Executive Compensation Practices Research Articles

Executive compensation, sustainable business practices and firm performance: a systematic literature review and future research agenda

PurposeThis paper provides the latest systematic literature review (SLR) of prevailing studies on the interrelationship among executive compensation, financial performance and sustainable business practices. This SLR is done in three parts: (1) examine the theories employed by previous studies; (2) identify the unique variables employed by researchers in analysing this interrelationship and (3) explore potential opportunities for further study in the field.Design/methodology/approachThis study conducted an SLR analysing studies from the Web of science, Scopus and EBSCO in over 20 countries from 2009 to 2022 published in several top-ranked journals. We utilised various search strings using the key phrases “executive compensation”, “CEO Pay”, “financial performance” and “sustainable business practices”. The initial sample of 27,210 was filtered with our meticulous inclusion and exclusion criteria to produce a list of 161 studies.FindingsOur findings are as follows: first, most studies encompassing this subject area lack multi-theoretical perspectives with agency theory being the most dominant theoretical viewpoint; second, we observed the use of monotonous quantitative research methods, with studies heavily lacking qualitative and mixed-method research approaches; finally, there is a palpable gap in cross-country studies.Research limitations/implicationsThere are a few limitations that must be acknowledged. First, the inclusion criteria ensured that only articles published in the CABS journal ranking of three star and above. Thus, this review may not be a precise reflection of the EC, FP and SBPs literature scope. The inclusion criteria also limit our review to only accounting, finance, management and business-related studies about the topic. Therefore, future studies could explore studies ranked three star and below and from other subject areas.Originality/valueThis study contributes to the existing literature by conducting a comprehensive SLR that examines both the theoretical underpinnings and empirical evidence on this topic. It builds upon previous research and extends our understanding of the interrelationship among executive compensation, financial performance and sustainable business practices.

The impact of corporate governance on default risk: BERTopic literature review

This study utilizes the BERTopic methodology, a topic modelling tool that facilitates a meticulous exploration of existing literature, to comprehensively review the interplay between corporate governance and default risk. Through analysis of diverse empirical studies, it delves into understanding how corporate governance practices influence default probability. The study underscores the importance of effective governance mechanisms — board attributes, ownership structures, executive compensation, shareholder rights, and disclosure practices — in molding default probabilities. It also highlights the role of external governance mechanisms and regulatory frameworks in managing default risk. Notably, this research advocates for further investigation into emerging governance models and their integration with modern machine-learning techniques to amplify their impact.

Charity in the 21st Century: Trending Toward Decay

The turn of the century seemed to bring with it a sharply critical focus on charity.(FN1) Under federal tax law, a charity includes organizations that are "organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes." This single phrase provides a standard not just for tax exemption for over 1.2 million organizations (which are diverse in purpose, size, function, complexity, and effectiveness) but also access to several tax and nontax preferences, including eligibility to receive tax deductible contributions (for income, estate, and gift tax purposes),(FN2) access to tax-exempt financing,(FN3) State property tax exemptions,(FN4) and regulatory relief, among other benefits.(FN5) The concerns about charities surfaced largely through press reports and are legion: spending of earmarked contributions for non-earmarked purposes; excess compensation to organization insiders; mission drift -- deliberate, or aided by faulty corporate governance; acceptance of property contributions when donors or others are the principal beneficiaries; participation in illicit tax shelter transactions; spending for non-charitable purposes; accumulations of income; failure to provide charitable services; use of the charitable form for non-charitable purposes; questionable investment practices; participation in political campaigns; and self-dealing transactions, to name a few.(FN6) The response to ongoing scandals by the Internal Revenue Service (IRS) and the Congress was mixed. As the scandals unfolded, the IRS continually pointed to abuses and the need to address them,(FN7) but also asserted that the charitable sector is "compliant," notwithstanding a minimal examination rate.(FN8) As part of its enforcement efforts, the IRS completed an ambitious overhaul of the annual information return charitable (and other tax-exempt) organizations file each year (the Form 990);(FN9) undertook intensive studies on the two largest segments of the charitable sector: hospitals,(FN10) and colleges and universities;(FN11) made an inquiry into executive compensation practices;(FN12) and raised new questions about governance.(FN13) The IRS's continuing actions indicate, at a minimum, suspicion that the charitable sector indeed has large pockets of noncompliance and that oversight, or the perception of it, is necessary. But the IRS can only do so much. Meaningful change of any underlying weaknesses in the tax law of charities ultimately must come from Congress.

