary that an executive receive in a certain year. This data is collected by the use of the Capital IQ, which describes salary as CTYPE1.
Total remuneration could be operationalised by calculating the sum of fixed remuneration and variable remuneration. In order to calculate the variable remuneration, the fixed remuneration is subtracted from the total remuneration. So the variable remuneration is operationalised by subtracting the fixed remuneration (CTYPE1) from the total remuneration (CTYPE18).
Like the research conducted by Boyd (1994); and Finkelstein and Hambrick (1989), the natural logarithm is taken to operationalise the total (LOG REM), fixed (LOG FIX REM) and variable remuneration (LOG VAR REM). By this way, the heteroscedasticity will be decreased (Boyd, 1994; Finkelstein and Hambrick, 1989).
16
The second independent variable is the implementation of CRD IV. This variable is operationalised by making use of dummy variables (0 and 1) (Hamadi et al., 2015). The dummy variable takes value 0 in the pre-CRD IV period before 2014, and 1 thereafter. This research made use of the annual reports of the banks during the years 2012-2014 in order to decide if banks have implemented CRD IV or not.
5.4 Control variables 5.4.1 Firm size
The first control variable that is identified in this research is firm size. Research of Bentzen et al. (2012) showed that there is a positive association between firm size and firm growth. They conclude that larger firms significantly have higher growth rates than smaller firms. According to Peetz (2015), large firms have more power in product markets, supply chains and influencing governments than small firms. Besides, executives of larger firms command more resources. As other organisations depend on these resources, the power of these executives grows (Nienhueser, 2008). So the executives of larger firms possess greater opportunities to benefit from their proximity to large flows of revenue and fees, which means that high executive pay reflects the advantages of their position (Erturk et al., 2007). Consequently, many studies found that firm size is the largest determinant of executive remuneration (Marris, 1964; Francis, 1980; Firth et al., 1999; Tosi et al., 2000; Frydman and Saks, 2005; Productivity Commission, 2009; Hunter, 2011)
Concluding from these findings, it can be stated that firm size leads to more remuneration and also leads to more firm growth. For this reason, firm size is a control variable in this research. Like the research conducted by Callen et al., (2010), the natural logarithm of the total assets (LOG ASSETS) at the end of each year is taken to operationalise firm size. By using the natural logarithm, the heteroscedasticity will be decreased (Boyd, 1994; Finkelstein and Hambrick, 1989). The data of the total assets is collected by the use of BVD Bankscope.
5.4.2 Return on assets
The second control variable that is identified in this research is the return on assets (ROA). Return on assets is a percentage that shows how profitable the assets of the firm are in generating revenue (Guo and Wang, 2016). Research of Walker (2010) showed that there is a positive association between the return on assets and firm growth. Walker (2010) concludes that firms with a higher return on assets significantly have higher growth rates than smaller
17
firms. Return on assets has been considered as a key performance outcome for firms (Samiee and Roth, 1992). Extant research examines the positive association between firm performance and firm growth (Lun et al., 2010) In other words, firm performance leads to more firm growth. So it can be stated that return on assets is positively associated with firm growth.
Concluding from these findings, it can be stated that a higher return on assets leads to more firm growth. For this reason, the return on assets is included in this research as a control variable. Swichtenberg (1999) operationalised the return on assets by dividing the net income by the total assets. The outcome of this measure will be a ratio, which makes no difference between small and big banks in terms of assets and net income. The return on assets is collected from the data of BVD Bankscope.
5.4.3 Year effects
The third control variable that is identified in this research is year effects. This variable is adopted in this research in order to control for the possible effect of time-invariant unobserved heterogeneity at bank-level, which could otherwise lead to omitted variable bias (Hamadi et al., 2015). This variable is operationalised by making use of dummy variables (0 and 1) for the year effects from 2012 till 2014. If the data derives from a particular year, then the dummy variable has the value“1”. If the data does not derive from a particular year, then the dummy variable has the value “0”. Hereby, the years 2012 and 2014 are not taken into account during the regression.
