Average pay in banks: do agency problems and bank performance matter?

We study the determinants of average pay across all levels of staff seniority for UK banks between 2003 and 2012. We show that pay is affected by agency problems but not by bank operating performance. Average pay does not depend on accounting outcomes at the bank level. By contrast, average pay is positively affected by the presence of a Remuneration Committee and the proportion of Non-Executives on the Board. These findings contribute to the existing literature in two ways. First, this is the first empirical study to directly compare the relative explanatory power of two theories of the determinants of bank pay (governance structures and bank performance). By finding empirical support for one theory but not the other, we identify dysfunctions in the determination of pay in banks. Second, our study considers a broader set of bank employees than any earlier research in this field, allowing us to identify more general patterns. Our results have practical implications for bank shareholders and regulators, suggesting the need for greater transparency in governance of bank pay.