Determinants Of Executive Compensation Research Articles

Keeping up with CEO Jones: Benchmarking and executive compensation

This paper seeks to understand the role that peer comparisons play in the determination of executive compensation. I exploit a recent change in the Securities and Exchange Commission's regulations that requires firms to disclose the peer companies used for determining the compensation of their top executives. Using a new dataset of S&P 900 companies’ choice of benchmarking firms during two fiscal periods (2007 and 2008), I investigate what determines the choice of comparison firms. I find that companies have a preference for choosing higher-CEO-compensation firms as their benchmark. Though I find that companies prefer to choose as their benchmark peers with similar firm characteristics, for CEO compensation, this effect is countered by a preference for firms with higher-than-own CEO compensation. Using the complete map of firms’ choices, I implement an instrumental variable strategy that uses the characteristics of peers-of-peers to estimate the effect of others’ compensation on own compensation. For Fiscal Year 2007, I find an elasticity of 0.5.

Are company founders underpaid?

This article examines the relation between founder status and CEO compensation in publicly listed US firms. The results suggest that CEO/founders receive lower cash pay and total compensation compared to professional managers. In contrast, CEOs who are relatives of the founders receive similar cash pay and total compensation to that of professional managers. Different compensation levels also emerge in terms of stock option awards. The findings underline the importance of distinguishing among these three CEO types when examining the determinants of executive compensation.

Self-interest or win-win: Determinants of executive compensation in China

This paper studies the determinants of executive compensation in listed firms in China between 2002 and 2005. There is significantly positive elasticity of compensation to scale. Moreover, corporate performance is positively related to the elasticity of compensation to scale. We find that both agency theory and managerialism hold true in Chinese listed companies. Compensation contract is the result of the game by stockholders and managers

Assessing Managerial Power Theory

Although studies about the determinants of CEO compensation are ubiquitous, the balance of evidence for one of the more controversial theoretical approaches, managerial power theory, remains inconclusive. The authors provide a meta-analysis of 219 U.S.-based studies, focusing on the relationships between indicators of managerial power and levels of CEO compensation and CEO pay-performance sensitivities. The results indicate that managerial power theory is well equipped for predicting core compensation variables such as total cash and total compensation but less so for predicting the sensitivity of pay to performance. In most situations where CEOs are expected to have power over the pay setting process, they receive significantly higher levels of total cash and total compensation. In contrast, where boards are expected to have more power, CEOs receive lower total cash and total compensation. In addition, powerful directors also appear to be able to establish tighter links between CEO compensation and firm performance and can accomplish this even in the face of powerful CEOs. The authors discuss the implications for theory and research regarding the determinants of executive compensation.

Are Company Founders Underpaid?

This paper examines the relation between founder status and CEO compensation in publicly listed US firms. The results suggest that CEO/founders receive lower cash pay and total compensation compared to professional managers. In contrast, CEOs who are relatives of the founders receive similar cash pay and total compensation to that of professional managers. Different compensation levels also emerge in terms of stock option awards. The findings underline the importance of distinguishing among these three CEO types when examining the determinants of executive compensation.

Re-Examining the Determinants of Executive Compensation in the Restaurant Industry: A Quantile Regression Approach

This study investigates the determinants of executive compensation in the restaurant industry with selected variables from both the pay-for-performance rule and the managerial power approach, using a quantile regression method. The quantile regression method also provides an empirical illustration that different levels of executive compensation are related differently to the pay-for-performance and managerial power variables. The results of the quantile regression analysis support the hypotheses that executive corporate governance influences executive compensation and that the restaurant industry partially follows the pay-for-performance rule to determine executive compensation.