5.4.4 Country effects
The fourth and last control variable that is identified in this research is country effects. This variable is adopted in this research in order to control for the possible effect of country-invariant unobserved heterogeneity at bank-level, which could otherwise lead to omitted variable bias (Hamadi et al., 2015). This variable is operationalised by making use of dummy variables (0 and 1) for each country that is involved in this research. The following countries are investigated in this research: Austria (AUS), Belgium (BE), Cyprus (CY), the Czech Republic (CZ), Denmark (DEN), Finland (FIN), France (FR), Germany (GER), Greece (GR), Ireland (IRE), Italy (IT), Lithuania (LT), the Netherlands (NL), Poland (PL), Portugal (POR), Romania (ROM), Spain (SP), Sweden (SWE), and the United Kingdom (UK). If the data derives from a particular country, then the dummy variable has the score “1”. If the data does
18
not derive from a particular country, then the dummy variable has the score “0”. Hereby, Germany is not taken into account during the regression.
6. Results
6.1 Descriptive statistics
The sample consists of 499 observations. The descriptive statistics of these observations are presented in Table 2. The mean of the growth in total assets is 1.7 percent (STD = 12.8 percent), with a minimum of -27.2 percent and a maximum of 52.9 percent. The mean of the growth in market capitalisation is 29.3 percent (STD = 43.4 percent), with a minimum of -5.6 percent and a maximum of 354 percent. The mean of the total remuneration is 7.12 (STD = 0.48), with a minimum of 5.27 and a maximum of 8.33. The mean of the fixed remuneration is 6.81 (STD = 0.46), with a minimum of 4.30 and a maximum of 8.07. The mean of the variable remuneration is 6.62 (STD = 0.76), with a minimum of 4.00 and a maximum of 8.12. The mean of the size is 4.94 (STD = 0.90), with a minimum of 3.08 and a maximum of 6.31. The mean of the return on assets is 0.81 (STD = 2.34), with a minimum of -6.74 and a maximum of 14.98.
6.2 Multiple regression analysis
In order to test my hypotheses, I use multiple regression analysis for all Models. The results are presented in Table 3. Model 1 describes the relation between the total remuneration and bank growth. Model 2 describes the interaction of CRD IV between the total remuneration and bank growth. Model 3 describes the interaction of CRD IV between the relation of variable remuneration and bank growth. Finally, Model 4 describes the interaction of CRD IV between the relation of fixed remuneration and bank growth.
The regression analysis of Model 1 is significant, R2 = 0.564, F (19,479) = 32.60, p < 0.01. Concluding from the findings of Model 1, total remuneration is positively associated with bank growth (B = 0.040, p < 0.01). This means that more total remuneration is associated with bank growth. Therefore, Hypothesis 1a is accepted. Therefore, these findings are insightful for banks and regulators for establishing the structure for total remuneration. Given that total remuneration is positively associated with bank growth, regulation that reduces it might put the bank in a competitive disadvantage relative to its peers outside the EU.
19
The regression analysis of Model 2 is also significant, R2 = 0.564, F (20,478) = 30.98, p < 0.01. Concluding from the findings of Model 2, the association between total remuneration and bank growth will not be weaker after the implementation of CRD IV (B = 0.014, p > 0.1). Therefore, hypothesis 2 is rejected. On the contrary, the findings from Model 2 show a slightly positive association (B = 0.014), but this association is not significant (p > 0.1). This could indicate that the association between total remuneration and bank growth will be stronger after the implementation of CRD IV. However, this association is not significantly supported by the Model. Although these findings could be insightful for bank and regulators for implementing CRD IV to attain more bank growth, more research is needed to find a (possible) significant association.
The regression analysis of Model 3 is also significant, R2 = 0.569, F (20,478) = 31.56, p < 0.01. Concluding from the findings of Model 3, variable remuneration is positively associated with bank growth (B = 0.046, p < 0.01). Therefore, hypothesis 1b is accepted. So, more variable remuneration leads towards more bank growth. Therefore, these findings are insightful for banks and regulators for establishing the structure for variable remuneration. Given that variable remuneration is positively associated with bank growth, regulation that reduces it might put the bank in a competitive disadvantage relative to its peers outside the EU.