Executive compensation and sustainable business practices: The moderating role of sustainability‐based compensation

AbstractThis study seeks to contribute to the extant business strategy and the environment literature by investigating the effect of CEO pay and executive compensation (EC) on sustainable business practice (SBPs). It also distinctively ascertains whether the pay‐for‐sustainability sensitivity (PSS) is reinforced in firms with sustainability‐based compensation (SBC) policy. Using a sample of 262 UK listed firms from 2009 to 2018, our findings are threefold. First, the findings reveal that both CEO pay and EC variables have positive effect on all SBP measures, except CO2 reduction performance where the link is negative. Second, the study shows that the PSS is reinforced for firms that implement SBC policy. Finally, we detect that both the PSS and the moderation effect of SBC on the PSS are higher in the symbolic construct of SBPs than the actual measures. The results support insights drawn from neo‐institutional theory. The findings have key implications for regulators and policy makers.

Director Pay Disputes in Japanese Courts: 1953 to 2018

This paper reviews a set of 230 judicial decisions collected by the author which Japanese courts rendered in disputes over claims of corporate directors to their pay between 1953 and 2018 in order to investigate what role litigation in the courts has played in relation to Japan's executive compensation practices. These all centered around either Article 361 of the Companies Act or its predecessor Article 269 of the Commercial Code, the main rule governing director compensation. The paper makes four findings which shed light on this question. The first insight is that Japanese courts, and particularly the Tokyo District Court, deal with director compensation disputes quite frequently. This has particularly been the case since the turn of the century, with decisions appearing at a rate of roughly ten per year since 2000. The second insight is that the nature of these litigated disputes differs drastically from the shareholder derivative action narrative developed in the American literature. Article 361 could be loosely described as a type of “Say on Pay” rule, which requires the pay of the board of directors be set either in the articles of incorporation or by a resolution of the shareholders meeting. This procedural requirement has lent itself to a fairly diverse set of uses in the Courts. Broadly speaking these fall into one of two categories. On the one hand, in keeping with its purpose, the rule has been used by both shareholders and corporations themselves to challenge director entitlements to pay. On the opposite side it has been used with even greater frequency in lawsuits initiated by directors claiming remuneration from corporations. A third insight which follows from the second is that in Japan with respect to director pay litigation in the Courts could more accurately be described as a mechanism for directors rather than shareholders. The vast majority of cases which this study uncovered are in fact lawsuits initiated by directors seeking to enforce claims for remuneration against the corporation, with shareholder lawsuits being far less common. The reason for this lies primarily in the fourth and final insight, which is the important role the courts have played in developing the rule itself. Taking a provision that consisted of a single line which left an enormous number of issued unanswered the Courts developed a fairly extensive set of rules governing how it, and by extension how decisions on director pay, operated. In particular the cumulative effect of these has been to give boards of directors, and particularly the representative directors who exercise control over them, a great deal of independent power to set the pay of individual directors. This in turn has put the pay of individual directors, and particularly those who run afoul of the representative directors, at some risk which has led many to turn to the courts to try to enforce their claims.