Determination Of The Performance Measure Of Executive Compensation

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="color: black; font-size: 10pt; mso-themecolor: text1;"><span style="font-family: Times New Roman;">This paper investigates the principal-agent model of executive compensation through an empirical study of the interaction between CEO compensation and firm performance. As a multi level regression analysis that specifically shows the weight of the variance of the main independent variable, above and over the other independent variables, the stepwise multiple regression is employed to induce a statistical model of the pay-performance sensitivity. The stepwise multiple regression offers insights into the different weight assigned to the performance measure. In this respect, variances of the variables related to the change in the market value of firms are specifically weighted against each other in order to determine specific characteristics of the pay-performance relationship. The analysis is consistent with the agency theory that firm’ executives take advantage of the lack of control by firms’ owners to pursuit their personal interests. As the United States’ economy tumbles, the change in CEO total compensation does not seem to follow the accounting criteria of performance measures typically specified in management compensation contracts. The study reveals a lack of relationship between CEO compensation and firm performance. The link running from the change in the market value of firms and the change in CEO total compensation is flawed. The incentives faced by shareholders to discipline executives would be able to increase the performance of firms. It would be absurd for the compensation committee to rely on the single firms’ total assets value as the performance measure of CEO compensation. Other performance vehicles, such as returns, earnings, and cash flows should be considered in the determination of executive compensation. </span></span></p>

Determinants of Executive Compensation in Private Family Firms

We study patterns of CEO compensation in private family firms. We find that private family firms pay their CEO less than other private firms, and that the tendency of low CEO pay is stronger in family firms that have a family member as CEO. More than in other firms CEO pay in private family firms is positively associated with performance, which is contrary to some findings regarding public firms. Private family firms more than other private firms shield the CEO from business risk, in particular when the CEO is a member of the controlling family. We find that private family firms compensate their CEO for systematic risk, whereas non-family firms rather compensate for unsystematic risk.

The Say-on-Pay Movement – Evidence From a Comparative Perspective

The level of shareholder participation in the determination of executive compensation has emerged, in recent years, as one of the most intensively debated fields in the area of modern corporate governance. A say-on-pay regime was implemented, for the first time, in the UK in 2002, but a decisive tipping point may well have been reached in July 2010 when the US Congress adopted a new set of rules under which all US listed companies are required, starting in the 2011 proxy season, to put a vote with respect to executive compensation on the agenda of their annual meetings. The recent financial crisis also prompted the enactment of a say-on-pay vote requirement in Germany. By contrast, in Switzerland, the principle of such a shareholder vote is still being debated among experts and laymen alike. In all likelihood, Swiss voters will be consulted in 2012 or 2013 on whether or not a say-on-pay regime, whose terms are rather stringent in international comparison, should be carved into the Swiss Constitution. After a review of the rules implemented or discussed in the four jurisdictions mentioned above, the authors will argue that say-on-pay votes are, by and large, a convincing concept to enhance the corporate governance of the large public firm. It is crucial however that the modalities of such a shareholder vote be tailored to the different corporate governance structures prevailing in various jurisdictions. Finally, the authors comment on, and recommend a series of improvements with respect to, the say-on-pay provisions that have been implemented or discussed in the four jurisdictions which are addressed in this contribution.

Executive compensation, corporate social responsibility, and corporate financial performance: a multi-equation framework

Much has been discussed in various disciplines about the determinants of executive compensation. The importance of these scholarly inquiries has been underscored by the recent condemnation of high executive remuneration levels in the face of corporate failures and financial declines. Most researchers confine their analyses to single equation models that test various determinants and different measures of compensation. In this paper, we expand this approach to a multi-equation model that examines the determinants of executive compensation within a broader framework. Our specification explicitly allows for the endogeneity of executive compensation, firm financial performance, and corporate social responsibility (CSR). Chief among our findings is that this endogeneity assumption is supported, which means that financial performance and social performance are determined simultaneously. We further show that CSR is among the determinants of CEO pay, which indicates that pay-for-performance does not sufficiently explain compensation. Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment.

Determinants of executive compensation in privately held firms

AbstractWe examine what determines executive compensation in privately held firms. Our study is motivated by the fact that most studies in this area rely on data from publicly traded firms. Further, the few studies that are based on data from privately held firms only examine a limited number of determinants of executive compensation. Our findings indicate that the pay‐to‐performance relation is weak. Board size and ownership concentration are the only corporate governance characteristics that explain variations in executive compensation. Executive characteristics like skills, title and educational attainment all explain variations in executive compensation. Contrary to our expectations, we do not find a stronger pay‐to‐performance relation in firms with better designed bonus plans.