Finally, the regression analysis of Model 4 is also significant, R2 = 0.556, F (20,478) = 29.90, p < 0.01. Concluding form the findings of Model 4, fixed remuneration is not positively associated with bank growth (B = -0.030, p > 0.1). Therefore, hypothesis 1c is rejected. On the contrary, the findings from Model 4 show a slightly negative association (B = -0.030) between fixed remuneration and firm growth, but this association is not significant (p > 0.1). This could indicate that more fixed remuneration leads towards to less bank growth. However, this association is not significantly supported by the Model. Although these findings could be insightful for banks and regulators for establishing the structure for fixed remuneration, more research is needed to find a (possible) significant association.
6.3 Sensitivity analysis
In order to test the robustness of the findings from the regression analysis, a sensitivity analysis was done. In this analysis, the bank growth was operationalised in a different manner. In the new regression analysis, the growth in total assets is replaced for the growth in market
20
capitalisation. With this new measure of bank growth, another regression analysis was done for all the Models. The results of the regression analysis are presented in Table 4.
The regression analysis of Model 1 is significant, R2 = 0.258, F (19,479) = 8.75, p < 0.01. Concluding from the findings of Model 1, total remuneration is negatively associated with bank growth. So, less total remuneration leads towards more bank growth. Therefore, hypothesis 1 is rejected.
The regression analysis of Model 2 is also significant, R2 = 0.259, F (20,478) = 8.38, p < 0.01. Concluding from the findings of Model 2, the association between remuneration and bank growth will not be weaker after the implementation of CRD IV (B = -0.086, p > 0.1). Therefore, hypothesis 2 also is rejected.
The regression analysis of Model 3 is also significant, R2 = 0.267, F (20,478) = 8.72, p < 0.01. Concluding from the findings of Model 3, variable remuneration is negatively associated with bank growth (B = -0.158, p < 0.01). So, less variable remuneration leads towards more bank growth. Therefore, hypothesis 1b is also rejected.
Finally, the regression analysis of Model 4 is also significant, R2 = 0.253, F (20,478) = 8.11, p < 0.01. Concluding form the findings of Model 4, fixed remuneration is not positively associated with bank growth (B = 0.006, p > 0.1). Therefore, hypothesis 1c is also rejected.
7. Conclusion
7.1 Summary and discussion
The purpose of this research is to describe the relationship between remuneration and bank growth, and the effect of the implementation of CRD IV on this relationship. To test if there is a relationship between those variables, four hypotheses are composed. The first hypothesis (hypothesis 1a) states that there is a positive association between the total remuneration and bank growth. Based on a regression analysis, this hypothesis is accepted. The second hypothesis (hypothesis 1b) states that there is a positive association between the variable remuneration and bank growth. Based on a regression analysis, this hypothesis is also accepted. The third hypothesis (hypothesis 1c) states that there is a positive association between the fixed remuneration and bank growth. Based on a regression analysis, this
21
hypothesis is rejected. Finally, the fourth hypothesis (hypothesis 2) states that the association between remuneration and bank growth will be weaker after the implementation of CRD IV. Based on a regression analysis, this hypothesis is also rejected.
In order to test the robustness of the findings from the regression analysis, a sensitivity analysis was done. This analysis concluded, like the first regression analysis, that hypotheses 1c and 2 are rejected. However, this analysis also concluded that hypotheses 1a and 1b are rejected, which is different from the findings of the first regression.
7.2 Limitations
Despite conducting considerate research, there are some limitations that have to be taken into account. The first limitation of this research is that there are more classifications of bank growth, which give different results.
The second limitation of this research is the way of categorising the dummy variable of CRD IV. In this research, the dummy variable takes value 0 in the pre-CRD IV period before 2014, and 1 thereafter. However, this does not mean that a bank actually implemented CRD IV correctly and/or completely. Therefore, another way of categorising this dummy variable is to give the value 0 if a bank has not implemented the CRD IV legislation correctly and completely and give the value 1 if has implemented the CRD IV legislation correctly and completely.
