Abstract
This study examines the variables influencing CEO compensation in the technology sector using both exclusively exogenous and interchangeably exogenous and endogenous variables. The study was confined to a single industry to isolate industry compensation practices which may be smoothed out in multi-industry studies. Multiple equations in a vector autoregressive model were used to explain compensation in recognition of the endogeneity of variables such as sales growth, stock returns and net income. Using US firms listed on the NASDAQ, we find that CEO compensation (measured separately as salary only, stock option grants only and total compensation from all sources) to be significantly explained by firm size, the ability to reduce debt, the ability to fund growth, net income and personal characteristics. CEOs are rewarded for achieving profitability. While there is an expectation of innovation in the technology sector with research and development expenditure increasing both sales and stock returns, such innovation only contributes to CEO compensation if it is translated into rising net income in an environment of debt-reduction. Further, CEOs are rewarded for implementing disruptive technology as a competitive strategy. The ability to fund growth is pertinent for the technology sector which may be restricted in its access to debt. Increases in age, tenure and the existence of celebrity status of the CEO led to increased compensation underscoring the importance of personal characteristics.
Highlights
The recent escalation of CEO pay has received much attention in both the popular press and in the academic li-How to cite this paper: Abraham, R., Harris, J. and Auerbach, J. (2014) CEO Pay-Performance Sensitivity: A Multi-Equation Model
Anderson et al [34] and Balkin et al [36] observed the significant influence of return on assets on CEO pay in technology firms, a general sample consisting of all firms in the ExecuComp database from 1993-2008 (Brookman and Thistle [32])), a general sample from 2007-2010 (Lin and Kuo, [33]), and privately-held firms (Cole and Mehran [19]) while on the other hand there was no link between earnings per share and CEO compensation (Garen [39])
Exploratory Question 4 was partly affirmed with net income significantly influencing all three measures of compensation, though such an effect failed to originate in cost containment through reduced cost of goods sold or higher operating income
Summary
How to cite this paper: Abraham, R., Harris, J. and Auerbach, J. (2014) CEO Pay-Performance Sensitivity: A Multi-Equation Model. Industry-specific studies are further justified on grounds that technology products are unique in terms of their rapid speed of life cycle, high economies of scale and the “all or nothing” affect of consumer market behavior. They have a large initial outlay for discovery cost (either research or patents buying), a low expansive variable cost and are vulnerable to subsequent disruptive technologies. Multiple regressions are conducted of executive compensation on firm performance measures (stock return, return on equity, return on assets, sales and net income) supplemented with CEO characteristics (tenure, career path, years as CEO) and firm size. We propose a multi-equation approach which employs vector autoregression to explore the paths from accounting variables to firm performance measures, and in turn, to executive compensation. This study’s employment of vector autoregression overcomes this limitation
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