Governance of Cyber Security: State of Play

With cyber-losses mounting worldwide, the need for effective cybersecurity governance has never been greater. The objective of this paper is to identify what is currently known about this important topic and what remains to be further investigated. We examine both the academic and industry literature and draw upon several recent cases involving malicious external attackers and loss of customers’ financial information, as these characteristics are associated with more significant loss of shareholder wealth. Section 1: Case Studies We discuss the following case studies: Equifax, Marriott, and two Canadian financial institutions (Bank of Montreal and Simplii, a subsidiary of CIBC). In the cases affecting a large number of customers (Equifax and Marriott), indirect costs dwarf the direct costs associated with the attack. Direct costs include investigating the attack, upgrading security after the attack, fines, and customer remediation. Indirect costs (sometimes called reputational costs) occur when customers and other stakeholders take their business elsewhere or demand a change in the terms of doing business. Section 2: What and Why of Cyber-Governance This section considers cyber governance in the broader context of risk governance. Drawing on existing research on risk governance, we identify key structural elements: effective board of directors with cybersecurity skills and an appropriate committee to focus on cybersecurity; specialist senior executive expertise with access to the board, such as a Chief Information Security Officer (CISO); risk, compliance, and assurance functions that are adequately resourced with cybersecurity expertise; executive accountability for cybersecurity, with appropriate rewards and sanctions; and disclosure of cybersecurity risks and risk management practices. Section 3: Disclosure of Cyber-Risk Evidence suggests that disclosure expands following a damaging cyber-attack. There is, however, no clear evidence to suggest that expanded disclosure of cyber-risk is associated either with greater likelihood of attack or with superior cyber resilience. Of our case study firms, the one with the most expansive cyber disclosure, Equifax, suffered the most severe cyber-attack. New research that uses machine-learning to analyse the text of cyber-disclosures and quarterly earnings calls offers some promise in this regard. Section 4: Board Structures/Committees and Cyber Risk The effectiveness of governance structures in relation to cyber-risk outcomes is not yet well understood. Very few papers have been published in this area and those that exist are quite recent. Kamiya et al. (2021) find that the existence of a board risk committee reduces the likelihood of an attack, although Akey et al. (2021) find no association. There is, however, good evidence to suggest that cyber risk governance is reformed following a cyber-attack. Risk governance is also transformed after cyber-attack in a peer firm. Section 5: Executive Compensation and Cyber Risk Analysis of the four cases reveals remarkably little executive accountability following even severe cyber-attacks. Lack of serious consequences for senior executives is a problem because it may encourage lack of diligence in cyber risk management processes. We also identify opportunities to better design executive compensation practices to promote better cyber risk management. Section 6: Cybersecurity Governance Scores. ESG ratings play an increasingly important role in the financial system. Within the broad ‘governance’ category, a number of providers now offer a cyber-security governance score. We conduct a preliminary investigation of the scoring system provided by S&P Global, considering large banks in Australia, Canada, the UK, and the US. We find that while cybersecurity governance scores are correlated with past cyber-attacks, they have no value for predicting future cyber-attacks. This raises questions about the methodologies used by ESG ratings providers that warrant further investigation.

Unpacking the dynamics of a contested practice: the case of executive compensation and the shareholder value orientation in the USA

AbstractThe corporate scandals and market crashes of the 2000s generated significant criticism of the shareholder value orientation (SVO) in the USA. We offer a sociopolitical analysis of how this criticism triggered changes in stock-based executive compensation, a central practice associated with the SVO. We first analyze how corporate stakeholders redefined different forms of stock-based compensation, motivated new regulations and wielded direct challenges to specific firms. We then predict how firm-specific differences in external challenges and intra-firm power relationships were related to changes in the use of stock options and restricted stock grants (RSGs), testing our predictions using a longitudinal dataset of S&P 500 executives between 2002 and 2012. We find that firms facing negative media coverage of their executive compensation practices made less use of both forms of stock-based compensation, while firms facing shareholder activism only made less use of stock options, the form that was more heavily criticized. In addition, firms with more powerful CEOs utilized RSGs more heavily and did so even when facing media criticism. Our findings demonstrate that while stock options were vulnerable to change, stock-based compensation remained resilient because the structural power of CEOs, a core corporate governance feature of the SVO, also remained resilient.

Does family ownership matter in executive pay design?