The third limitation of this research is that there might be an inconsistent classification of some financial items across banks. If the databases (like Capital IQ and BVD Bankscope) comprises other than camera-copies of original documents, then some assumptions are inevitable in order to produce systematic cross-company classifications (Smith, 2015).
7.3 Further research
Findings from this research imply that there does not exist an unambiguously meaning of the growth of a firm. For this reason, it is difficult to come to unambiguous results. Therefore, it is necessary to come up with a standardised meaning of bank growth, which would be an interesting topic for further research.
22
Moreover, there is not much research available about the implementation of CRD IV. For example, it is unclear how banks from different countries react on the new CRD IV
legislation, and why they react in a certain manner. Therefore, it is interesting to look deeper in the implementation process of CRD IV for banks. By this way, a more qualitative view of research will be conducted about the implementation of this legislation.
Also, it would be interesting to examine a longer post-adoption window to research the long-term effects from the implementation of CRD IV. This will also give more insights how banks implement the new legislation of CRD IV, and how they struggle with the implementation.
Finally, banks could be resistance to change to CRD IV (Armstrong, 1987; Hopper et al., 1987; Fincham, 1992; Hardy, 1996; Burns, 2000; Collier, 2001; Modell, 2002). This could be explained by the culture of banks. In other words, the culture in a specific country could explain the successful implementation of CRD IV (Chui et al., 2002). This will also be an interesting topic of further research to explain bank growth from a different perspective.
23 References
Akerlof, G. A. (1970). The market for “lemons”: quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84 (3), 488-500.
Armstrong, P. (1987). The rise of accounting controls in British capitalist enterprises. Accounting, Organizations and Society, 12 (5), 415-436.
Bank for International Settlements (2004). Implementation of Basel II: practical
considerations [online]. Available from: http://www.bis.org/publ/bcbs109.htm [accessed on 17/05/2016].
Basel Committee on Banking Supervision (1988). International convergence of capital measurement and capital standards. Basel.
Basel Committee on Banking Supervision (1999). Capital requirements and bank behaviour: the impact of the Basel accord. Basel.
Basel Committee on Banking Supervision (2004). International convergence of capital measurement and capital standards: a revised framework. Basel.
Basel Committee on Banking Supervision (2010). Basel III: a global regulatory framework for more resilient banks and banking systems. BIS, Basel.
Bentzen, J., Madsen, E. S., & Smith, V. (2012). Do firms’ growth rates depend on firm size? Small Business Economics, 39 (4), 937-947.
Boyd, G. K. (1994). Board control and CEO compensation. Strategic Management Journal, 15 (5), 335-344.
Buck, T., Bruce, A., Main, B. G. M., & Udueni, H. (2003). Long term incentive plans, executive pay and UK company performance. Journal of Management Studies, 40 (7), 1709-1727.
Burns, J. (2000). The dynamics of accounting change: interplay between new practices, routines, institutions, power and politics. Accounting, Auditing & Accountability Journal, 13 (5), 566-596.
Callen, J. L., Klein, A., & Tinkelman, D. (2010). The contextual impact of non-profit board composition and structure on organizational performance: agency and resource dependence perspectives. Voluntas, 21 (1), 101-125.
CFA Institute (2013). Capital requirements directive (CRD) IV – issue brief [online]. Available from:
https://www.cfainstitute.org/ethics/Documents/CRD_IV_issue_brief_final.pdf [accessed on 02/01/2016].
Chan, Y. E., Bhargava, N., & Street, T. (2006). Having arrived: the homogeneity of high-growth small firms. Journal of Small Business Management, 44 (3), 426-440.
24
Chui, A. C. W., Lloyd, A. E., & Kwok, C. C. Y. (2002). The determination of capital structure: is national culture a missing piece to the puzzle? Journal of International Business Studies, 33 (1), 99-127.
