CEO Pay-performance Sensitivity Research Articles

CEO Pay-performance Sensitivities in the ESG Managed Firms

CEOs of highly rated ESG firms are paid significantly higher salaries. High ESG firms are larger, more profitable, and mature firms, facing less risks compared to low ESG rated firms. Although these systematic differences in firm characteristics account for a significant portion of the CEO pays, when we decompose the CEO pays between different ESG groups, there exists a non-trivial residual portion of the unexplained compensation gap that the traditional firm characteristics can not fully explain. About 79.8% of the mean difference is attributable to the firm characteristic part and the residual 20.2% can be ascribed to the ESG group effect. The high ESG firms are more active in using the incentive compensation scheme to discipline managers while the low ESG firms are more conservative in adopting the sensitive incentive pay systems because they are more susceptible to the negative factors such as risk and leverage. As a result, we observe significantly higher pay-performance sensitivities for the high ESG group and the low ESG firms are paid lower than what their firm characteristics prescribe. The ESG rating has an orthogonal part of the explanatory power that contributes to the pay-performance sensitivity over the traditional solvency measure such as credit ratings.

Export diversification, CEO compensation and CEO pay-performance sensitivity: lesson from china

Export diversification, CEO compensation and CEO pay-performance sensitivity: lesson from china

Mandatory CSR disclosure and CEO pay performance sensitivity in China: evidence from a quasi-natural experiment

PurposeThis paper aims to empirically examine the impact of mandatory CSR disclosure on the CEO pay performance sensitivity.Design/methodology/approachUsing the mandatory requirement of CSR disclosure as an exogenous shock, the authors compare the changes in CEO pay performance sensitivity for treatment firms with control firms through a difference-in-difference (DiD) approach.FindingsThe authors find that mandatory CSR disclosure enhances CEO pay performance sensitivity. The results also show that monitoring CEO power is a conduit through which mandatory CSR disclosure affects CEO pay performance sensitivity. The positive impact is more profound in firms with a powerful CEO, i.e. one who is politically well-connected, holds dual roles as both CEO and Chairman, and/or has had a long tenure. Furthermore, the increased CEO pay performance sensitivity after the mandate is prominent among state-owned enterprises (SOEs) only.Practical implicationsThe findings of this paper have implications for other economies with similar institutional backgrounds as China. Although the mandatory CSR disclosure does not require firms to spend on CSR investment, the mandatory CSR disclosure alters firm behaviour, and mitigates agency problems.Originality/valueThis paper contributes to the studies on the impact of CSR disclosure on firms' behaviour. To the authors' knowledge, this is the first study to examine the effects of mandatory CSR disclosure on CEO pay performance sensitivity using the quasi-natural experiment settings.

Climate risk and future stock price crash: Evidence from U.S. firms

This study investigates the impact of climate risks on stock prices and explores the measures that corporate managers may take to stabilize their company's stock price in response to unexpected climate risks. We analyze a sample of U.S. firms from 1996 to 2022 and find that firms located in disaster-prone counties are associated with a higher risk of stock market crashes. The results indicate that firms exposed to climate risks are more likely to experience unexpected earnings and breaks in earnings strings. While earnings management can sometimes provide short-term benefits, it can also lead to long-term risks and negative consequences on stock price crashes. Moreover, mature firms and firms with higher CEO pay-performance sensitivity are more susceptible to stock market crashes. The findings suggest that climate risk can induce short-term thinking among managers, affecting market valuation. By shedding light on the complex relationship between climate risks and financial risks, this study can inform responsible investment strategies and corporate governance policies that promote transparency, accountability, and long-term value creation.

How Does Risk Tolerance Reflected in National Culture Affect Pay-Performance Sensitivity?

ABSTRACTThe standard principal-agent model predicts that, ceteris paribus, a negative relation exists between firm risk and CEO incentives or pay-performance sensitivity. We examine how a CEO’s risk tolerance (captured by national culture) affects pay-performance sensitivity using international data from 29 countries. We find that CEOs from countries with high (low) risk tolerance are associated with high (low) pay-performance sensitivity, suggesting that they require a low (high) risk premium. We contribute to the CEO compensation literature by introducing CEO risk tolerance, an overlooked factor, into CEO compensation contracts.