PurposeThe purpose of this study is to analyse the level and structure of executive compensation of family and non-family businesses and if minority shareholders are expropriated by family businesses in the Australian context using excessive pay. Studies on compensation practices of family businesses are limited to the European and North American contexts. This study, for the first time, considers the Australian context, which is unique with its transparent compensation disclosures, and a principle-based corporate governance framework to examine the level of compensation as well as the association between pay and performance.Design/methodology/approachA set of family and matched non-family firms for the period 2004–2014 are examined in a panel data setting. Robust models are estimated to examine the association between compensation and a set of economic, governance and ownership factors.FindingsThis study finds evidence that family businesses in general pay lower levels of compensation than non-family businesses. An investigation of the role of economic factors on compensation of family and non-family businesses shows evidence that supports the optimal contracting theory. Further examination of governance factors on compensation levels and pay–performance sensitivities shows there is a limited role for managerial power approach in explaining the executive compensation practices of family businesses in Australia. These findings infer that family businesses, given their interest in non-financial goals, do not pay excessive compensation to their executives to expropriate minority shareholders.Research limitations/implicationsThese findings have implications for theory relating to executive compensation and human resource management in all types of businesses, including family firms. These findings offer support for the theory of optimal contracting. Empirical analysis shows no evidence of entrenchment effect or managerial power in family businesses in Australia. In terms of theory-building, there is role for socioemotional wealth model in addition to optimal contracting theory and managerial power approach.Practical implicationsThe findings of this study also have implications for practice. Compensation practices may be designed in such a way that executives and firms pursue broader social goals such as the sustainable development goals or more generally non-financial objectives. Businesses may not necessarily use only financial outcomes when assessing appropriate level of pay of executives. Often, the financial outcomes may involve wealth transfers between different stakeholders and may not necessarily lead to improving the societal well-being. In terms of human resource management, the findings of this study emphasise the need for explicit consideration of socioemotional wealth of all family-related and non-related employees when designing recruitment, training, reward and recognition policies.Originality/valueThis study highlights the role non-financial factors play in executive pay setting processes in family businesses in a highly transparent and principle-based governance framework. Family businesses in Australia are not motivated by monetary considerations, and that their interest in non-financial objectives leads to less emphasis on the link between compensation and performance.

Management compensation contracts and distribution policies in the US technology sector

This paper examines the impact of executive compensation practices on (a) the decision to distribute and (b) the distribution channel employed by companies from the US technology sector. We report that firms that compensate their managers using executive stock options (ESOs) tend to distribute less and firms that use stock awards make more distributions. When we simultaneously examine the distribution and the channel used, we find firms using ESOs restrict their dividend payments but their propensity for stock repurchases is unaffected. Firms using stock awards to compensate managers make greater distributions across all channels. We also provide strong evidence in favour of the agency and leverage explanations for distributions.

Comparison of executive compensation practices at Nordic and US markets: a mini-review article based on empirical evidence

This paper examines the compensation package of the CEO of both the Nordic and US markets and their roles in the organization. The paper contains the comparison between the compensation package of Nordic and US CEOs along with the harmony of the determinants. The work pattern and compensation are different in these two markets, certainly. It has been a big influence in the organization or working places to provide the most desired efforts on the particular or assigned responsibilities. This study is based on a systematic review of literatures, empirical evidences and surveys extracted from 23 articles of the previous studies on the compensation packages of CEO of both Nordic and US markets. The paper will be discussing about the chief executive body in the organization, the compensation design along with their compensation package system, discussing about the theories and determinants’ differences of their compensation practices and how this package is designed in both the Nordic and US markets. The difference between these two markets will be elaborately discussed and following by the author’s own discussion. The paper will end by providing a valid conclusion about the whole study.