Collier, P. M. (2001). The power of accounting: a field study of local financial management in a police force. Management Accounting Research, 12 (1), 465-486.
Conyon, M. J., & Schwalbach, J. (2000). Executive compensation: evidence from the UK and Germany. Long Range Planning, 33 (4), 504-526.
Dahlstrom, R., & Ingram, R. (2003). Social networks and the adverse selection problem in agency relationships. Journal of Business Research, 56 (9), 767-775.
Dias, A. (2013). Market capitalization and value-at-risk. Journal of Banking & Finance, 37 (12), 5248-5260.
Efinancialcareers.com (2015). The current state of salaries, bank by bank [online]. Available from: http://news.efinancialcareers.com/nl-en/164/the-current-state-of-salaries-bank-by-bank/ [accessed on 29/12/2015].
Elizalde, A. (2007). From Basel I to Basel II: an analysis of the three pillars [online]. CEMFI Working Paper No. 0704. Available from: ftp://ftp.cemfi.es/wp/07/0704.pdf [accessed on 17/05/2016].
Erturk, I., Froud, J., Johal, S., Leaver, A., & Williams, K. (2007). Against agency: a positional critique. Economy and Society, 36 (1), 51-77.
European Banking Authority (2016). Remuneration - regulation and policy [online]. Available from: https://www.eba.europa.eu/regulation-and-policy/remuneration [accessed on 23/05/2016].
Fenn, G. W., & Liang, N. (2001). Corporate payout policy and managerial stock incentives. Journal of Financial Economics, 61 (1), 45-72.
Fincham, R. (1992). Perspectives on power: processual, institutional and ‘internal’ forms of organizational power. Journal of Management Studies, 29 (6), 741-759.
Finkelstein, S., & Hambrick, D. C. (1989). Chief executive compensations: a study of intersection of markets and political processes. Strategic Management Journal, 10 (2), 121-134.
Firth, M., Tan, M., & Tang, M. (1999). The determinants of top management pay. Omega: the International Journal of Management Science, 27 (6), 617-635.
Florence, P. S. (1957). New measures of the growth of firms. Economic Journal, 67 (266), 244-248.
Francis, A. (1980). Company objectives, managerial motivations and the behaviour of large firms: an empirical test of the theory of ‘managerial’ capitalism. Cambridge Journal of Economics, 4 (4), 349-361.
25
Frydman, C., & Saks, R. E. (2005). Historical trends in executive compensation 1936-2003. ChicagoBooth Economics Workshop. University of Chicago, Chicago: Booth School of Economics. Available at:
http://faculty.chicagobooth.edu/workshops/AppliedEcon/archive/pdf/FrydmanSecondPa per.pdf%3E [accessed on 24/05/2016].
Frydman, C., & Saks, R. E. (2010). Executive compensation: a new view from a long-term perspective. The Review of Financial Studies, 23 (5), 2099-2138.
Gabaix, X., & Landier, A. (2008). Why has CEO pay increased so much? Quarterly Journal of Economics, 123 (1), 49-100.
Goergen, M., & Renneboog, L. (2011). Managerial compensation. Journal of Corporate Finance, 17 (4), 1068-1077.
Guo, C. Q., & Wang, Y. (2016). Market orientation, distributor relationship, and return on assets: optimizing distribution performance for industrial firms. Asia Pacific Journal of Marketing and Logistics, 28 (1), 107-123.
Hamadi, M., Heinen, A., Linder, S., & Porumb, V. A. (2015). Does Basel II affect the market valuation of discretionary loan loss provisions? Working paper. Version February 2015. Hardy, C. (1996). Understanding power: bringing about strategic change. British Journal of
Management, 7 (S1), S3-S16.
Hermalin, B. E., & Wallace, N. E. (2001). Firm performance and executive compensation in the savings and loan industry. Journal of Financial Economics, 61 (1), 139-170. Hopper, T., Storey, J., & Willmott, H. (1987). Accounting for accounting: towards the
development of a dialectic view. Accounting, Organizations and Society, 12 (5), 437-456.
