Does executive compensation matter to bank performance? Experimental evidence from Jordan

Abstract

The high pays received by executives has gained global attention. This study examines the impact of executive compensation on the performance of Jordanian banks, an area that has not been explored much. The study uses empirical methods for data collection and analysis. Dependent variables include Return on Equity (ROE) and Tobin’s Q performance, while total compensation incentives is the main independent variable. Control variables include bank size, bank age, leverage, and female executives. Through balanced panel data analysis comprising 196 bank-year observations, this quantitative research paper applies Ordinary Least Squares (OLS), fixed-effect, and Generalized Method of Moment (GMM) methods. These methods accurately establish the compensation-performance relationship in the banking sector from 2009 to 2022. The coefficient of determination (R2) for the ROE model: 51.63%, Tobin-Q model: 39.33%. These robust models support the main finding that executive compensation is significantly and positively correlated with operating and market-based performance indicators. Results validate the agency hypothesis, indicating that executives are rewarded for bank performance indicators. Consequently, a one-unit increase in executive compensation leads to a rise of 22.8 cents in ROE and 29.51 cents in Tobin-Q. Additionally, bank size, age, leverage, and female executives positively impact bank performance indicators. A modification of BSIZE, BAGE, LEV, and FEMALE by one-unit results in a proportional adjustment of 26.1 cents, 16.6 cents, 2.07 cents, and 48.6 cents, respectively, in ROE. Additionally, a one-unit alteration in BSIZE, BAGE, LEV, and FEMALE corresponds to variations of 77.6 cents, 56.42 cents, 34.39 cents, and 48.8 cents, in Tobin-Q, all in the same direction.