Components Of CEO Compensation Research Articles

CEO Compensation and SMEs Performance: A Structural Equation Modelling Approach from Jordanian Listed SMEs

This study's main goal is to discover whether the CEO's cash comparison affects SMEs' performance, with the bonus having a favorable impact instead. The research comprises an analysis of the SMEs mentioned in the Jordanian Ministry of Industry and Trade. To test hypotheses, data were meticulously collected from a sample of 80 SMEs in Amman, Jordan, a pivotal business hub in the country. Utilizing Structural Equation Modelling through Smart PLS 3, our chosen methodological framework facilitated a comprehensive analysis of the intricate relationships between CEO compensation variables and SME performance. The study's conclusions show a substantial correlation between the performance of SMEs included and the components of CEO compensation in the Jordanian Ministry of Industry and Trade. Despite this, it has been discovered that a few additional incentive factors significantly improve performance in SMEs. This study has shown that some incentive contract theories are appropriate for businesses with specific sizes and operating in particular industries.

CEO compensation, portfolio holdings and strategic investments

PurposeThe purpose of this paper is to examine the relationship of CEO compensation plans and the risk of managerial equity portfolios with the extent of strategic investments in advertising, capital expenditures and research and development (R&D). The elements of compensation are salary, bonuses, options and restricted stock grants. The authors proxy the design of CEO equity portfolios by the price performance sensitivity of the holdings and the portfolio deltas.Design/methodology/approachThe authors use the components of executive compensation and portfolio risk as the dependent variables, regressing these against measures for the level of strategic investment. The authors test for non-linear relationships between the components of CEO compensation and strategic investments. The sample is a broad cross-section from 1992 to 2016.FindingsThe authors find strong support for non-linear relationships of capital expenditures and R&D with CEO bonuses, option grants and restricted stock grants. There are very complex relationships between the components of executive compensation and R&D expenditures, but little evidence of a relationship with advertising expenditures. The authors also find strong complex relationships in the design of CEO equity portfolios with advertising and R&D.Originality/valueLittle earlier research has considered advertising, capital expenditures and R&D in a unified framework. Also, testing for non-linear associations provides much greater insight into the relationship between the components of executive compensation and strategic investment. The findings represent a valuable incremental contribution to the executive compensation literature. The results also have normative policy implications for compensation committees’ design of optimal annual CEO compensation packages to incentivize or discourage particular strategic investment behavior.

CEO Compensation Trends in the Republic of Serbia in the Context of EU Integration

CEO compensations are an effective instrument for adjusting the interests of managers and equity owners, so that full engagement and commitment can only be expected of managers who are sufficiently motivated. Among other things, sufficient motivation is achieved by the use of adequate CEO compensations. This paper analyzes applied models of CEO compensation, and their levels, in the Republic of Serbia and EU member countries. Comparison of CEO compensation in the Republic of Serbia and EU countries will enable the positioning of the Republic of Serbia in the context of EU integration; as well as enable Serbian business organizations to track trends that are current, and structure their CEO compensations to meet managers’ expectations in terms of attractiveness, and equity owners in terms of cost efficiency. The paper will try to determine the existing differences in CEO compensation levels, conditioned by the degree of economic development of the observed countries. The paper will analyze the factors that directly or indirectly affect the level of CEO compensation. It will try to determine which components of CEO compensation are mostly used in business organizations from the EU, and compare the results with business organizations from the Republic of Serbia in order to improve existing practice. As CEO compensations are still underdeveloped area in the Republic of Serbia, the contribution of the paper is expected to be significant, for Serbian business organizations that operate, or plan to operate, on the international market, and allow their managers to work in EU countries. Strategy and policy of CEO compensation is a very sensitive area, so the focus of the paper is on identifying existing differences that could be used in terms of convergence of the CEO compensation practice in the Republic of Serbia to the one that is present in the more advanced EU countries, in the context of EU integration.