Executive compensation of immigrant-founder firms in the USA

PurposeThe purpose of this paper is to examine CEO compensation in immigrant-founder firms vs CEO compensation in non-immigrant-founder firms.Design/methodology/approachUnivariate and multi-variate tests are implemented. CEO compensation is designed as a function of the origin of a firm’s founder (immigrant or native), executive characteristics and firm characteristics with firm and year fixed effect regressions. CEO compensation is measured with cash pay, equity-based pay and total compensation.FindingsCEOs of immigrant-founder firms receive higher equity-based compensation and higher total pay than CEOs of non-immigrant-founder firms and the levels of their equity-based and total compensation are contingent upon their stock ownership. CEOs in high-growth immigrant-founder firms receive higher stock-based pay than their counterparts in non-immigrant-founder firms. Immigrant-founder family firms compensate their CEOs with higher equity-based pay than immigrant-founder non-family firms.Practical implicationsThe paper provides some explanations on the success of immigrant-founder firms. CEO compensation designs in immigrant-founder firms can be adopted in other firms.Social implicationsThe paper provides some rationale for immigration legislation to encourage the talented to come to the USA and start their business in the USA.Originality/valueThis paper is the first to study executive compensation practice in immigrant-founder firms. The findings provide some practical and policy implications on immigration reform.

Determinants of CEO Compensation in Korea: A Corporate Governance Perspective

CEO compensation is a representative corporate governance system that regulates the management of entrepreneurs’ interests and entrenchment, which is important to be designed in tandem with corporate performance. Recently, in Korea, we disclose personal compensation information of top management to strengthen transparency and social responsibility of company management. However, even though the individual compensation of listed company executives has been announced for the last three years, related data are not systematically collected and related research results are not reported. This study is significant in that it attempted to understand executive compensation practices of listed companies in Korea by conducting empirical analysis for the first time in Korea where research on CEO compensation is limited due to lack of data. As a result of analysis, it was confirmed that the owner family CEO has a higher share of fixed salary than professional managers. Moreover, the proportion of bonus items linked to company performance is significantly lower. These results were stronger in the CEOs who did not sign in the annual business report and the large group sample. In addition, it was confirmed that the proportion of bonus items was significantly higher than the case where no compensation committee was installed.

The role of accounting conservatism in executive compensation contracts

AbstractTo test the implication of Watts’ (2003) argument that accounting conservatism increases the efficiency of executive compensation contracts, we investigate the relation between accounting conservatism and earnings‐based executive compensation contracts in Japanese firms. We focus on Japanese executive compensation practices because the demand for accounting conservatism is likely to be greater for Japanese than for US firms given the predominance of earnings‐based executive compensation contracts and relatively weak corporate governance of compensation contracts in Japan. We also investigate how the quality of the ex‐ante information environment affects the relation between accounting conservatism and earnings‐based executive compensation contracts. Consistent with our expectations, we find a positive relation between accounting conservatism and the compensation earnings coefficient. We also show that this positive relation is greater for firms with poor ex‐ante information environment. These results suggest that the demand for accounting conservatism is greater for firms that use more earnings‐based executive compensation contracts and have more serious ex‐post settling‐up problems.

EXECUTIVE COMPENSATION AND FIRM PERFORMANCE: EVIDENCE FROM INDIAN FIRMS

The study examines the relationship between executive compensation and firm performance among Indian firms. The evidence suggests that firm performance measured by accounting, as well as market-based measures, significantly affects executive compensation. We also test for the presence of persistence in executive compensation by employing the system generalized methods of moments (GMM) estimator. We find significant persistence in executive compensation among the sample firms. Further, we report the absence of pay–performance relationship among the smaller sample firms and business group affiliated firms. Thus, our findings cast doubts over the performance-based executive compensation practices of Indian business group affiliated firms.

An Evaluation of Compensation Benchmarking Peer Groups Based on Mutual Peer-Designating Behaviors

In this paper, I argue that firms mutually recognizing each other as compensation benchmarking peers constitute viable competitors in the same CEO labor market, and that non-mutual peer relationships can serve as a tool to evaluate firms’ executive compensation practices. In particular, I ask why some of the firm’s chosen peers do not consider to select the base firm back despite listing other firms as compensation benchmarking peers. I hypothesize that such one-sided peer choices are driven either by rent extraction or motivational motives. My analyses show that firms with a larger proportion of such one-sided peer choices are associated with higher compensation via setting a higher benchmark level. Consistent with rent extraction motives, such firms are also associated with higher excess compensation and lower firm performance. In additional analyses, I show that the proportion of one-sided peers increases when firms adjust their benchmark level upward by adding higher compensated peers and/or dropping lower compensated peers. Collectively, the findings suggest that patterns in mutual compensation benchmarking peer-designating behaviors can serve as a tool to evaluate firms’ executive compensation practices.

