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Executive Summary This article addressed the issue of the relationship between CEO compensation and both firm specific characteristics and CEO specific characteristics. The study design used Pearson Product Moment correlation and least squares regression analysis to test the relationship between CEO compensation against both firm specific characteristics and CEO specific characteristics. The independent variables for this study consisted of performance variables (percentage change in stock market return and percentage change in return on equity) and size variables (sales, assets, and number of employees). Also, the independent variables for this study consisted of CEO specific characteristics (age, job tenure, education, and CEO stock ownership). The two dependent variables are percentage change in CEO compensation and dollar level of CEO compensation, which was defined as each CEO's salary plus bonus. The data was gathered for the years 2001 - 2003. The sample for the study consisted of 108 years of CEO characteristics and firm data for 36 firms in the U. S. commercial banking industry. Two tests were conducted using Pearson Product Moment Correlation Analysis: First, a test to determine if there is a positive correlation between total salary plus bonus compensation and the indicators for firm specific characteristics over the three-year period. Second, a test to determine if there is a positive correlation between total salary plus bonus compensation and the indicators for CEO specific characteristics over the three-year period. Regression analysis was used to predict CEO compensation based on firm performance, firm size and CEO characteristics. The results indicated there is a weak relationship between both percentage stock price return and percentage return on equity and the percentage change in CEO compensation. There is a strong relationship between sales, assets and number of employees and dollar level of CEO compensation. There is a weak relationship between age, CEO tenure in present position, education and CEO stock ownership and the dollar level of CEO compensation. Introduction In the last two decades, compensation of CEOs in the banking industry has been a major controversy among shareholders and has experienced more pressure in both legislative and economic arenas than at any time since the 1930s. As a result of changes in the banking industry, the role of the CEO has grown in importance and has the greatest influence on the performance of the firm by becoming the leader in determining the strategy of the firm while during the last decade there has been a tremendous growth in executive compensation. The purpose of this paper is to explore the process used to determine the relationship between firm performance and Chief Executive Officer compensation in the U. S. commercial banking industry. Literature Review There has been increased interest in the importance of executive compensation in banking. Akhigbe, Madura and Ryan (1997), Hubbard and Palia (1995), Houston and James (1995), Ely (1991), and Barro and Barro, (1990) have examined the conflicting goals of management and shareholders in the banking industry and how the industry attempts to alleviate these agency problems. The focus of this study is to fill the gap in the literature for executive compensation practices in the U. S. commercial banking industry and to extend previous studies on bank executive compensation, e. g., Houston and James (1995) used 147 banks in the period 1981 -1990, Hubbard and Palia (1995) examined 134 banks during 1980 - 1990, and Crawford, Ezzel and Miles (1995) studied 124 banks in 1976 -1988. A study by Vafeas, Waegelain, & Papamichael (2003) analyzed changes in the executive compensation policy of 94 commercial banks. After compensation reform, banks substituted other rewards for cash compensation, and exhibited a stronger pay-for-performance relationship. Their analysis suggests that compensation reform, rather than deregulation or corporate control, led commercial banks to change their governance structures. …
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