Differences in CEO Compensation Under Institutional and Large Shareholder Ownership

Using the most recent data available, I examine the influence of large shareholders and institutional investors on different components of CEO compensation. Increased large shareholder ownership reduces total pay and current elements of incentive compensation, i.e. option, stock, and bonus pay, while institutional investors lower long-term incentive pay, i.e. pension, deferred pay, stock incentive pay. These findings are consistent with the managerial agency theory and the substitution of incentive pay by institutional monitoring. The results are more pronounced for higher levels of ownership, and firms with weak governance, smaller boards, less financial distress, tenured CEO, multiple segments, and free cash-flow.

Board independence, gender diversity and CEO compensation

PurposeThis paper aims to investigate the joint effect of board independence and gender diversity on the effectiveness of boards in monitoring CEO compensation in a continental European context, i.e. France.Design/methodology/approachFixed-effect regressions are used to study the impact of board independence, gender diversity and their interaction, i.e. the proportion of female independent directors on the different components of CEO compensation (total, fixed and variable).FindingsThe authors observe that both the proportions of independent directors and women sitting on the boards positively influence the various components of CEO compensation. However, the interaction of these factors, i.e. the proportion of female independent directors, is negatively associated with CEO compensation. These results suggest that independent women directors improve board effectiveness in monitoring CEO compensation, especially its fixed component.Originality/valueThe results of this research help to elucidate the importance of women being appointed to boards as independent directors to properly monitor managerial pay. These results provide support to the approach of the French Cope-Zimmerman law of January 2011, which promotes female representation on boards as independent directors to enhance board decision-making. Thus, evidence presented and discussed in this paper should provide useful insights for academics, corporate managers and regulators.

Do CEOs possess any extraordinary ability? Can those abilities justify large CEO pay?

Do CEOs possess any extraordinary ability critical to organizational success? Do CEOs receive large pay because of their unique abilities? We examine those questions using one such ability – the ability to forecast future firm risks – because over the last 40 years, firms’ survival and success has become highly dependent on firms’ preparedness to face uncertain future business environments. We measure CEOs’ risk-forecasting ability by the information contained in their personal equity trades. We find that CEOs’ earlier-than-normal stock-option exercises often represent modifications of their personal portfolios in anticipation of future risks unknown to the market today. These results suggest that on average, CEOs can forecast at least some future firm risks better than the market can, and they use that information to modify their personal portfolios. Additional tests show that firms design incentive-compatible compensation contracts by tying high-powered components of CEO compensation to their risk-forecasting abilities, arguably, to competitively sort and attract CEOs with better risk-forecasting abilities and/or to motivate them to expend greater efforts on forecasting risks. We conclude that increases in CEO pay over the last 40 years can be explained, at least partly, by the increasing importance of risk-forecasting skills, especially because firms have become smaller and are more susceptible to failure due to sudden changes in the business environment, but are also more likely to benefit from opportunities created by those changes.

CEO compensation and future shareholder returns: Evidence from the London Stock Exchange

This study examines the ex-post consequences of CEO compensation for shareholder value. The main objective is to explore whether companies that pay their CEO excessive fees (in comparison to those of peer firms in the same industry and size group) generate superior future returns and better operating performance. Our analysis, which separately considers the cash-based and incentive/equity-based components of CEO compensation, is based on a large sample of UK-listed companies over the period 1998–2010. We find that CEO incentive pay is negatively associated with short-term subsequent returns. Interestingly, firms that pay their CEOs at the bottom of the incentive-pay distribution earn positive abnormal returns and, also, significantly outperform those at the top of the incentive-pay distribution. Further analysis reveals that such outperformance can be largely explained by the excessive exposure of low-incentive-pay firms to idiosyncratic risk. Finally, evidence from panel regressions suggests that, in addition to its negative relationship with returns, incentive pay is also inversely associated with future operating performance.

CEO Compensation and Future Shareholder Returns: Evidence from the London Stock Exchange

This study examines the ex-post consequences of CEO compensation for shareholder value. The main objective is to explore whether companies that pay their CEO excessive fees (in comparison to those of peer firms in the same industry and size group) generate superior future returns and better operating performance. Our analysis, which separately considers the cash-based and incentive/equity-based components of CEO compensation, is based on a large sample of UK-listed companies over the period 1998-2010. We find that CEO incentive pay is negatively associated with short-term subsequent returns. Interestingly, firms that pay their CEOs at the bottom of the incentive-pay distribution earn positive abnormal returns and, also, significantly outperform those at the top of the incentive-pay distribution. Further analysis reveals that such out-performance can be largely explained by the excessive exposure of low-incentive-pay firms to idiosyncratic risk. Finally, evidence from panel regressions suggests that, in addition to its negative relationship with returns, incentive pay is also inversely associated with future operating performance.

