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STUDY: BANK MERGERS BOLSTER CEO SALARIES, BUT NOT STOCKHOLDERS' FINANCIAL RETURN
BLOOMINGTON, Ind. -- National banks involved in the most recent wave of mega-mergers may be touting benefits to shareholders and depositors, but research by a professor in Indiana University's Kelley School of Business indicates that financial returns to stockholders of the acquiring banks aren't much different than those of the average bank.
In fact, the ones who may benefit the most from bank mergers are those in the banks' top management, according to Richard J. Rosen, IU assistant professor of finance.
"In the past, if you look at the long-run performance of stock prices of banks that were involved in acquiring another bank, they basically did no better than the average bank," said Rosen, a former economist for the Board of Governors of the Federal Reserve in Washington, D.C.
"When we hear about mergers providing all of these great efficiencies, they may, but that doesn't seem to be reflected in the stock price three or four years after the merger is announced or completed," he added. "Whatever benefits there are don't seem to be passed on to shareholders in the acquiring bank."
Rosen and Richard T. Bliss, an IU graduate now teaching at Babson College, examined in a major study whether bank mergers offered private benefits in the form of increased compensation for bank chief executives. They analyzed the compensation of bank CEOs between 1986 and 1995 and found "there is strong evidence that as a bank gets bigger, the salary of the CEO goes up," Rosen said.
Included in the professors' sample were all bank holding companies that were among the 30 largest in asset size for at least one year and that existed for at least five of the 10-year time period studied. As a result, they studied managerial compensation at 32 different U.S. banks.
Rosen and Bliss found that while increases in institutional size affected CEO compensation, those increases were the same whether the size was inherited, acquired during a merger, or the result of growth.
Previous studies examining the effect of size on compensation have not distinguished among the different ways that size can be acquired. Rosen noted that mergers are a fast way to increase the size of a firm. If boards of directors reward managers equally for all types of growth, then a manager desiring a quick increase in compensation will have a strong incentive to make an acquisition.
In one hypothetical example of a merger involving two banks -- one with assets of $50 billion and the other with assets of $15 billion -- the CEO of the larger, acquiring bank would receive $1.6 million in cash compensation and an additional $1.1 million in other compensation, for total compensation of $2.7 million. By acquiring the $15 billion bank, the CEO could expect his cash compensation to rise by $390,000 and total compensation to increase by $580,000 -- for a 22 percent increase in total compensation.
There is anecdotal evidence to support a connection between CEO compensation and bank merger activity. First Chicago NBD Corp.'s 1997 proxy statement attributes the 37 percent increase in CEO Verne Istock's annual compensation to the "successful merger of First Chicago and NBD." Walter V. Shipley, CEO of Chase Manhattan Corp., received a "special merger bonus" of $5 million, payable in equal annual installments beginning in 1996.
As Rosen and others have found, a merger increases the size of a bank, but can reduce the stock price. In many business scenarios, a reduction in stock price usually reduces CEO compensation.
However, even if the bank stock price of an acquiring bank falls when a merger is announced, the merger can significantly increase managerial compensation. "This gives at least a partial explanation why managers might make such acquisitions," Rosen and Bliss concluded in their study.
Rosen also pointed out that in banking there are very few hostile takeovers. For example, when Core States Bank was taken over by First Union, Core States turned down a bid from Mellon Bank. First Union offered Core States' CEO a better position after the merger. "Generally you want to get approval of the management," he said.
(George Vlahakis, Office of Communications and Marketing, 812-855-0846 or 812-855-3911,gvlahaki@indiana.edu