CEO Compensation Structure Research Articles

Conformity or differentiation? The role of CEO turnover

This study investigates the nexus between CEO turnover and corporate social responsibility (CSR) practices using all US-listed companies as the sample. Considering each company's different fields in the CSR practice, we use conformity and differentiation to quantify the CSR practice. Our generalized difference-in-difference method shows that incoming CEOs can positively impact differentiation and negatively affect conformity. Our empirical evidence further indicates that CEO career horizon and compensation structure are the two potential mechanisms through which CEO turnover affects the CSR practice. Our results provide insightful implications for companies that wish to gain a competitive advantage via the CSR practice.

The long-term impact of CEO compensation structure on CEO pay for luck and asymmetry

The long-term impact of CEO compensation structure on CEO pay for luck and asymmetry

Performance measure skewness and the structure of CEO compensation: Theory and evidence

AbstractWhile research has analyzed how the structure of incentive pay relates to the dispersion of the performance measure distribution, as measured by its variance or volatility, we examine how it relates to the asymmetry of the distribution, as measured by its skewness. In contrast to the variance, skewness affects the relative informativeness of high and low performance about the agent's effort, which determines the relative efficiency of providing rewards and punishments for incentive purposes. Therefore, skewness is an important determinant of compensation convexity, which is determined by the relative holdings of stock and options. Consistent with our analytical and numerical results, we find that the skewness of expected earnings is negatively associated with the convexity of CEO compensation. Our results are economically significant, robust to alternative specifications, and do not appear to be driven by reverse causality. In addition, we find that earnings skewness is negatively associated with total CEO compensation and that this association is driven by lower options‐based compensation. These findings are consistent with CEOs preferring positively skewed performance metrics. Overall, we provide theoretical, numerical, and empirical evidence suggesting that skewness is a more important determinant of the convexity and structure of CEO compensation than volatility.

The impact of legal systems on CEO compensation and bank stability: a cross-country study

PurposeRemuneration policies may differ from country to country, and their effect on bank stability could be due to the legal framework. Therefore, this study aims to investigate how the legal system impacts the relationship between CEO compensation and bank stability across countries.Design/methodology/approachTo test the study hypotheses, the authors use panel data of 74 banks operating in ten OECD countries during the period 2009–2016 and apply the generalized moments method regression model to better remediate the endogeneity problem.FindingsThe findings confirm that a country’s banking regulations significantly affect its bank stability. Common law countries have less bank stability than civil law countries. This result can be interpreted by the fact that, in common-law countries, banks’ CEO are strongly protected by the law, so they allocate a large part of bank assets to risky loans to improve their variable remuneration.Practical implicationsThe research can help policymakers understand bank stability in one country. Any legal reform would require prior knowledge of how risk-taking may arise in executive compensation.Originality/valueThe contribution is to explain the controversial effect of executive compensation on bank stability in the framework of legal theory. The authors argue that regulators should monitor compensation structures and that the country’s legal origin of law shapes the CEO compensation structure and is a determinant of bank stability. To the best of the authors’ knowledge, there are no studies exploring this field. So, this study tries to shed more light on the dark side of CEOs’ behavior when undertaking risky projects to maximize their remuneration.

An unintended consequence of liberal judge ideology: Evidence from CEO compensation structure

An unintended consequence of liberal judge ideology: Evidence from CEO compensation structure

The effect of CEO's compensation in driving corporate ESG greenwashing: Evidence from China.

This study examines the relationship between CEO compensation schemes and ESG greenwashing behavior in Chinese listed firms during the period 2013-2022. We find that a CEO's cash (equity) compensation has a significantly positive (negative) correlation with corporate ESG greenwashing behavior. From mechanism analysis, consistent with the agency problem view, firms engage in more severe ESG greenwashing behavior under a higher proportion of cash in the CEO compensation structure. Such distortion behavior is mitigated by higher internal control quality in firms having an equity incentive for their CEO under the convergence of interest viewpoint. Additional analysis reveals that corporates audited by large accounting firms and those with more media coverage exacerbate the positive correlation between CEO cash compensation and ESG greenwashing behavior, while government environmental regulations reinforce the inhibitory effect of CEO equity compensation on ESG greenwashing. Our results imply that different CEO compensation schemes can have opposite effects on limiting firms' ESG greenwashing behavior in the Chinese context. Furthermore, we highlight that the question of form over substance principle to certain external governance mechanisms, leading CEO to exacerbate impression management of ESG disclosure.

