Owners’ Return and Salary Growth in Swedish Banks

Abstract

In recent times, the financial industry has gone through a major crisis which heavily affected the real economy. It is clear that investors holding bank shares have lost large amount of wealth, whereas it appears that the employees of these institutions have been little affected. This study focuses on the return made by owners of bank stocks and puts this return in relation to the level of employee compensation. Do the banks’ owners profit from high salary levels, or is the employees’ compensation interfering with the goal of maximising shareholders’ wealth? The aim of this thesis is to study the equity flow in financial institutions, in order to recognise whether one should invest in financial institutions in a long term perspective. Through an examination of Swedish banks present on the Stockholm Stock Exchange between the years 1983 and 2008, this study attempts to answer the above raised questions. The return for bank owners, both in the form of capital gains and dividends, as well as the salary per employee and total salary costs are variables scrutinised. If the actual and expected return is equal with regards to the systematic risk of bank stocks is also examined. A method to calculate the banks’ internal rate of return inspired by the academics Fama and French along with statistical tests of the different variables are used to research the topic and make conclusions. Among the major findings is the fact that long-term investments in Swedish bank shares were profitable over the period studied, whilst short-term investments had volatile yields. The level of salary for bank employees did not decrease during crises, however the amount of employees was affected by a downturn and a reduction in the size of the workforce could be observed two years after an economic plunge in the banking industry.