CECL and Bank CEO Compensation

Authors

Ilona Babenko, Arizona State UniversityFollow
Benjamin Bennett, Tulane University - A.B. Freeman School of BusinessFollow
Gauri Bhat, Southern Methodist University (SMU) - Accounting DepartmentFollow
Todd T. Milbourn, Washington University in Saint Louis - Olin Business SchoolFollow

Publication Date

7-19-2024

Abstract

The adoption of the Current Expected Credit Losses (CECL) model, a new methodology for accounting for expected credit losses, has significantly increased bank earnings volatility. Using a difference-in-differences around the adoption, we examine how more volatile earnings impact CEO compensation design. We find that post-CECL, bank CEO pay becomes less sensitive to earnings, but more sensitive to other performance measures, such as stock returns and revenues. Additionally, total executive compensation increases, consistent with the higher risk premia demanded by bank executives. Overall, our results suggest that compensation committees view accounting earnings as having lower contractual usefulness for incentives after CECL.

Document Type

Article

Keywords

Pay-Performance Sensitivity, Earnings-Based Incentive Compensation, CECL

Disciplines

Accounting

DOI

10.2139/ssrn.4899741

Source

SMU Cox: Accounting (Topic)

Language

English