Determinants Of Executive Compensation Research Articles

The compensation of national union presidents: Moderating effects of union size

Over the last forty years numerous reseachers from the fields of economics, finance, and human resources management have proposed and empirically evaluated a number of models in efforts to identify determinants of executive compensation. Recently, similar research efforts have been undertaken to identify compensation determinants for union officers, both at the local and national levels. As an extension of these works, this study found measures of union financial strength, job complexity, performance and tenure in office to be directly related to national union presidents’ compensation. Although union income and relative union member earnings were the strongest determinants of officer compensation for the sample of unions as a whole, analyses of three subgroups of unions based on size revealed very different findings for large as opposed to small and medium-sized unions.

Regulatory and Life Cycle Influences on Managerial Incentives

An important controversy persists in economics concerning the appropriateness of profit maximization as opposed to various competing nontraditional theories of the firm [13]. Of particular interest has been the comparative relevance of the sales maximization hypothesis suggested by Baumol [4] and others. A typical methodology employed to empirically analyze the profit versus sales maximization issue has been to question whether the financial rewards of top executives are more strongly influenced by corporate profit or sales performance. It is implicitly assumed that the firm has a well-defined set of organizational goals and that the structure of executive compensation is designed to provide executives with a consistent set of incentives. Therefore, should profit performance constitute a significant determinant of executive compensation, support for the profit maximization hypothesis would be gained. On the other hand, if executive compensation is closely related to firm sales, then the nontraditional sales maximization hypothesis would be supported. In an early empirical analysis of the issue McGuire, Chiu and Elbing [14] found that sales and compensation were more highly correlated than were profits and compensation and, therefore, that the Baumol hypothesis seemed most relevant. Lewellen and Huntsman [12] pointed out, however, that McGuire, et al., had neglected to consider the deferred and contingent (stock options, etc.) elements of executive compensation and in so doing had perhaps biased their analysis against the profit maximization hypothesis. By correctly considering the impact of corporate performance on the total compensation of top corporate executives, Lewellen and Huntsman found strong support for the profit maximization hypothesis, and no support for sales maximization. In fact, so convincing were the Lewellen and Huntsman results that they seemed to resolve the managerial motivation issue in favor of the traditional profit maximization model. More recent empirical analyses, however, have tended to suggest that the issue is far from resolved. Baker [3], Boyes and Schlagenhauf [5], and Ciscel and Carroll [6] have all

Determinants of Executive Compensation

Industrial Relations: A Journal of Economy and SocietyVolume 20, Issue 1 p. 36-45 Determinants of Executive Compensation NARESH C. AGARWAL, NARESH C. AGARWAL *Assoeiate Professor, Faculty of Business, McMaster University.Search for more papers by this author NARESH C. AGARWAL, NARESH C. AGARWAL *Assoeiate Professor, Faculty of Business, McMaster University.Search for more papers by this author First published: January 1981 https://doi.org/10.1111/j.1468-232X.1981.tb00180.xCitations: 96AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume20, Issue1January 1981Pages 36-45 RelatedInformation

Executive Compensation: Performance versus Personal Characteristics

The purpose of this paper is to present evidence on the determinants of compensation of top-salaried chief executives of American industrial corporations. While a number of previous studies have purported to pursue this topic, prior research has actually been focused on one rather narrow aspect of the executive compensation process. Specifically, the emphasis in previous studies of executive compensation has been placed upon testing the relative importance of sales and profits as determinants of executive salaries, in an effort to shed light upon the targets and objectives of modern managers. Briefly, if the profit-maximization hypothesis of the economist's theory of the firm is to hold, executive salaries must be more closely related to profits than sales-if incomes and sales are more closely related, then a sales maximization objective is inferred. The implicit assumption in these studies is that profits and/or sales are indicators of executive productivity. Since performance is the principal determinant of compensation within the traditional neoclassical marginal productivity approach to wage determination, little attention has been directed to broader determinants of executive compensation, such as the personal characteristics of the individual executives. The intent of this paper is to introduce and test some additional hypotheses concerning executive compensation. We are particularly interested in examining the role of experience, education, business background, and related characteristics which might be considered by a corporate board of directors attempting to recruit and compensate a chief executive in a world of imperfect information.

