Director Compensation in the Banking Industry Around the Dodd-Frank Act

Abstract

Directors’ monitoring and advising activities as agents were supposed to increase after the Dodd-Frank Act in 2010. The Dodd-Frank Act significantly increases the pressure on the board of directors to be more effective agents of the stockholders even after the Sarbanes-Oxley Act (2002) became effective. Director compensation, especially incentive-based compensation, is intended to align with the interests of shareholders and motivate director behavior. This paper empirically tests how banks respond to the Dodd-Frank Act by redesigning their director compensation plans. Our findings suggest that banks recognize the need for improved board monitoring by highlighting the importance of director workload and qualifications through the design of director compensation packages in the post-Dodd-Frank Act period. We also find that the negative impact of excessive director equity compensation on firm performance was attenuated after the passage of the Dodd-Frank Act. The findings of this study shed light on the rationale of director compensation policies for banking firms.