Is there fire? Executive compensation and employee attitudes

PurposeThis paper aims to examine the relationship between CEO compensation and employee attitudes.Design/methodology/approachBased upon equity/organizational justice theories and the CEO compensation literature, hypotheses were developed which suggest that executive compensation and employee attitudes will be related. These hypotheses were tested by linking a large‐scale survey of employee attitudes to CEO compensation data for public companies based in the USA.FindingsEmployee attitudes appear to be related to some measures of CEO compensation, although sometimes the relationship that was found was negative and sometimes it was positive, but in all cases the effect size was quite small. Specifically, change in CEO salary was negatively related to evaluation of senior management and general satisfaction. However, change in total CEO compensation was positively related to evaluation of senior management and general satisfaction, while CEO bonus level was positively related to general satisfaction.Research limitations/implicationsLimitations of this study include the inability to show a causal relationship, limited external validity, equations that explain only a small amount of variance and attitudinal measures that are single source. Future research which helps understand what employees know and why differences across organizations exist would be helpful.Practical implicationsFrom an employee attitude perspective, changing performance‐based components of CEO compensation (e.g. bonus) is better than changing CEO salary. However, if salary is going to be increased, a communication plan for employees should be developed.Originality/valueWhether executive compensation has an impact on employees' attitudes has not been explored previously.

CEO Compensation and Firm Performance: an Empirical Investigation of UK Panel Data

Abstract This paper examines the link between CEO pay and performance employing a unique, hand‐collected panel data set of 390 UK non‐financial firms from the FTSE All Share Index for the period 1999–2005. We include both cash (salary and bonus) and equity‐based (stock options and long‐term incentive plans) components of CEO compensation, and CEO wealth based on share holdings, stock option and stock awards holdings in our analysis. In addition, we control for a comprehensive set of corporate governance variables. The empirical results show that in comparison to the previous findings for US CEOs, pay‐performance elasticity for UK CEOs seems to be lower; pay‐performance elasticity for UK CEOs is 0.075 (0.095) for cash compensation (total direct compensation), indicating that a ten percentage increase in shareholder return corresponds to an increase of 0.75% (0.95%) in cash (total direct) compensation. We also find that both the median share holdings and stock‐based pay‐performance sensitivity are lower for UK CEOs when we compare our findings with the previous findings for US CEOs. Thus, our results suggest that corporate governance reports in the UK, such as the Greenbury Report (1995) that proposed CEO compensation be more closely linked to performance, have not been totally effective. Our findings also indicate that institutional ownership has a positive and significant influence on CEO pay‐performance sensitivity of option grants. Finally, we find that longer CEO tenure is associated with lower pay‐performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure.

Information Technology Investments, CEO Compensation and Market Valuation

Managers face tradeoffs. On one hand, CEOs make IT spending decisions in anticipation of generating competitive advantages and productivity improvements. On the other hand, CEOs realize the risky nature of IT spending and its immediate negative effect on current income. Boards of directors, recognizing the potential long-term contribution of IT to firm value, should thus structure its CEO compensation packages to encourage strategic IT spending. To test this proposition, we examine the relation between IT spending and various components of CEO compensation and assess its impact on firm value. Our empirical results suggest that IT spending is positively related to ratio of equity to total CEO compensation. This result is consistent with the notion that boards of directors understand that payoffs to IT are uncertain and, hence, tie CEO compensation to the long-term results by placing greater weight on equity compensation. Furthermore, we find that boards of directors shield CEOs' cash compensation from the earnings decreasing effects of IT expense to mitigate potential underinvestment in IT. Finally, we conclude that the synergistic relationship between IT spending and CEO equity compensation is positively associated with firm market value. Bridging the two research streams of business value of IT and CEO compensation, our study contributes to the literature by examining how ties between IT and CEO compensation contracts impact firm value.