The Determinants of Executive Salaries: An Econometric Survey

FOR over three decades, debate has raged over the economic assumption that the large corporation, through the decisions of its managers, attempts to maximize its profits. Empirical analysis of the behavior of the corporation has led to conflicting claims. The inquiry into the determinants of executive compensation has been no exception. Statistical investigation of executive compensation has been dominated by a search for one decisive explanation. Is the size, measured by either sales or assets, or profitability, measured by net corporate income or by the rate of return on assets, the key variable in establishing the level of the executive's reward? Proponents on both sides of this issue-the managerialists who support the corporate growth hypothesis and the neoclassical economists who favor the profit maximization assumption-seem to argue that the contest can be resolved by the presentation of unambiguous evidence that will award victory to one side and vanquish the other. This spirit of antagonism has distorted the essential element of the executive compensation question. The behavior of the corporation and the market forces that shape this behavior can be explained or illustrated only by the use of a series of intercorrelated variables. Not one of the available measures of corporate success, be it net income, sales or assets, is an exact measure of economic profits or firm size, nor is it independent of the other variables. This study focuses on the resolution of the serious econometric problems encountered in the process of estimating the determinants of executive compensation. Later we will show how the successful elimination of problems of simultaneous equations bias, multicollinearity and heteroscedasticity leads to the conclusion that the managerialist and neoclassical models of the firm are complementary, rather than substitute, explanations for the pattern of executive compensation.

Executives' remuneration maximization behavior: Some further evidence

The traditional concern of most economic analyses of corporate behavior has been with the hypothesis that top executives of an enterprise direct their managerial activities in such a manner as to maximize the monetary well-being of its fiduciary owner, the stockholders. However, recently the possibility has been raised that goals other than maximization profits or common stock price might well govern top executives' behavior. More than a decade ago Baumol observed that [1, p. 46] , "Executives' salaries appear to be far more closely related with scale of operations of the firm than its profitability." This statement, which was a corollary to his "sales maximization" hypothesis, has served as a theoretical framework of two well-known executive compensation studies. The first one was by McGuire, Chiu, and Elbing [4] which concluded that sales and compensation were more highly correlated than were profits and compensation. The authors of a later inquiry, Lewellen and Huntsman [3, pp. 718-19], on the other hand, inferred that: "Because the results of the study persistently indicate that both repoited profits and equity market values are substantially more important in the determination of executive compensation than are sales-indeed, sales seem to be quite irrelevant-the clear inference is that there is a greater incentive for management to shape its decision rules in a manner consonant with shareholder interests than to seek the alternative goal of revenue maximization." Lewellen and Huntsman's multivariate regression results totally refute both Baumol's hypothesis and McGuire et al. 's findings. Our empirical scrutiny shows that earlier analysis is either too simple or contains a fundamental statistical prob*Ohio University. lem, namely multicollinearity, which allowed them to reach conclusions as they did. In the following paragraphs we will a t tempt to show that as one discerns this problem and methodologically resolves it one would arrive at conclusions supportive of the original hypothesis postulated by Baumol [ 1 ] . According to Baumol, the overall most important performance variables which the top executives consider are (i) profits and (ii) sales; ergo, it is hypothesized that welfare of top executives is a function of (i) profits and (ii) sales. Their welfare is measured by the amount of total compensation which they receive from their firms. Specifically, the functional form is as follows:

Determinants of Executive Compensation: Comment

Determinants of Executive Compensation: Comment

Determinants of Executive Compensation: Reply

Determinants of Executive Compensation: Reply

Directors' Pay, Growth and Profitability

THE last i5 years have witnessed a series of theoretical works that have sought to replace the traditional motive of company directors, maximization of profit, with the maximization of some form of growth.' In support of this new maximand, several writers maintain that increases in size present overwhelmingly greater material incentives to directors than do increases in profitability. Several analysts have reviewed the evidence for this contention, using correlation or regression techniques to estimate the respective influence of size and profitability on pay. Studies before I970 obtained results that were surprisingly decisive by the standards of applied economics, and reported in favour of the 'managerial theorists arguments with remarkable unanimity.2 The relation between size and pay was found to be positive and passed the usual statistical significance tests with flying colours, whereas that between profitability and pay earned only scorn: the estimated coefficient was not significantly different from zero even at the permissive 5% level. In 1970 the harmony was disturbed by Lewellen and Huntsman [i], who declared, on the basis of new estimates, that '. . . reported profits are substantially more important in the determination of executive compensation than are sales-indeed sales seem to be quite irrelevant.. .'3 This paper, using hitherto unavailable data for a very large sample of U.K. companies,4 reconciles these apparently conflicting statistical results; and, in interpreting them, rejects both extreme positions.

Determinants of Executive Compensation

from the vagaries of individual leadership, the control and the goal formation process have moved to the management group. In response the corporation has adapted its style, performance, and reward structure to the dominance of the professional manager. The management group tends to be motivated by identification with the company's expansion. In turn, the organization rewards management with a larger organization and a higher salary structure. There is a strong correlation between sales, management compensation, and employment in the large corporation. Beginning with Berle and Mean's observation that effective control of the largest industrial corporations had passed into hands of management, debate has raged over the implications of the change in control [2]. The result has been a great deal of speculation over the impact of management control on the performance of the corporation. Most recent investigations have been tied to Baumol's revenue maximization hypothesis