Howarth, D., & Quaglia, L. (2013). Banking on stability: the political economy of new capital requirements in the European Union. European Integration, 35 (3), 333-346.
Hunter, T. (2011). Size does matter, to the CEO. Sydney Morning Herald, 11 June.
Hutchinson, M., & Gul, F. (2004). Investment opportunity set, corporate governance practices and firm performance. Journal of Corporate Finance, 10 (4), 595-614.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behaviour, agency costs and capital structure. Journal of Financial Economics, 3 (4), 305-360.
Jensen, M. C., & Murphy, K. J. (1990a). CEO incentives – it’s now how much you pay, but how. Harvard Business Review, 68 (3), 138-153.
Jensen, M. C., & Murphy, K. J. (1990b). Performance pay and top-management incentives. Journal of Political Economy, 98 (2), 225-264.
26
Jones, D. (2000). Emerging problems with the Basel capital accord: regulatory capital arbitrage and related issues. Journal of Banking and Finance, 24 (1-2), 35-58.
Kaplan, R., & Atkinson, A. (1998). Advanced management accounting (3rd ed.). Prentice Hall Inc., New Jersey.
Kinateder, H. (2015). Basel II versus III: a comparative assessment of minimum capital requirements for internal model approaches. Journal of Risk, 18 (3), 25-45.
Leonard, J. S. (1990). Executive pay and firm performance. Industrial and Labor Relations Review, 43 (3), 13-29.
Lucas Jr., R. E. (1978). On the size distribution of business firms. The Bell Journal of Economics, 9 (2), 508-523.
Lun, Y. H. V., Pang, K. W., & Panayides, P. M. (2010). Organisational growth and firm performance in the international container shipping industry. International Journal of Shipping and Transport Logistics, 2 (2), 206-223.
Madhani, P. M. (2011). Realigning fixed and variable pay compensation management. SCMS Journal of Indian Management, 8 (1), 5-17.
Marris, R. (1964). The economic theory of ‘managerial’ capitalism. Macmillan, London. Modell, S. (2002). Institutional perspectives on cost allocations: integration and extension.
European Accounting Review, 11 (4), 653-679.
Nienhueser, W. (2008). Resource dependence theory – how well does it explain behavior of organizations? Management Revue, 19 (1+2), 9-32.
Peetz, D. (2015). An institutional analysis of the growth of executive remuneration. Journal of Industrial Relations, 57 (5), 707-725.
Pepper, A., Gore, J., & Crossman, A. (2013). Are long-term incentive plans an effective and efficient way of motivating senior executives? Human Resource Management Journal, 23 (1), 36-51.
Productivity Commission (2009). Executive remuneration in Australia. Productivity Commission Inquiry Report No. 49, Melbourne.
Rosen, S. (1981). The economics of superstars. American Economic Review, 71 (5), 845-858. Rosen, S. (1982). Authority, control and the distribution of earnings. The Bell Journal of
Economics, 13 (2), 311-323.
Rosen, S. (1992). Contracts and the market for executives. In Lars Werin and Hans Wijkander (eds.). Contract Economics, 1 (1), 181-217. Blackwell Publishers, Cambridge MA. Samiee, S., & Roth, K. (1992). The influence of global marketing standardization on
27
Shiwakoti, R. K. (2012). Comparative analysis of determinants of executive remuneration in the UK financial services sector. Accounting and Finance, 52 (1), 213-235.
Smith, M. (2015). Research methods in accounting (3th eds.). Sage Publications Ltd, London. Stenholm, P., Pukkinen, T., & Heinonen, J. (2016). Firm growth in family businesses – the
role of entrepreneurial orientation and the entrepreneurial activity. Journal of Small Business Management, 54 (2), 697-713.
Stroh, L. K., Brett, J. M., Baumann, J. P., & Reilly, A. H. (1996). Agency theory and variable pay compensation strategies. The Academy of Management Journal, 39 (3), 751-767. Swichtenberg, B. (1999). Return on assets. Water-engineering and Management, 146 (5), 1-5. Tervio, M. (2008). The difference that CEOs make: an assignment model approach. American
Economic Review, 98 (3), 642-668.
