Chief Executive Compensation Research Articles

Nonprofit Chief Executive Compensation: Implications of Board Governance Activities

Using secondary data collected as part of a national survey of nonprofit organizations, this research examines compensation outcomes of 704 nonprofit Chief Executives (CEO), integrating and social and performative aspects of governing/governance to explain compensation (in)equity. Theorizing governance as a socially complex and functionally consequential arena, we examine the impact of social categorization and identity fit between CEO Ethno-Racial Demography and Board Ethno-Racial Variety prior to overlaying the influence of three forms of governance activity: Fiduciary Oversight, Internal Awareness, and External Engagement. We employ serial multiple mediation regression analysis to test direct and indirect effects of demographic diversity and governance activity for nonprofit CEO compensation outcomes. We found compensation of ethno-racialized CEOs is higher when their organizations have diverse boards. Therefore, boards of directors must be cognizant of board composition, the potential for subjectivity and bias, and the impact these factors can have on CEO compensation and compensation equity.

Does chief executive compensation predict financial performance or inaccurate financial reporting in listed companies: A systematic review.

Financial incentives for chief executive officers (CEOs) are thought to motivate them to lead their company toward achieving important business objectives. Based on the Rousseau et al. (2019) protocol, this systematic review assesses the predictive effects of CEO incentives on certain business outcomes. This review addresses whether CEO financial incentives predict: (1) firm financial performance and (2) financial restatement due to misreporting. We searched nine research databases for published peer-reviewed literature (to July 23-26, 2021 and an attenuated search from those dates to July 27-31, 2023) and thirteen professional association websites for non-published gray literature (to August 2021). We also hand-searched selected relevant journals. We reviewed peer-reviewed and unpublished studies available in English since 1980. Eligible studies regarding our first question assessed CEO financial incentives (1) 1 year or more before the measurement of outcomes, (2) controlled for pre-incentive firm performance or market conditions, and (3) analyzed CEO financial incentives as predictors of firm outcomes. Eligible studies regarding our second question assessed whether financial restatement had occurred and analyzed effects of CEO incentives on this outcome. We extracted standardized regression coefficients for each effect or converted unstandardized regressions to standardized. Analyses were conducted using STATA. All studies were assessed to have moderate risk of bias. For our first question, 20 studies (15,398 firms) met our criteria for meta-analysis of effects. Bonuses, the most commonly studied incentive, had a small positive effect on next year's accounting performance metric Return on Assets (ROA, 0.046 [k = 7, 95% confidence interval(CI) = 0.014, 0.078]). The bonus effect in the market-related metric of Stock Returns (-0.026 [k = 5, 95% CI = -0.119, 0.067]) fell within a CI including 0, as did its effect on another market-related metric, Market-to-Book value (Tobin's Q, 0.028 [k = 3, 95% CI = -0.024, 0.08]). We conclude that Bonuses show no predictive effect on the following year's market-related metrics but do affect ROA. Stock Options had no effect on next year's ROA (0.027 [k = 5, 0.95% CI = 0.000, 0.052]), nor on Market-to-Book Value (Tobin's Q, 0.097 [k = 5, 95% CI = -0.027, 0.220]) or Stock Return (0.042 [k = 6, -0.033, 0.117]), indicating no predictive effect for Stock Options on either accounting or market-related performance. We sought but found too few studies to report on effects of incentives on other financial outcomes or for lags greater than 1 year. For our second question, three studies (n = 2044 firms) met our criteria. The overall effect size for CEO Incentives on Restatement (-0.09 [k = 3, 95% CI = -0.363, 0.184) fell within a CI including zero. We conclude that current evidence does not support a direct relationship between CEO financial incentives and Restatement. This review affirms a small effect of CEO Bonuses, but no effect of Stock Options, on the accounting performance metric ROA. In contrast, neither Bonuses nor Stock Options predict a firm's market-related metrics. CEO incentives also are unrelated to Financial Restatement. Despite widespread use of CEO financial incentives, lack of evidence supporting their use, beyond the bonus-ROA effect we identify, suggests caution regarding current CEO financial incentive practice and greater consideration of alternative arrangements to enhance firm performance.

