We use a hand-collected international database to analyze the change in the risk-taking incentives embedded in bank executive compensation after the onset of the global financial crisis. Our results reveal a reduction in both the risk sensitivity of stock option grants (vega) and total and cash pay-risk sensitivities in countries suffering systemic banking crises. This reduction is greater in countries with strong shareholder protection, especially in banks with good corporate governance, solvent banks, and banks that suffered a reduction in their specific investment opportunity set. The regressions control for government intervention, banking development, and crisis intensity. Our results confirm that the contracting hypothesis is more relevant in countries with stronger shareholder protection, and provide support for measures improving shareholder rights in the approval of bank executive compensation.

This paper analyzes the country determinants of risk-taking incentives embedded in bank executive compensation using hand-collected international panel data on 135 publicly-traded banks in 26 countries. We exploit time-series changes in investor protection within a country and confirm that stronger protection leads to a higher vega. Moreover, the positive effect on vega is higher in countries where stronger bank competition and more extensive safety nets increase bank shareholders' risk-taking incentives. Our analysis controls for changes in bank regulation, systemic banking crises, and government bailouts. The results are robust to alternative specification models, alternative proxies for country determinants, and remain when we apply a more traditional cross-sectional analysis.