Payout Policy and Executive Compensation Among Financial Institutions

1
Payout Policy and Executive Compensation Among
Financial Institutions

• Aigbe Akhigbe
• University of Akron
• Ann Marie Whyte
• University of Central Florida

2
Objective

• Examine link between payouts and compensation for
  financial institutions
• Large banks ( 10 billion in assets)
• Small banks (
• Savings institutions
• Insurance companies
• Investment banks

3
Motivation

• Growing importance of repurchases among financial
  firms
• Recent regulatory changes may have altered both
  payouts and compensation structure
• Existing literature focuses on nonfinancial firms
  (Fenn and Liang 2001)

4
Motivation

• However, financial firms are unique
• Liano, Huang, and Manakyan (2003) suggest that
  the impact of stock repurchases varies by
  industry because of differences in the cost of
  equity
• Regulation means financial firms have less
  flexibility in deploying free cash flows
• Despite growth in stock repurchases, still less
  prevalent among financial firms

5
Motivation

• Compensation structure is different for financial
  firms use of stock options not as pervasive
• GLBA of 1999

6
Hypotheses

• Positive relation between payouts and use of
  stock incentives
• stock incentives align interests of managers and
  shareholders resulting in higher payouts
• Negative relation between payouts and use of
  stock incentives
• Stock ownership is alternative mechanism for
  controlling agency problems

7
Data and Methods

• We use SIC codes to identify the institutions
• The sample period is 1992-2002
• Constraint all sample firms must have data in
  Execucomp for the compensation measures
• Managerial share ownership
• Managerial stock ownership

8
Data and Methods

• Three payout measures
• Dividend payout total cash dividends/market
  value of equity
• Repurchase payout total value of shares
  repurchased/market value of equity
• Total Payout dividend payout plus repurchase
  payout

9
Data and Methods

• Issues in measuring the repurchase payout
• Actual amount difficult to measure
• Annoucing a repurchase program doesnt mean firm
  is obligated to repurchase
• Regulatory reports (provided by banks) dont
  specify actual repurchases
• Thus, we use annual changes in shares outstanding
  (consistent with Stephens and Weisbach, 1998)

10
Methods
11
Table1 Trend in payouts and compensation across
financial institutions
12
Table 2 Descriptive Statistics
13
Table 2 Descriptive Statistics (continued)
14
Table 2 Descriptive Statistics (continued)
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Table 3 The relationship between payouts and
executive compensation at large banks
16
Table 4 The relationship between payouts and
executive compensation at small banks
17
Table 5 The relationship between payouts and
executive compensation at savings institutions
18
Table 6 The relationship between payouts and
executive compensation at insurance companies
19
Table 7 The relationship between payouts and
executive compensation at investment banks
20
Conclusions

• The dividend payout is the only payout measure
  impacted by compensation the repurchase payout
  is largely unaffected
• Among banking organizations and insurance
  companies, only managerial stock ownership
  impacts the dividend payout

21
Conclusions

• Specfically, we find an inverse relationship
  between MANSHR and the dividend payout
• Some evidence that the relationship is not
  monotonic among large banks
• Among investment banks, both measures of
  compensation are inversely related to the
  dividend payout

22
Conclusions

• Regulatory and structural differences between
  financial and nonfinancial firms impact the
  relationship between payouts and compensation