Determinants of executive compensation

Basierend auf einem neuen, die deutschen Prime-Standard-Unternehmen fur die Jahre 2005 bis 2007 umfassenden Datensatz untersuchen wir die Determinanten der Hohe der Vorstandsvergutung. Dabei unterscheiden wir drei Kategorien moglicher Einflussfaktoren: Unternehmens-, Performance- und Corporate Governance-Merkmale. Bereits ein einfaches, die Unternehmensgrose, Industrie- und Zeiteffekte enthaltendes Regressionsmodell erklart im Querschnitt uber 60 % der Variation der Vergutungshohe. Die Analyse der Performancesensitivitat der Vergutungshohe zeigt gemischte Ergebnisse: Zunachst ist zu konstatieren, dass aus okonomischer Sicht die Performancesensitivitat sowohl im Quer- wie auch im Langsschnitt als eher gering zu bezeichnen ist. Eine Unterscheidung der Unternehmen in Unternehmen in Streubesitz und dominierte Unternehmen zeigt, dass dominierte Unternehmen geringere Vergutungspakete gewahren und die Vergutungshohe in diesen Unternehmen starker an die Unternehmensgrose und die operative Performance, tendenziell jedoch geringer an die Aktienkursperformance gekoppelt ist. Eine Analyse des Zusammenhangs mit der Aufsichtsratsstruktur zeigt schlieslich, dass Aufsichtsratsgrose und Charakteristika des Aufsichtsratsvorsitzenden signifikant mit der Vergutungshohe zusammenhangen. Zusammenfassend stellen wir fest, dass trotz substantieller Anderungen des deutschen Corporate Governance Systems unsere Ergebnisse damit weiterhin auf hohe Agencykosten in deutschen Aktiengesellschaften schliesen lassen.

Executive compensation and gender: S&P 1500 listed firms

We examine if a gender gap persists in executive compensation and if the composition and the determinants of executive compensation for men versus women are the same for the S&P1500 listed firms during the period from 1992 to 2004. This analysis is also extended to high tech firms, where high scholarship is required both for male and female executives. The results reveal that the gender gap in executive compensation is reducing essentially after the year 2000. Also, the factors that explain the variation in executive compensation are not all the same for men and women. However, firms continue to pay women, who are considered more risk averse than men, a similar proportion of risky compensation components, such as stock options and restricted stocks, than they pay to men. In terms of technology firms, we find that the gender differences in total compensation are not statistically significant. Our study offers insight into recent data for executive compensation. The finding that the gender gap diminishes is a sign of a better functioning market for executives. Our findings could be potentially useful for compensation committees in order to develop compensation packages that take into consideration the degree of risk aversion in order to enhance performance. Compensation adjusted for risk aversion can produce a higher level of satisfaction for the employees and can lead to better performances. Future research should focus on international comparison of various dimensions of executive compensation.

Thomas Kuhn and Corporate Governance Research

Thomas Kuhn and Corporate Governance Research

The impact of firm strategy on performance measures used in executive compensation

We investigate the relationship between firm strategy and the use of performance measures in executive compensation. Our analysis shows that there is an increased emphasis on sales in the determination of executive compensation for firms pursuing a cost leadership strategy, which seek to achieve their competitive advantage through low price and high volume. In contrast, there is a decreased emphasis on accounting measures in firms pursuing a differentiation strategy, which require investments in brand recognition and innovative products, investments that are subject to unfavorable accounting treatment. These results indicate that compensation committees link executive rewards to firm strategy.

Are CEOs Compensated for Value Destroying Growth in Earnings?