Government controlling ownership and CEO compensation incentives: evidence from China

ABSTRACT This paper investigates the relationship between government-controlling ownership and CEO compensation incentives in China, using a comprehensive evaluation of CEO pay-performance sensitivity (PPS). We find that government-controlling ownership weakens CEO PPS, with PPS being around 6 lower for CEOs in state-owned enterprises (SOEs) than CEOs in non-state-owned enterprises (non-SOEs), representing a reduction of around 14% for a CEO with the average level of PPS. The results sustain after using privatization as the experiment setting wherein firms’ ultimate controllers changed from government owners to private owners. Moreover, the negative influence of government controlling ownership on CEO compensation incentives is more prominent in SOEs with a higher level of government ownership or a lower hierarchy government as the controller. We also explore the association between CEO incentives and firm performance and find that PPS in SOEs is more important in association with firms’ stock performance than non-SOEs. Results in this paper extend studies on the influence of government controlling ownership on CEO compensation incentives, an issue that is caught much attention in the ongoing reform of China’s SOEs.

Air pollution and executive incentive: Evidence from pay-performance sensitivity

Based on the China's non-state-owned listed corporates in 2014–2020, we adopt the real-time air quality index data published by the Ministry of Environmental Protection of China as the proxy of air pollution to examine how air pollution affects firm's CEO pay–performance sensitivity (PPS). The results of logistic regression show that air pollution is negatively correlated with the executives' PPS. We also find that industrial and regional characteristics is heterogeneous by exploring the interaction effect of CEO. In addition, our study indicates that the influence of air pollution on PPS is more significant in companies with improved performance and we provide a possible explanation of this based on the theory of resource category equivalence. The mechanism test shows that air pollution increases the firms' difficulty to motivate executives, it also destroys the effectiveness of compensation contracts and significantly reduces the PPS by increasing explicit and implicit incentive. Furthermore, we investigate the economic consequences of air pollution. Results show that air pollution would damages the firm value directly and also affect their PPS. Overall, our study reveals how air pollution affects executives' incentive, therefore provides policy support to developing countries to balance the relationship between economic development and environmental protection.

Gender Quota and CEO PAY Performance Sensitivity: Evidence from the California Gender Quota Law

Gender Quota and CEO PAY Performance Sensitivity: Evidence from the California Gender Quota Law

What matters more in board independence? Form or substance: Evidence from influential CEO-directors

We exploit heterogeneities among CEO-directors and find that influential CEO-directors (ICDs) provide value through advising and monitoring. To expansively capture their relative influence, we identify CEO-directors who command more pay than the appointing firm's CEO. We find ICDs are more (less) likely to serve on the compensation (audit) committee. ICDs serve on more board seats and benefit more by serving on these seats. ICDs improve the performance of their appointing firm by increasing CEO pay-performance sensitivities and by helping with R&D and M&A activities. Alternatively, uninfluential CEO-directors are largely inconsequential or even detrimental to the appointing firm.

Do Intangible Assets Foster Corporate Tax Avoidance?

Although existing studies have documented ample evidence that intangible assets foster corporate tax avoidance, they fail to account for the productivity of intangible assets. Using intangible intensity that reflects both the scale and productivity, we show that intangible-intensive firms exhibit lower levels of corporate tax avoidance. The negative association mainly manifests in firms with low CEO pay-performance sensitivity, less corporate diversification, and a lack of foreign revenues. In addition, we examine the possible mechanism for the relationship and find that firm productivity plays a mediating role, which is supported by separating scale and productivity of intangible intensity. The firm productivity main stems from the goodwill acquired from M&A activities. Overall, our findings suggest that intangible asset productivity plays a critical role in corporate tax policies.

Does Non-controlling Large Shareholder Monitoring Improve CEO Incentives?