Does CEO Power Affect the Relations between CEO Compensation and Risk-Taking?

Purpose - This study investigates the effect of incentive compensation and CEO power on a firm’s risk-taking behavior, leveraging stock return volatility and earnings volatility as the key indicators of risk-taking.
 Design/Methodology/Approach - A comprehensive analysis is conducted using data from 1,958 U.S. firms over a 28-year period (1992- 2019). The study employ both ordinary least square (OLS) regression and two-stage least square (2SLS) regression for analysis. Pay-volatility sensitivity (PVS) and CEO-pay slice (CPS) are used as proxies for incentive compensation and CEO power, respectively.
 Findings - The findings offer solid empirical proof that PVS and CPS have a negative influence on both earnings volatility and stock return volatility. Furthermore, the detrimental effect of PVS on managerial risk-taking is significantly more pronounced for CEOs with lower CPS compared with those with higher CPS. While incentive compensation appears to deter CEOs from embracing higher risks, CEOs with more power are less risk-averse when offered incentive compensation compared to their less powerful counterparts.
 Research Implications - This study significantly contributes to existing literature by revealing the interactive effects between CEO power and incentive compensation on a firm’s risk-taking behavior. Understanding these dynamics is pivotal as it offers a nuanced view of how CEO compensation structures and power hierarchies within a firm influence its risk-taking propensity, which is critical for both firm performance and broader financial stability considerations. The insights derived from this analysis can inform more balanced executive compensation structures and governance models that ensure an optimal level of risk-taking.

Corporate governance Role between CEO compensation and earnings management: A developing economy Perspective Evidence from Pakistan

The purpose of this research is to examine the relationship of compensation of CEO and management of earnings of firm and further investigated the corporate governance role as a moderator in this relationship in developing country, Pakistan. In this research, a sample of 100 Pakistani listed firms is used from 2012 to 2022. In e-views software, the technique of panel data is performed as the data is both time series and cross sectional, and the results of fixed effect model are used for analysis. The study finds that the impact of compensation of CEO on earnings management is positive and the relationship is moderated by governance structure of the firm. The association between compensation of CEO and management of earnings is positive and it is strengthened in weak governance system of company but this relationship weakens in strong governance system of firm. The sample of the study comprises of only CEO’s of firm. Other top management can be used to conduct this research. This study allows a clear understanding of how top management responds and reacts if corporate governance structure of the firm is weak or strong. Strong corporate governance structure can help the firm to control the manipulative behavior. The structure of CEO compensation may be designed in such a way that the interests of shareholders and managers are aligned and information asymmetry is reduced. This research adds significantly to the current literature by considering governance structure of company as a moderator between compensation of CEO and management of earnings in the perspective of Pakistan.

CEO compensation and CSR: Economic implications and policy recommendations

The theoretical underpinning of compensation for CSR in the SDG era emerges as a trending area for researchers. However, the measurability of CSR is a technical problem for CSR research in developing nations. This study uses 5,699 firm-year observations and entropy measures to assign CSR engagement scores based on CSR breadth and depth. The results reveal that total compensation (TC) behaves according to stewardship theory and positively influences CSR engagement, breadth, and depth. However, fixed (FC) and variable (VC) compensations follow agency theory and have a negative and positive impact on CSR engagement, breadth, and depth, respectively. We also examine the impact of TC, FC, and VC on CSR engagement levels in firms’ external and internal control. We observe that high-leverage firms hold the baseline result, whereas, in internal control, the non-business group firms hold the baseline result. Moreover, in institutional ownership, we find that TC and VC follow the stewardship and agency theories and positively affect CSR engagement. In contrast, the impact of FC on CSR engagement is not affected by institutional ownership. The findings of this study can help policymakers improve CEO compensation structures to increase CSR practices and ensure the achievement of SDGs by 2030.