Tosi, H. L., Werner, S., Katz, J. P., & Gomez-Mejia, L. R. (2000). How does performance matter? A meta-analysis of CEO pay studies. Journal of Management, 26 (2), 301-339. Walker, J. (2010). The use of performance-based remuneration: high versus low-growth
firms. Australian Accounting Review, 20 (3), 256-264.
Webster, M. (1999). The economics of intangible investment. Edward Elgar Publishing Limited, Cheltenham UK.
Wyatt, A. (2008). What financial and non-financial information is value-relevant? A review of the evidence. Accounting and Business Research, 38 (3), 217-256.
28
Table 1: Variables definition
Variable name Explanation
Growthict Growth in total assets from the beginning to the end of year t.
Growth in market capitalisation from the beginning to the end of year t.
CRDict Dummy variable that has the value 1 for the period after the bank adopted CRD IV
and has the value 0 for the period before the bank adopted CRD IV. REMict The total remuneration during year t.
VARict The variable remuneration during year t.
FIXict The fixed remuneration during year t.
SIZEict Natural logarithm of the total assets at the end of year t.
ROAict The return on assets during year t.
YEARict Dummy variable that has the value 1 if it is that specific year and has the value 0 if it
is not that specific year.
COUNTRYict Dummy variable that has the value 1 if it is that specific country and has the value 0 if
it is not that specific country.
29
Table 2: Descriptive statistics
Variable N Mean Median Q1 Q3 Min Max STD Growth (Assets) 499 0.0165 0.0020 -0.0616 0.0748 -0.2720 0.5294 0.1280 Growth (MarkCap) 499 0.2926 0.2430 0.0271 0.4623 -0.5630 3.5436 0.4343 Tot. Remuneration 499 7.1235 7.1561 6.7875 7.4433 5.2725 8.3263 0.4751 Fix. Remuneration 499 6.8128 6.8129 6.5490 7.0792 4.3010 8.0719 0.4617 Var. Remuneration 499 6.6214 6.7507 6.1755 7.1761 4.0000 8.1206 0.7616 Size 499 4.9440 4.9064 4.3975 5.7968 3.0777 6.3058 0.8956 Return on assets 499 0.8099 0.2060 0.0150 1.1920 -6.7390 14,981 2.3392
30
Table 3 – Regression analysis for firm growth based on total assets
Variable Model 1 Model 2 Model 3 Model 4 Tot. Remuneration 0.040*** 0.036*** Fix. Remuneration 0.019 Var. Remuneration 0.003 CRD IV 0.043*** -0.059 -0.267*** 0.250* Size -0.060*** -0.060*** -0.058*** -0.056*** Return on assets 0.004* 0.004* 0.005** 0.005** Austria 0.030 0.030 0.026 0.018 Belgium - - - - Cyprus -0.106*** -0.104*** -0.103** -0.132*** Czech Republic 0.012 0.015 0.038 0.024 Denmark 0.028 0.028 0.047** 0.042* Finland - - - - France 0.086*** 0.085*** 0.072*** 0.064** Greece - - - - Ireland -0.041 -0.040 -0.040 -0.062* Italy 0.037** 0.037** 0.038** 0.024* Lithuania - - - - Netherlands -0.038* -0.037* -0.040* -0.054** Poland 0.037** 0.036** 0.043*** 0.039** Portugal 0.023 0.022 0.009 -0.001 Romania -0.080*** -0.079*** -0.075*** -0.074*** Spain 0.058*** 0.057*** 0.057*** 0.057*** Sweden 0.015 0.016 0.033 0.029 United Kingdom 0.089*** 0.088*** 0.082*** 0.087*** 2013 -0.086*** -0.086*** -0.085*** -0.085*** Interaction - 0.014 0.046*** -0.030 Observations 499 499 499 499 R-squared 0.564 0.564 0.569 0.556 Adjusted R-squared 0.547 0.546 0.551 0.537 Robust standard errors in parentheses: *** p < 0.01, ** p < 0.05, * p < 0.1.