Executive compensation and firm performance: Evidence from Indian firms

The study examines the relationship between executive compensation and firm performance among Indian firms. The evidence suggests that firm performance measured by accounting, as well as market-based measures, significantly affects executive compensation. We also test for the presence of persistence in executive compensation by employing the system-generalised methods of moments (GMM) estimator. We find significant persistence in executive compensation among the sample firms. Further, we report the absence of pay–performance relationship among the smaller sample firms and business group affiliated firms. Thus, our findings cast doubts over the performance-based executive compensation practices of Indian business group affiliated firms.

Study of 2014 Short- and Long-Term Incentive Design Criterion Among Top 200 S&P 500 Companies

Published by The Conference Board in collaboration with Arthur J. Gallagher & Co., CEO and Executive Compensation Practices: 2015 Edition documents trends and developments on senior management compensation at companies issuing equity securities registered with the US Securities and Exchange Commission (SEC) and, as of May 2015, included in the Russell 3000 Index.The report has been designed to reflect the changing landscape of executive compensation and its disclosure. In addition to benchmarks on individual elements of compensation packages and the evolving features of short-term and long-term incentive plans (STIs and LTIs), the report provides details on shareholder advisory votes on executive compensation (say-on-pay) and outlines the major practices on board oversight of compensation design.

Equity Incentives and Corporate Fraud in China

This paper explores how managers’ and supervisors’ equity incentives impact the likelihood of committing corporate fraud in Chinese-listed firms. Previous research has shown that corporate fraud in China is a widespread phenomenon and has severe consequences for affected firms and executives. However, our understanding of the reasons that fraud is committed in a Chinese setting has been very limited thus far. This is an increasingly important topic, because corporate governance is rapidly changing in China, and it is unclear whether adopting the executive compensation practices of the West is appropriate for Chinese firms. We show that managers’ equity incentives increase their propensity to commit corporate fraud. We also find that this effect is more pronounced for state-owned firms. However, we find a negative but not significant relationship between the equity incentives of the supervisory board and the incidence of fraud.

Excess Executive Compensation and the Demand for Accounting Conservatism

To test the implication of Watts’ (2003) argument that accounting conservatism increases the efficiency of executive compensation contracts, we investigate the relationship between accounting conservatism and earnings-based executive compensation contracts in Japanese firms. We focus on Japanese executive compensation practices because the demand for accounting conservatism is likely to be larger for Japanese than U.S. firms because of the predominance of earnings-based executive compensation contracts and lack of explicit compensation contracts in Japan. Consistent with our arguments, we find a positive relationship between accounting conservatism and the compensation earnings coefficient. Furthermore, this positive relationship is greater for firms with poor ex-ante information environment. These results suggest that the demand for accounting conservatism is higher for firms that use more earnings-based executive compensation contracts and have more serious ex post settling up problems.

Optimal Contracting Under Mean-Volatility Ambiguity Uncertainties

We present a continuous-time agency model under mean-volatility joint ambiguity uncertainties, where both the principal and agent exhibit Gilboa-Schmeidler's extreme ambiguity aversion. For this, we extend the well-known martingale method for mean-volatility control problems in weak formulation, and show that the second-best contract in general consists of two sharing rules: one for realized outcome and the other for realized volatility. The outcome sharing is for uncertainty sharing and work incentives, and the volatility sharing is to align the agent's worst prior over ambiguity uncertainties with the principal's own. The structure of the optimal contract offers an alternative way of looking at managerial compensation. Unlike the existing standard contracting models, our model implies that the compensation increases with the realized volatility, and that pay-performance sensitivity to the outcome is unrelated to the realized volatility. The positive dependence on the realized volatility is consistent with the frequent executive compensation practices of granting stock options and the empirical evidence of the sharp rise in executive pays during 1990s.