The dynamics of CEO equity vs. inside debt and firm performance

This paper provides new evidence on the comparative dynamic effects of CEO inside debt and equity compensation on firm performance as measured by Tobin’s Q. In contrast to the extant literature, we find significant empirical evidence supporting the classic Jensen and Meckling (1976) premise that managers should receive debt vs. equity compensation in proportion to the capital structure of the firm. We also provide new evidence showing that the effects of the CEO compensation structure on firm performance are dependent on the CEO’s time horizon, as measured by the expected period of employment to retirement. We show that the incremental benefits of equity compensation to performance increase with the CEO’s projected time to retirement. A similar, but insignificant relationship is observed for CEO inside debt compensation. Cash compensation is more beneficial to the firm when concentrated near the end of the CEO’s tenure.

Do credit unions have distinct objectives? Evidence from executive compensation structures

AbstractCredit unions compete directly with commercial banks in markets for consumer financial services yet receive an exemption from federal corporate income tax. Commercial banks claim that credit unions are no different than banks and that the credit union tax exemption represents an unfair competitive advantage. Credit unions counter that while they offer similar products and services, they differ from commercial banks in terms of structure and mission, given their not‐for‐profit, cooperative status. In this paper, we test for substantive differences in the objective functions of commercial banks and nonprofit credit unions by comparing CEO compensation structures. Drawing on the relevant principal–agent literature, we provide several arguments to support the hypotheses that credit union boards of directors establish lower‐powered incentive contracts with their CEOs relative to similarly sized commercial banks, and offer lower total compensation. We find that credit union CEOs receive approximately 250% less performance‐based compensation relative to CEOs of similarly sized community banks. Bank CEOs also earn approximately 15% to 20% more total compensation on average. The results are generally robust to controlling for CEO‐ and board‐level characteristics, local economic conditions, and institution‐level indicators of size, growth, complexity, liquidity and risk. The findings suggest important differences in incentive structures and objectives between banks and credit unions.

Quality of Governance, Opportunity Costs, and CEO Compensation Structure

Quality of Governance, Opportunity Costs, and CEO Compensation Structure

Corporate Social Responsibility, CEO Compensation Structure, and Corporate Innovation Activities

This study empirically investigated the economic effect of CSR initiatives on innovation by examining Korean firms. Our primary objective of this study was to explore how a CEO compensation system can affect the CSR-innovation relationship. An integrated model of the impact of CSR on innovation activities was developed through analyzing various CEO compensation components such as structure, type, mix, and distribution. We identified the CEO compensation system that more suitably supports CSR in driving innovation performance improvement, and empirically examined a compensation system that enhances corporate innovation by creating a good alignment with CSR. Using a longitudinal data, we empirically tested the interactive effect of a CSR and compensation system of CEO in Korean publicly traded companies. Our empirical findings concerning the interaction between CSR strategies and CEO compensation schemes hold practical implications for establishing and implementing a suitable human resource system to improve organizational competitiveness.

CEO regulatory focus and myopic marketing management

This study details the mechanisms on how CEO regulatory focus affects the salience of the gains versus losses involved in myopic marketing decision-making, and how such CEO psychological attributes interact with internal equity-based compensation, external pressure from equity analysts, and environmental turbulence to affect firms’ myopic marketing management propensities. We find that when faced with short-term earnings pressure to meet earnings expectations and when time is no longer a resource, predominantly promotion-focused are more likely to engage in myopic marketing management to benefit from the temporary stock price increase, which comes from meeting or beating earnings expectations. Conversely, predominantly prevention-focused CEOs are less prone to such short-termist actions which results in long-term value loss. For the moderating variables, we find that: (1) equity-based compensation tends to attenuate myopic marketing tendencies of promotion-focused CEOs but have no impact on prevention-focused CEOs, (2) whether equity analysts improve monitoring or aggravate short-term earnings pressure depends on the CEO’s regulatory focus, and (3) environmental turbulence does not increase the myopic marketing management tendencies of predominantly promotion-focused CEOs but rather intensifies the relunctance of prevention-focused CEOs to take short-termist actions. We further find that myopic marketing management mediates the impact of CEO regulatory focus on future firm performance. These findings have important implications for firms and boards when selecting new CEOs and structuring the compensation of existing CEOs. Firms need to simultaneously consider the fit between the CEOs’ regulatory focus, firms’ needs, the business environment, as well as CEO compensation structure.

Corporate Social Irresponsibility (CSiR): Does CEO Compensation Matter?