CEO duality, CEO compensation, and earnings management: Evidence from China

This paper investigates whether chief executive officer (CEO) duality and CEO compensation influence earnings management. We obtain the data of the A-shares companies listed in both the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) from the Chinese Securities Market and Accounting Research (CSMAR) database. Using a sample of 8,419 firm-year observations of 881 unique listed companies in China from 2011–2022, we find that the firms with CEO duality exhibit a higher level of earnings management, through both discretionary accruals and real activities. In addition, CEOs with higher cash-based compensation are more likely to engage in earnings management, while CEOs with higher equity-based incentives are less likely to engage in real earnings management. We further examine the moderating role of CEO duality and find that CEOs who also chair the board are more likely to engage in real earnings management. Additional analysis shows that state-owned companies are less likely to engage in earnings management activities. However, equity-based compensation provides incremental incentives for the CEOs of state-owned companies to manage earnings through accruals rather than real activities.

Organizational Capital, Corporate Leadership, and Firm Dynamics

We argue that economists have studied the role of management from three perspectives: contingency theory (CT), an organization-centric empirical approach (OC), and a leader-centric empirical approach (LC). To reconcile these three perspectives, we augment a standard dynamic firm model with organizational capital, an intangible, slow-moving, productive asset that can be produced only with the direct input of the firm’s leadership and that is subject to an agency problem. We characterize the steady state of an economy with imperfect governance and show that it rationalizes key findings of CT, OC, and LC as well as generates a number of new predictions on performance, management practices, chief executive officer behavior and compensation, and governance.

Nonprofit Chief Executive Compensation: Implications of Board Governance Activities

Using secondary data collected as part of a national survey of nonprofit organizations, this research examines compensation outcomes of 704 nonprofit Chief Executives (CEO), integrating and social and performative aspects of governing and governance to explain compensation (in)equity. Theorizing governance as a socially complex and functionally consequential arena, we examine the impact of social categorization and identity fit between CEO Ethno-Racial Demography and Board Ethno-Racial Variety prior to overlaying the influence of three forms of governance activity: Fiduciary Oversight, Internal Awareness, and External Engagement. We employ a serial multiple mediation regression analysis to test the direct and indirect effects of demographic diversity and governance activity for CEO compensation outcomes. Findings demonstrate the social and performative complexity underlying executive compensation outcomes, with mediators highlighting the interplay among social and performative aspects in executive compensation decisions. The significance of this study lies in its contribution to the discourses of CEO compensation and compensation equity, providing practical guidance to leaders and governors.

The relationship between management entrenchment and financial statement fraud

PurposeThis study aims to assess the relationship between managerial entrenchment and the chance of fraud in financial statements, which are the only available source for shareholders’ decisions, so their accuracy and reliability are of great importance. Hence, the realization of contributing factors to preventing financial information distortion is vital. Moreover, managerial entrenchment on the chance of fraud in the company’s upcoming years has also been analyzed.Design/methodology/approachThe factor analysis of five variables [chief executive officer (CEO) duality, managerial ownership, board independence, board compensation and CEO tenure] is used for management entrenchment. To examine the hypothesis testing, multivariate regressions, feasible general least squares regression and Logit model regression are used. The statistical sample under study in this paper includes 1,122 year-company observations during 2013–2018 and Beneish’s (1999) model is used for evaluating fraud.FindingsThe study results show a negative and significant relationship between management entrenchment and the chance of fraud in financial statements. That means managers with a higher degree of managerial entrenchment are more likely to create value and acquire wealth for the firm, and that causes them not to waste and waste the firm resources through enhancing the supervisory mechanisms. Moreover, the study results also show that improving and strengthening management entrenchment will lower the upcoming years’ fraud condition.Originality/valueThe current paper is the first time that the relationship between managerial entrenchment and financial statement fraud is assessed within a study. The results of the paper help the beneficiaries and shareholders realize different aspects of management entrenchment. That means managers’ power and authority can be used to make shareholders’ interests, but they can hinder misuse and fraud.

