Optimally designed managerial compensation structures
not only align CEO interests with those of shareholders, but
also signal to other stakeholders the incentive structures
underlying the risk choices being made by top management.
Commercial banks are unique in that depositors are the most
important class of claimholders; how risky depositors perceive
their debt to be will determine how costly the banks’ capital will
be.12 Hence, optimal management compensation in banks that
takes into account both of these roles will have a payperformance
sensitivity that is lower than it is for firms in
general.