ABSTRACT This paper investigates the influence of non-controlling large shareholders (NLSs) on CEO pay-performance sensitivity (PPS), using over 2,000 Chinese firms. We find that NLSs’ equity ownership or Shapley value is positively related to CEO PPS, suggesting that cash-flow rights or real voting power of NLSs help align the interests between CEOs and shareholders. This positive impact is more prominent when the benefit of monitoring is larger. There is also preliminary evidence that different types of NLSs boost CEO incentives through different channels. Overall, our study helps understand the monitoring role of NLSs in emerging markets.

Are Superstar Directors Effective in Corporate Governance?

In this paper, I hand-collected a sample of prestigious business award-winner directors based on the four types of awards discussed by Chen, Wu, and Zhivotova (2017) and use them to represent reputable board of directors. I examine how awardee directors would influence management monitoring effectiveness and corporate governance by testing with CEO compensation level, pay-performance sensitivity, risk-taking behavior, accounting conservatism, and turnover-performance sensitivity. The results show that with award-winner directors sitting in the boards, CEOs receive more incentive compensation, have higher risk-taking incentives, and the firm adopts higher level of accounting conservatism. The findings suggest that reputable directors are effective in performing monitoring and advising duties.

CEO Pay-performance Sensitivity in KOSPI and KOSDAQ Firms

CEO Pay-performance Sensitivity in KOSPI and KOSDAQ Firms

Why Do Firms Use Compensation Peer Benchmarking?

We develop a cost-benefit tradeoff model to explain corporate boards’ decision whether to use compensation peer benchmarking. Peer benchmarking helps a board retain a talented but risk-averse CEO, but it weakens CEO incentives to exert effort. Consistent with high retention needs, benchmarking firms have more peer citations, operate in general business domains with more similar firms, and their CEOs are at the most marketable age. Benchmarking firms also tend to be younger and have more volatile stock returns and earnings and higher leverage, where CEO performance is riskier. Consistent with high incentive costs, CEO pay-performance sensitivities are lower and CEO pay growth is higher at benchmarking firms. To mitigate such costs, benchmarking firms award their CEOs more equity annually and are more likely to dismiss them for poor performance. When retention needs are low, peer benchmarking is associated with lower firm value. Retention needs can also explain peer selection decisions.

What Matters More in Board Independence? Form or Substance?

Prior studies show uncertain associations between board independence and firm performance. We propose a novel measure of board independence and argue that influential CEO-directors (ICDs), those with higher compensation than the appointing firm’s CEO, are more independent of appointing firm’s top management. Controlling for conventional measures of board independence, we show that ICDs are effective monitors who help appointing firms by improving CEO pay-performance sensitivities. Through improved managerial incentives, ICDs have a significantly positive impact on long-term firm performance. In contrast, uninfluential CEO-directors are ineffective monitors whom presence on the board is either inconsequential or even detrimental to the firm.

Non-CEO top managers’ monitoring power and CEO pay-performance sensitivity in state-owned enterprises: Evidence from Chinese state-owned listed firms

Few studies have focused on the role of non-CEO top manager inside directors in corporate governance, especially in the context of emerging countries. Despite their tendency to be subject to CEOs, non-CEO top manager inside directors can counterbalance CEOs in specific situations. Using panel data on state-owned listed companies in China, we conduct an empirical study of how non-CEO top manager inside directors influence CEO pay-performance sensitivity under serious agency conflicts. We find that the proportion of non-CEO top manager inside directors is significantly negatively correlated with CEO pay-performance sensitivity in state-owned enterprises, whereas the shareholding proportion of the controlling shareholders weakens this relationship. Furthermore, we find that non-CEO top manager inside directors significantly increase executives’ on-the-job consumption. Our conclusions are robust to endogeneity testing and alternative specifications.