The regression Models are:
𝐆𝐫𝐨𝐰𝐭𝐡𝑖𝑐𝑡 = 𝛼0+ 𝛼1𝐂𝐑𝐃𝑖𝑐𝑡+ 𝛼2𝐑𝐄𝐌𝑖𝑐𝑡+ 𝛼3𝐒𝐈𝐙𝐄𝑖𝑐𝑡+ 𝛼4𝐑𝐎𝐀𝑖𝑐𝑡+ 𝛼5𝐘𝐄𝐀𝐑𝑖𝑐𝑡+ 𝛼6𝐂𝐎𝐔𝐍𝐓𝐑𝐘𝑖𝑐𝑡 + 𝜀𝑖𝑐𝑡 (𝟏) 𝐆𝐫𝐨𝐰𝐭𝐡𝑖𝑐𝑡 = 𝛼0+ 𝛼1𝐂𝐑𝐃𝑖𝑐𝑡+ 𝛼2𝐑𝐄𝐌𝑖𝑐𝑡+ 𝛼3𝐂𝐑𝐃𝑖𝑐𝑡∙ 𝐑𝐄𝐌𝑖𝑐𝑡+ 𝛼4𝐒𝐈𝐙𝐄𝑖𝑐𝑡+ 𝛼5𝐑𝐎𝐀𝑖𝑐𝑡+ 𝛼6𝐘𝐄𝐀𝐑𝑖𝑐𝑡 + 𝛼7𝐂𝐎𝐔𝐍𝐓𝐑𝐘𝑖𝑐𝑡+ 𝜀𝑖𝑐𝑡 (𝟐) 𝐆𝐫𝐨𝐰𝐭𝐡𝑖𝑐𝑡 = 𝛼0+ 𝛼1𝐂𝐑𝐃𝑖𝑐𝑡+ 𝛼2𝐕𝐀𝐑𝑖𝑐𝑡+ 𝛼3𝐂𝐑𝐃𝑖𝑐𝑡∙ 𝐕𝐀𝐑𝑖𝑐𝑡+ 𝛼4𝐒𝐈𝐙𝐄𝑖𝑐𝑡+ 𝛼5𝐑𝐎𝐀𝑖𝑐𝑡+ 𝛼6𝐘𝐄𝐀𝐑𝑖𝑐𝑡 + 𝛼7𝐂𝐎𝐔𝐍𝐓𝐑𝐘𝑖𝑐𝑡+ 𝜀𝑖𝑐𝑡 (𝟑) 𝐆𝐫𝐨𝐰𝐭𝐡𝑖𝑐𝑡 = 𝛼0+ 𝛼1𝐂𝐑𝐃𝑖𝑐𝑡+ 𝛼2𝐅𝐈𝐗𝑖𝑐𝑡+ 𝛼3𝐂𝐑𝐃𝑖𝑐𝑡∙ 𝐅𝐈𝐗𝑖𝑐𝑡+ 𝛼4𝐒𝐈𝐙𝐄𝑖𝑐𝑡+ 𝛼5𝐑𝐎𝐀𝑖𝑐𝑡+ 𝛼6𝐘𝐄𝐀𝐑𝑖𝑐𝑡 + 𝛼7𝐂𝐎𝐔𝐍𝐓𝐑𝐘𝑖𝑐𝑡+ 𝜀𝑖𝑐𝑡 (𝟒)
where, for bank i, year t and country c, Growthict stands for growth in total assets from the beginning to the end
31
the value 0 for the period before the bank adopted CRD IV. REMict is the total remuneration during year t.
VARict is the variable remuneration during year t. FIXict is the fixed remuneration during year t. SIZEict is the
natural logarithm of the total assets at the end of year t. ROAict is the return on assets during year t. YEARict is a
dummy variable that has the value 1 if it is that specific year and has the value 0 if it is not that specific year. COUNTRYict is a dummy variable that has the value 1 if it is that specific country and has the value 0 if it is not
