Measuring the Rate of Technological Progress in Structures

Banking problems in the 1980s led to passage of the FDICIA (1991). The purpose of this legislation was to improve market and regulatory discipline of banks’ performance through changes in incentive structures. This paper looks at how the FDICIA changes bank CEOs’ pay–performance relationship. It finds that the FDICIA improves healthy banks’ growth opportunities, making their CEOs’ tot al compensation less sensitive to performance. Meanwhile, the FDICIA restricts unhealthy banks’ growth opportunities, making their CEOs’ total compensation more sensitive to performance. These results support the agency-cost-of-debt theory developed in John and John (1993). This paper shows that since enactment of the FDICIA, CEOs’ compensation structure has become more incentive-based for both healthy and unhealthy banks. At the same time, the main components of CEOs’ compensation, salary and bonus, have become more sensitive to accounting earnings, while stock-based compensation has become more responsive to stock returns.