Abstract
We examine the effect of pay gaps between CEOs and non-CEO executives on bank stability for a sample of large, mostly international banks. Our primary result is that larger pay gaps are associated with an increase in bank stability and a decrease in portfolio risk and leverage risk. This result is robust to mandated changes in compensation arrangements and differences in national cultures. We find that the effect of pay gaps on stability and risk is sensitive to the power of bank CEOs. It suggests that powerful CEOs and senior non-CEOs exhibit a level of conservatism which both counters the effect of tournament incentives for junior non-CEOs to take risks and protects the pay and status of senior executives.