Executive Compensation and Retention Outcomes Associated with TARP Participation

This study provides evidence regarding executive compensation and retention outcomes associated with banks’ participation in the Troubled Asset Relief Program (TARP). I find that TARP participation is associated with lower levels of total compensation, consistent with TARP’s regulations constraining not only the structure but also the level of executive pay. I also find TARP participation to be positively associated with executive departure rates after controlling for firm performance and determinants of TARP participation. Executive turnover rates at TARP participants are positively associated with executives’ pre-TARP levels of compensation. Supplemental tests suggest that the higher incidence of SEO resignations among TARP participants is driven primarily by voluntary turnover rather than forced terminations. Overall, my results are consistent with the view that TARP’s pay restrictions increased the deadweight costs of compensation and reduced the efficiency of the executive pay-setting process.