Prior research has shown that firms who generate earnings growth by improving profitability create value for shareholders, while firms who generate earnings growth through investment destroy value. This paper examines whether compensation committees take this into account while determining CEO compensation. We first confirm the results from prior research that internally generated growth is perceived by markets to add value while investment-driven growth does not. We find that while internally generated growth is positively associated with compensation, so is investment-driven growth. There is evidence to suggest that the weight placed on investment-driven growth in earnings is higher despite such earnings growth not delivering value to shareholders. We find partial support for the hypothesis that institutional investors act as monitors to ensure that managers are compensated efficiently. The presence of institutional ownership increases the weight on internally generated growth, but does not reduce the weight on investment-driven growth. We further show that value oriented institutional ownership increases the sensitivity of compensation growth to internally generated earnings growth and reduces the sensitivity to investment-driven earnings growth. Contrary to this, growth oriented institutional ownership increases the sensitivity of compensation growth to investment-driven earnings growth. Our results indicate the importance of understanding the different sources of earnings growth in the determination of executive compensation.

Strategic leadership: theory and research on executives, top management teams, and boards

TABLE OF CONTENTS PREFACE DEDICATION 1. The Study of Top Executives 2. Do Top Executives Matter? 3. How Individual Differences Affect Executive Action 4. Executive Experiences and Organizational Outcomes 5. Top Management Teams 6. Changes at the Top: The Antecedents of Executive Turnover and Succession 7. Changes at the Top: The Consequences of Executive Turnover and Succession 8. Understanding Board Structure, Composition, and Vigilance 9. The Consequences of Board Involvement and Vigilance 10. The Determinants of Executive Compensation 11. Executive Compensation: Consequences and Distributions REFERENCES LIST OF TABLES ENDNOTES

Determinants of Executive Compensation and Its Impact on Organizational Performance

Company size is closely related to job complexity and employer's ability to pay in determining executive pay.

What Do We Know About Executive Compensation at Privately Held Firms?

This study examines the determinants of executive compensation using data from two nationally representative samples of privately held U.S. corporations conducted ten years apart-in 1993 and 2003 — and uses these data to test a number of hypotheses. We find that: (i) the level of executive pay at privately held firms is higher at larger firms and varies widely by industry, consistent with stylized facts about executive pay at public companies; (ii) inflation-adjusted executive pay has fallen at privately held companies, in contrast with the widely documented run-up in executive pay at large public companies; (iii) the pay-size elasticity is much larger for privately held firms than for the publicly traded firms on which previous research has almost exclusively focused; (iv) executive pay is higher at more complex organizations; (v) organizational form affects taxation, which, in turn, affects executive pay, with executives at C-corporations being paid significantly more than executives at S-corporations; (vi) executive pay is inversely related to CEO ownership; (vii) executive pay is inversely related to financial risk; and (viii) executive pay is related to a number of CEO characteristics, including age, education and gender: executive pay is inversely related to CEO age, positively related to educational, and is significantly lower for female executives.

New Vs. Old Economy: Trends and Determinants of Executive Compensation

We analyzed the executive compensation in the new and old economy in the period between 1992 to 2005. We focused on the evolution of the compensation and the factors that explain the executive compensation and if the form of compensation changed after the Nasdaq crash and the Sarbanes-Oxley act. Our results reveal that the new economy executives received, on average, much more than executives from the old economy from 1992 to 2003, but after 2004 the mean difference is very small and not statistically significant. In terms of compensation components, old economy executives always received more salary than new economy executives, and between 1992 to 2000, new economy executives received more bonus than old economy executives, but after this year the situation changes. We also found that the crash of Nasdaq and the Sarbanes Oxley act affected in a different way the executive compensation from new and old economy. In the case of the new economy, executives are changing from stock options based compensation to restricted stocks, and in the case of the old economy, they are changing to bonuses. We also investigated the impact of corporate governance and financial variables on new and old economy CEOs' and Directors' compensation and found evidence that the percentage of stock options that are vested but not exercised, size of the firm, the percentage of firm stocks owned by the executive, volatility, closing price of the company stock for the calendar year, one year total return to shareholders, number of board meetings, age as CEO and the ROA are variables that play important roles in explaining CEO and Director compensation. We also found that these factors are not all the same when we explain CEO and directors compensation from new and old economy and, in the case of the variables that are the same the intensity of the coefficients is different and generally statistically significant