This paper examines the relationship between CEO compensation and corporate social irresponsibility (CSiR) by examining the perceptions of fairness or unfairness of CEO compensation structure. Infusing the integrative model of organizational trust with the bounded self-interest agency theory and the stakeholder-agency theory, we progress the distributive unfairness hypothesis and the procedural unfairness hypothesis to suggest that perceptions of distributive and procedural unfairness in compensation structure influence the severity with which CEOs view firms as opportunistic towards them. Using a sample of 8,873 observations across 849 U.S. firms between 2001-2018 and sophisticated empirics, we theorize and empirically demonstrate how CEO perceptions of firm opportunism trigger negative reciprocity behaviours, manifesting in increased firm-level CSiR. Furthermore, we find the prevalence of reinforcing and counter-balancing effects through which the interactions between distributive and procedural unfairness impact the CEO compensation-CSiR relationship. Our paper contributes to the literatures on CEO compensation and corporate misconduct and has important implications for the design of executive compensation packages.

Terrorist attacks, CEO overconfidence, and CEO compensation

This study examines how terrorist attacks and CEO confidence levels impact CEO compensation structures. Terrorist attacks in the United States from 1999 to 2018 are examined as negative exogenous shocks affecting CEO compensation. The findings indicate that overconfident CEOs of affected firms are likely to receive higher equity compensation than overconfident CEOs of firms located far from attacks, while non-overconfident CEOs of affected firms receive higher cash compensation than CEOs located far from attacks. This study contributes to the literature by examining how CEO compensation levels and structures vary according to nonfinancial shocks and CEO confidence levels.

CEO Compensation, Director Compensation, and Earnings Management: Does Compensation Structure Matter?

This study investigates the relationship between excess director compensation and CEO compensation and explores the effects of various abnormal CEO compensations on earnings management. The results show that CEOs who receive abnormal cash and bonus compensation resulting from excess director total compensation tend to increase firm profits through earnings management, thereby reducing future performance. By contrast, CEOs who receive abnormal incentive compensation, total compensation, and exercise-value of stock options are less likely to manipulate earnings. These findings suggest that a proper director and CEO compensation structure can reduce managerial earnings management and can motivate CEO-director collaboration. Key words: Compensation structure, CEO compensation, director compensation, earnings management, incentive compensation

Outside Opportunities, Managerial Risk Taking, and CEO Compensation

ABSTRACT Exploiting the setting of staggered adoption of the Inevitable Disclosure Doctrine (IDD) in U.S. state courts, we examine how quasi-exogenous restrictions of outside employment opportunities affect CEO compensation structure. The IDD adoption constrains executives' ability to work for competitors, which likely decreases CEOs' tendency to take risks by increasing the cost of job loss and reducing the reward to risk taking. We expect the board to respond by increasing the sensitivity of CEO wealth to stock volatility (vega) to encourage risk taking. We find a significant increase in vega post-IDD adoption. The effect is stronger among CEOs with greater career concerns. The effect also increases with the ex ante CEO mobility and the importance of trade secrets, suggesting the board increases vega more when there is a greater reduction in CEO outside opportunities. Overall, we provide new evidence on how external labor market frictions affect the convexity of CEO compensation. JEL Classifications: G32; M12; J60.

The effect of professional director/CEO relationships on the structure and composition of outsider CEO compensation: an international empirical examination

Directors are integral participants and stakeholders in outsider CEO succession events. This study examines the impact of professional director/CEO relationships in 1,173 outsider CEO successions on a range of fixed and short- and long-term, performance-related CEO compensation ratios. Results show that these relationships matter in determining the structure and composition of CEO compensation but that there are significant international differences, reflecting varying approaches to corporate governance, including board monitoring, in unique national institutional environments. Results also show that in the United States and other Anglo-Saxon capital markets, where institutional transparency is highly regarded, professional director/CEO relationships are associated with a restructuring of CEO compensation in favour of CEOs and against the interests of investors.

The relationship between CEO nominal salary and firm operating performance

Nominal salary is a symbolic amount that does not represent economically meaningful compensation. In this study, we document that CEO nominal salary is positively related to a firms' operating and stock performance. Our results stay robust when we address endogeneity issues using the Heckman self-selection two-stage regression and propensity score matching approach. The findings of our study render important implications about CEO compensation structure and how it can align manager incentives with shareholder wealth.