How International Diversification and Industrial Diversification Affect CEOs Long-Term Compensation?

Abstract

This study examine CEOs long-term compensation for 2448 CEOs from 1997 through 2002 and to explore whether or not the independent variables (international diversification, industrial diversification, market-based performance, accounting-based performance, investment opportunities, firm size, and stock ownership) was associated with CEOs long-term compensation. Corporate diversification is separated into an international diversification and industrial diversification for this study. Based on agency and expectancy theories, this study tests and hypotheses related to corporate diversification being associated with the CEOs long-term compensation. Multiple regression analysis was employed to examine the relationship between CEOs long-term compensation and the independent variables - international diversification, industrial diversification, investment opportunities, firm size, firm performance and stock ownership. This study builds upon the previous studies to identify other variable not previously considered, which may effect corporate diversification (international diversification and industrial diversification) and CEOs long-term compensation. The results found that the higher degree of international diversification, higher stock return earnings performance, higher accounting earning performance, and higher stock ownership, CEOs receive higher levels of long-term compensation. The results also demonstrated that CEOs in firms with more investment opportunities will receive higher long-term compensation than CEOs in firms with fewer investment opportunities and CEOs in larger firms will receive higher long-term compensation than CEOs in smaller firms. In contrast, the higher the degree of industrial diversification, CEOs receive less levels of long-term compensation. In addition, the result also found that CEOs who have greater outstanding stock ownership make less use of CEO long-term compensation. These findings will help decision makers, such as boards of directors, investors, shareholders and CEOs, construct optimal compensation contracts that reduce agency cost and maximize shareholder wealth in the future.