The relationship between managerial attributes and firm risk-taking

PurposeThe main objective of the paper is to examine the relationship between managerial attributes (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) and firm risk-taking on the Tehran Stock Exchange (TSE).Design/methodology/approachThe study’s sample comprises 150 companies listed on the TSE from 2011 to 2017. Risk-taking is calculated as the standard deviation (SD) of stock return. Explanatory factor analysis was performed to calculate the weight of each of the five variables managerial ownership, board independence, chief executive officer (CEO) tenure, board compensation and CEO duality as a proxy for managerial entrenchment. The study by Anderson and Hsiao (1982) was also used to calculate managerial myopia, and the study by Schrand and Zechman (2012) was used to calculate managerial overconfidence.FindingsThe results indicate that the effect of managerial entrenchment and managerial myopia on risk-taking of listed firms on the TSE is positive and significant, implying that an increase in CEO entrenchment is likely to give rise to risk-taking. The authors conjecture that this finding could be due to the investment projects impairing the firm performance in the long run. Furthermore, the effect of managerial overconfidence on listed firms' risk-taking on the TSE is significantly negative. Since overconfidence is one of the traits of narcissism and corporate managers tend to be encouraged and admired, it is implied that they tend to make efficient and low-risk investments that ultimately reduce the firm risk-taking.Originality/valueSeveral theoretical studies show that managerial behavior is a determining factor in the economy. One of the reasons which justify the originality of this study is the context and institutional environment. Undoubtedly, managerial behavior (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) is expected to have some significant variations in developing countries compared to prevailing in developed countries, particularly in the Iranian stock market the economic sanctions. Furthermore, due to the direct impact of individuals' psychological and behavioral characteristics on their decisions and the effect of companies' risk-taking on increasing and decreasing shareholders and companies' wealth, this research is essential. Given the function of designed behavioral criteria for assessing risk-taking behaviors, the relationship between managerial attributes and firms' risk-taking is still unclear and investigated in this study.

English

Corporate governance is not an abstract goal but exists to serve corporate purposes by providing a structure within which stockholders, directors, and management can pursue most effectively the objectives of the corporation and thereby it maximize the financial performance of the company for its shareholders. This paper investigates and examines the corporate governance and its effects on financial performance from the evidenced data gathered from selected privately owned commercial banks in Ethiopia. By adopting panel data, Purposive sampling technique has been utilized to select the respondents from the existing target population. This paper will include independent corporate governance variables such as Board size, Meeting frequency of board, Audit Committee Size, Liquidity Ratio, Existence of outside director, Board Educational Qualification, Board Gender Diversity, chief executive compensation and controlling variable of bank age and bank growth. Random Effect Model GLS regressions analysis was adopted to analyze the annual data generated from the annual statements of the selected private commercial banks of Ethiopia and annual reports of National Bank of Ethiopia covering a period from 2010 to 2018G.C.In addition, primary data of structured open ended questionnaires used to support the finding of secondary data. The presence female director, chief compensation, audit committee size, Educational Qualification, meeting frequency of board, liquidity ratio was found to be a positive and significant relationship with return on asset. In the other side, board size has a negative and insignificant association with return on asset. As a recommendation, Private commercial banks have to have a moderate number of board size and they have to hold meeting and discussion for the future fate of banks. Audit committee in private commercial banks should be given as a major determinant. As much as possible, banks have to hire and train female board and it is better in that banks should encourage and motivate executive with compensation.    Key words: Corporate governance, financial performance, privately owned commercial bank. &nbsp

Impact of Board Structure and Firm Performance on Chief Executive’s Compensation

The corporate board usually influences all important decisions of a firm including setting of its long-term goals, developing a corporate strategic policy, as well as hiring and setting the compensation of the chief executive. Moreover, the organization of the board may have a significant effect on the monitoring and governance of the company. This paper analyses the impact of structure of the board and firm performance on chief executive compensation, in an emerging economy context specifically, Pakistan. Chief executive compensation is one of the controversial and sought after topics in research nowadays. Interestingly, the exploration into the topic has found that there is a significant and positive impact of the non-executive directors serving on the corporate boards on the compensation of chief executive. Furthermore, the size of the board has also showed to have a significant and positive impact on the chief executive’s compensation which logically means that the companies in which the boards are larger than the mean size will relatively pay higher to their chief executives. Also it was found that the performance of the firm does not have a statistically significant impact on chief executive compensation. These results have policy implications and are important to corporate stakeholders. Keywords: corporate governance, board structure, firm performance, Pakistan

The Working Poor: Two Perspectives on Reality—A Communication to the Editor Inviting a Discussion

The Working Poor: Two Perspectives on Reality—A Communication to the Editor Inviting a Discussion

How costly is corporate bankruptcy for the CEO?