The effect of financial reporting quality on CEO compensation structure: Evidence from accounting comparability

This study examines the effect of accounting comparability on the design of CEO compensation structure. After controlling for firm-specific attributes, we find that accounting comparability is positively associated with CEO equity-based compensation intensity and pay-performance sensitivity. This suggests that the improved comparability increases the usefulness of equity-based compensation and a firm is willing to offer more equity-based compensation contracts to CEOs and increase their pay-performance sensitivity. Further, we find that the impact of comparability on the CEO’s compensation contract increases with information asymmetry, which is consistent with the notion that accounting comparability is a quality of financial reporting that facilitates the use of equity-based compensation in a poor information environment. Our analysis also reveals that the effect of accounting comparability on CEO compensation structure is greater when a firm’s corporate governance is strong, consistent with the complementary relation between comparability and the exiting corporate governance in determining CEO compensation schemes. Overall, our evidence suggests that firms utilize more equity-based compensation as a proportion of total compensation under greater accounting comparability and enhance the alignment between equity-based compensation and firm performance.

Serum IFN© concentration in rheumatoid arthritis patients does not depend on the disease activity

This study examines the effect of accounting comparability on the design of CEO compensation structure. After controlling for firm-specific attributes, we find that accounting comparability is positively associated with CEO equity-based compensation intensity and pay-performance sensitivity. This suggests that the improved comparability increases the usefulness of equity-based compensation and a firm is willing to offer more equity-based compensation contracts to CEOs and increase their pay-performance sensitivity. Further, we find that the impact of comparability on the CEO’s compensation contract increases with information asymmetry, which is consistent with the notion that accounting comparability is a quality of financial reporting that facilitates the use of equity-based compensation in a poor information environment. Our analysis also reveals that the effect of accounting comparability on CEO compensation structure is greater when a firm’s corporate governance is strong, consistent with the complementary relation between comparability and the exiting corporate governance in determining CEO compensation schemes. Overall, our evidence suggests that firms utilize more equity-based compensation as a proportion of total compensation under greater accounting comparability and enhance the alignment between equity-based compensation and firm performance.

The effect of race on CEO pay-performance sensitivity in South Africa

South Africa’s labour policies and the growing societal calls to better explain executive remuneration create a unique opportunity to examine the effects of race on CEO pay. This empirical research study sought to investigate the effects of race on the sensitivity of executive pay to corporate performance. The study aims to contribute to the literature by providing an evidence-based approach to understanding the effect of race on CEO remuneration. The research design was quantitative, descriptive and longitudinal in nature, utilising validated secondary data sources. The sample consisted of 19 black CEOs and a random sample of 45 white CEOs. All components of South African CEO remuneration studied were found to correlate strongly with PAT (Profit after Tax) and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) and to a lesser degree with ROE (Return on Equity) and HEPS (Headline Earnings per Share). Black and white CEO mean remuneration was found to show no significant difference as a result of race. A notable difference found was the higher degree of payperformance sensitivity and variability seen within the black CEO sample. The study showed that race does not affect the level of CEO remuneration but does impact on pay-performance sensitivity and variability.

Do Compensation Consultants Drive Up CEO Pay? Evidence from UK Public Firms

AbstractDo compensation consultants drive up CEO pay for the benefit of managers, or do they design pay packages to benefit firm owners? Using a large sample of UK firms from the FTSE All‐Share Index over the 2003–2011 period, we show a positive correlation between the presence of compensation consultants and CEO pay. Importantly, isolating this effect is somewhat dependent on the endogenous selection of consultants and the statistical modelling strategy deployed. We find evidence that compensation consultants improve CEO compensation design when their expertise is of greater importance (e.g. during the post‐financial crisis period, or for firms that have particularly weak compensation policies). In addition, our findings show that compensation consultants increase CEO pay–performance sensitivity. The balance of evidence supports optimal contracting theory more than managerial power theory, but the authors caution the limits to this verification. We are careful to note that the more compelling evidence for the positive effect of pay consultants on CEOs is based on advanced methods (such as propensity score matching and difference‐in‐differences), and that more standard approaches (such as OLS and fixed effects) are unlikely to reveal the same level of causality of consultants on CEO pay.