The determinants of CEO compensation: Rent extraction or labour demand?

CEO compensation is topical and controversial and accordingly receiving considerable attention by various stakeholders. We investigate whether rent extraction or labour demand explains CEO compensation level in Australia. We do so by examining the determinants (economic, governance and ownership) of CEO compensation level and explore the relationship between predicted excess compensation and subsequent firm performance. Our results suggest that governance and ownership attributes, in addition to economic attributes, are significant determinants of CEO compensation. However, these attributes differentially determine the various components of CEO compensation. Our evidence is consistent with: (1) the determination of fixed salary and share-based compensation reflecting a firm's demand for a high-quality CEO; and (2) the CEO's ability to extract rent through bonus and options compensation, particularly for smaller firms or firms with above average performance. However, the rent extraction is not economically significant and does not persist beyond one year. This is in sharp contrast to the US evidence where rent extraction through CEO compensation is pervasive, economically significant and persistent [Core, J., Holthausen, R., Larcker, D., 1999. Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51, 371–406].

Are CEOs Charged for Stock-Based Pay? An Instrumental Variable Analysis

Using instrumental variables approach, this paper investigates whether an increase in stockbased compensation for CEOs is associated with a reduction in the dollar value of all other CEO compensation, as agency theory would suggest. I find that, on the contrary, larger stock-based compensation is on average accompanied by larger other components of CEO compensation. Similar results are obtained when focusing on option grants alone. The analysis of the compensation practices in corporations that have voluntarily started to include option grants into income statements shows little support for the hypothesis that accounting methods aect the

The impact of performance-based compensation on misreporting

This paper examines the effect of CEO compensation contracts on misreporting. We find that the sensitivity of the CEO's option portfolio to stock price is significantly positively related to the propensity to misreport. We do not find that the sensitivity of other components of CEO compensation, i.e., equity, restricted stock, long-term incentive payouts, and salary plus bonus have any significant impact on the propensity to misreport. Relative to other components of compensation, stock options are associated with stronger incentives to misreport because convexity in CEO wealth introduced by stock options limits the downside risk on detection of the misreporting.

The Impact of Performance-based Compensation on Misreporting

This paper examines the effect of CEO compensation contracts on misreporting. We find that the sensitivity of the CEO's option portfolio to stock price is significantly positively related to the propensity to misreport. We do not find that the sensitivity of other components of CEO compensation, i.e., equity, restricted stock, long-term incentive payouts and salary and bonus have any significant impact on the propensity to misreport. Relative to other components of compensation, stock options are associated with stronger incentives to misreport because convexity in CEO wealth introduced by stock options limits the downside risk on detection of the misreporting.

The Determinants of CEO Compensation: Rent Extraction or Labour Demand?

CEO compensation is topical and controversial and accordingly receiving considerable attention by various stakeholders. We investigate whether rent extraction or labour demand explains CEO compensation level in Australia. We do so by examining the determinants (economic, governance and ownership) of CEO compensation level and explore the relationship between predicted excess compensation and subsequent firm performance. Our results suggest that governance and ownership attributes, in addition to economic attributes, are significant determinants of CEO compensation. However, these attributes differentially determine the various components of CEO compensation. Our evidence is consistent with: a) the determination of fixed salary and share based compensation reflecting a firm's demand for a high quality CEO; and b) the CEO's ability to extract rent through bonus and options compensation, particularly for smaller firms or firms with above average performance. However, the rent extraction is not economically significant and does not persist beyond one year. This is in sharp contrast to the US evidence where rent extraction through CEO compensation is pervasive, economically significant and persistent (Core, Holthausen & Larcker, 1999).

RELATIONSHIP BETWEEN CEO COMPENSATION AND FIRM PERFORMANCE: EMPIRICAL EVIDENCE OF LABOR MARKET NORMS

The study supports the existence of a relationship between components of CEO compensation and firm performance. On average, the sampled firms can be characterized as having high levels of CEO cash compensation and high ROE, as well as high levels of stock option values and high market returns. These between‐firm effects suggest the existence of labor market norms linking executive compensation with firm performance. CEO cash compensation was also strongly influenced by CEO age and firm size.