We examine chief executive officer (CEO) career and compensation changes for large firms filing for Chapter 11. One-third of the incumbent CEOs maintain executive employment, and these CEOs experience a median compensation change of zero. However, incumbent CEOs leaving the executive labor market suffer a compensation loss with a median present value until age 65 of $7 million (five times pre-departure compensation). The likelihood of leaving decreases with profitability and CEO share ownership. Furthermore, creditor control rights during bankruptcy (through debtor-in-possession financing and large trade credits) are associated with CEO career change. Despite large equity losses (median $11 million for incumbents who stay until filing), the median incumbent does not reduce his stock ownership as the firm approaches bankruptcy.

Executive compensation, organizational performance, and governance quality in the absence of owners

I study the relationship between chief executive compensation, organizational performance, and governance quality in large U.S. nonprofits. Due in large part to the absence of shareholders, the nonprofit sector is characterized by weaker monitoring mechanisms and potentially more severe agency problems relative to their for-profit counterparts. As a result, there have been numerous instances of executive abuse, such as exorbitant pay for very little work. Despite the size of the nonprofit sector (5.5% of GDP and 9% of employment) and the obvious monitoring and legal responsibility concerns, governance issues at nonprofits have received much less attention than that at for-profits. Using recent IRS data on governance practices at nonprofits, I find that, after controlling for known determinants, both the CEO-to-employee relative pay ratio and the consumption of perquisites are significantly negatively related to an index of nonprofit governance quality. Furthermore, consistent with governance problems at nonprofits and inconsistent with the Pay-for-Performance Hypothesis, I find a significantly negative relationship between CEO-to-employee relative pay and multiple measures of nonprofit performance. These results highlight the importance of strong governance mechanisms in mitigating high levels of relative pay to and poor performance by executives in organizations marred by severe agency conflicts and ineffective monitoring mechanisms.

What can the departing chief executive compensation structure tell us?

This paper examines the amount and structure of the pay package for the departing CEO in a company around CEO succession. I find that the characteristics of the departing CEO compensation can provide valuable information regarding the incoming changes in corporate governance around the succession. Specifically, when a departing CEO is entrenched with a “better” compensation package characterized with a greater amount of pay in cash and in total at a lower risk, the CEO, after his retirement, is more likely to remain on the board as a director or become the chairman of the board, persuade the board to pick an insider rather than an outsider to be his successor, and to promote the company’s current president and/or chief operating officer to be the incoming CEO. These findings are consistent with the management entrenchment theory that when a CEO is entrenched with a greater discretionary power and better personal benefits, he is more likely to use his managerial power to continue his influence on the company even after he retires from the CEO position.

Does Delaware Incorporation Affect Executive Compensation? An Empirical Analysis

Motivated by agency theory, this study attempts to ascertain whether chief executive compensation is influenced by legal rules. In particular, we analyze whether Delaware law has an impact on CEO pay. Legal rules have been argued to impact agency conflicts. Agency costs, in turn, affect CEO compensation. Thus, we contend that Delaware law influences CEO pay through their associations with agency problems. The empirical evidence corroborates this hypothesis, showing that Delaware firms pay their CEOs significantly more generously than do non-Delaware firms (about 36% higher in total compensation). Furthermore, Delaware firms exhibit significantly lower pay-performance sensitivity (almost 50% lower), implying that the higher pay more likely reflects rent expropriation rather than shareholder wealth maximization.

How Costly is Corporate Bankruptcy for Top Executives?

We examine chief executive officer (CEO) career and compensation changes for large firms filing for Chapter 11. One-third of the incumbent CEOs maintain executive employment, and these CEOs experience a median compensation change of zero. However, incumbent CEOs leaving the executive labor market suffer a compensation loss with a median present value until age 65 of $7 million (five times pre-departure compensation). The likelihood of leaving decreases with profitability and CEO share ownership. Furthermore, creditor control rights during bankruptcy (through debtor-in-possession financing and large trade credits) are associated with CEO career change. Despite large equity losses (median $11 million for incumbents who stay until filing), the median incumbent does not reduce his stock ownership as the firm approaches bankruptcy.

Tenure, firm's performance, and CEO's compensation

PurposeThe purpose of this paper is to assess the association between Chief Executive Officer (CEO) tenure, compensation, and firm's performance.Design/methodology/approachThe paper compares the influence firms' performance on CEOs' cash and total compensation based on the length of tenure. It also examines pay–performance relationship for new CEOs vs those serving their last year in such positions.FindingsThe firm size appears to be a significant explanatory variable for CEOs' cash and total compensation regardless of CEOs tenure and measure of performance. Additionally, firms' performance is a significant determinant of cash compensation for CEOs during the first three years of their work as CEOs and not significant for those with 15 years or more as the company's CEO. Both market‐based and accounting‐based performance measures are negatively correlated with CEOs' total compensation regardless of length of experience.Research limitations/implicationsThis study did not differentiate routine CEO changes, i.e. normal retirement, from the non‐routine ones. Additionally, the results may be limited by the temporal nature of the sample. Future studies dealing with CEO turnover should cover a longer period of CEO' tenure and examine the nature of CEO's dismissal. Such a research design may provide additional insight to the CEO compensation and influence of performance measures in executive contracts.Originality/valueThis research offers some evidence in support of CEO incentives relative to the length of service as the firm's CEO. The findings indicate differences in pay–performance sensitivities on the basis of CEO's tenure. Comparing the pay–performance relationship for individuals serving their first year and those serving their last year as the firm's CEOs, the paper detects statistically significant differences in influence of performance on cash compensation.

Managerial pay and executive turnover in the Czech and Slovak Republics*

AbstractDespite the crucial role played by managers in changing the functioning of labour markets in transition economies, research on the determinants of executive pay and CEO turnover in these countries is almost non‐existent. The current paper aims to add to this minuscule literature. For this purpose I make use of a unique dataset containing relevant firm–manager information from the Czech and Slovak Republics in the late nineties. This allows me to examine the influence of individual and in particular firm characteristics, such as, size, ownership type, industry and region, as well as corporate performance on chief executive compensation levels and changes therein and on the extent of executive turnover.

Chief Executive Compensation and Corporate Groups in Japan: New Evidence From Micro Data

This paper begins with addressing a simple empirical question: how much Japanese executives earn. By presenting the first systematic review of prior studies reporting the mean level of Japanese executive compensation, I conclude that the best available answer to this empirical question is that the average salary and bonus of CEOs of large Japanese firms during 1980s is between 30 to 45 million yen, roughly one third of what the US counterparts earn in salary and bonus. In reaching this conclusion, I also identify three major data sources available for empirical studies of Japanese executive compensation and discuss the strengths and weaknesses of each data source. The rest of the paper is devoted to a more analytical question: What is the relationship between executive compensation and financial corporate groups in Japan, an issue that has not been previously investigated. By using micro data on CEO compensation of 154 large Japanese firms consisting of 116 group-affiliated firms and 38 independent firms, I find that CEOs of group firms earn 20 to 30 % less than those of independent firms, after controlling for shareholder returns, accounting measures of profitability, alternative firm objective measures such as size and capital investment, and personal characteristics of CEOs. I also find that alternative firm objectives, measured by employment and capital investment, are more relevant to the determination of CEO compensation of group firms than that of independent firms. These findings are consistent with the recent contributions in the literature of Japanese corporate governance stressing the role of banks as monitoring agents and suggesting that managers of group firms represent not only the interest of shareholders but the interest of main banks.

The Effects of Outside Directors and Board Shareholdings on the Relation Between Chief Executive Compensation and Firm Performance

Critics of corporate governance have suggested that improvements in board monitoring will arise from more independent boards consisting of outside directors and from increased stock ownership by directors. Presumably these changes should result in more rational, more defensible compensation decisions in which pay is clearly tied to results. In this paper, we test the premise that boards with a relatively higher proportion of outsiders and boards with significant shareholdings maintain a closer link between corporate performance and executive pay than do boards with fewer outsiders and boards holding little stock. The results of the study, based on a sample of 268 large corporations, are mixed. As expected, boards with significant shareholdings maintain a stronger linkage between compensation and firm-level performance. This finding persists even after controls are included for CEO and outsider shareholdings. Contrary to expectations, however, evidence was not found that firms with a higher proportion of outsiders on the board of directors relate compensation more strongly to firm results.

Chief executive compensation and corporate groups in Japan: New evidence from micro data

Using micro data on chief executive (CEO) compensation of 154 large Japanese firms with and without financial keiretsu affiliation, I find that CEOs of keiretsu firms earn 21% less than those of independent firms, after controlling for performance and other relevant variables. I also find that CEO compensation of keiretsu firms is structured so as to reward CEOs for promoting capital investment and thus growth of the firm. These findings are consistent with the recent literature of Japanese corporate governance stressing the role of banks as monitors. © 1997 Elsevier Science B.V.