Executive Pay-performance Sensitivity Research Articles

Does internal control affect firms' use of derivatives? Evidence from China

This study investigates the impact of internal control on firms' use of derivatives. We find that firms with strong internal controls are more likely to use derivatives than firms with weak internal controls. In cross-sectional analyses, we find that this relationship is more pronounced for subsamples with lower executive pay-performance sensitivity, lower executive ownership, smaller board size, and higher proportion of busy directors. Additional analyses suggest that among the five components of internal control, control environment, risk assessment, information & communication, and monitoring exhibit stronger impacts on derivatives use than that of control activities. We contribute to the literature on the determinants of firms' use of derivatives and highlight some components of internal control are more critical than the others in guiding a firm's derivatives usage.

Corporate digital transformation, governance shifts and executive pay-performance sensitivity

We utilized text mining techniques to gauge a company's level of digital transformation and found that the higher the degree of digitalization, the more apparent the decoupling of executive compensation from performance, indicating lower sensitivity of executive pay to performance outcomes. Within the framework of agency theory, digital technology empowers shifts in corporate governance models, enabling process-based behavioral monitoring and constraining governance mechanisms, thereby reducing reliance on outcome-based incentive mechanisms. Heterogeneous analysis reveals that the substitutive effect of digitization on the pay-performance sensitivity is more pronounced in companies with lower executive ownership. These companies often rely more on compensation incentives in the absence of digital technology. Moreover, the effectiveness of digital technology in enhancing governance depends on the user's wealth of knowledge and technical proficiency. We additionally confirmed that digital transformation has a positive impact on mitigating agency problems, as it enhances information quality, improves internal control standards, reduces excessive perk, and diminishes managerial short-termism. In essence, digital transformation indeed elevates governance regime. Furthermore, we discovered that digitalization increases the association between compensation and executive effort. Our research findings provide a fresh perspective on corporate governance and executive incentive mechanisms in emerging markets.

Customer prospects and pay-performance sensitivity: Evidence from Korea

This paper examines how business prospects in customer firms affect executive pay-performance sensitivity in supplier firms. Using Korean Input-Output Accounts Data and Business Confidence Index published by the Bank of Korea, I find that customer prospects are positively associated with executive pay-performance sensitivity and the association is extended to the components of performance in a way that encourages managers to better exploit the market opportunities. The positive association is more pronounced when the inter-industry data are more informative, when the firm belongs to a more competitive industry, and when the corporate governance is stronger. Data availabilityAll data are publicly available from sources identified in the text.

Analyst coverage and corporate misconduct

AbstractThis paper examines the causal effects of the coverage by financial analysts of the incidence of corporate misconduct in China. Using a unique dataset consisting of Chinese listed companies that committed misconduct in information disclosure and were consequently fined by the regulatory bodies, we show that firms covered by a larger number of financial analysts are less likely to engage in corporate misconduct. This could be explained by the information production role of analyst, which is especially important in emerging markets. We show that the presence of more covering analysts helps provide quality information and reduce information asymmetry regarding the firms. Because of information production by analysts, a firm could employ more intensive policies: increasing executive pay–performance sensitivity and executive turnover‐to‐performance sensitivity, which promote managerial incentives in improving corporate governance, thus leading to less corporate misconduct.

CEO discretion, CEO tenure and executive pay-performance sensitivity: A dynamic model based on game theory

Following the latest research trend which argues that the effects of CEO discretion on executive pay-performance sensitivity (EPPS) are some “contingent effects” instead of the “fixed effects”, the paper innovatively addresses the moderating role of CEO tenure in the relationship between CEO discretion and EPPS. For this purpose, based on the insights of game theory, the study creates a comprehensive theoretical algorithm model of EPPS with the introduction of two new critical variables, namely CEO discretion and CEO tenure into the classical principal-agent models of EPPS. By adopting the method of differential calculus, the model solution is calculated and further discussed. According to the model results, CEO tenure can moderate the relationship between CEO discretion and EPPS. To be specific, CEO discretion of fresh CEOs is positively related to EPPS; while for senior CEOs, CEO discretion is negatively related to EPPS. This finding is of great significance to reconcile the conflicting views on the relationship between CEO discretion and EPPS by proving fresh CEOs’ firm-serving motivations and senior CEOs’ self-serving motivations.

上市国企高管薪酬业绩敏感性结构化解析

本文以2006~2013年1001家国有上市公司为样本，通过动态面板数据构建多元回归模型对国有企业薪酬业绩敏感性结构化差异进行实证检验，比较了中央控股国有企业和地方控股国有企业在薪酬业绩上的不同表现，及国企高管业绩敏感性在行业上的差异。研究发现：(1) 我国国有上市公司高管薪酬与业绩存在相关性，但其薪酬业绩敏感性显著低于非国有上市公司；(2) 国有上市公司中，央企高管薪酬业绩敏感性显著低于地方国企；(3) 金融行业国有上市公司管理层的薪酬业绩敏感性显著低于其他行业。实证结果有助于明确未来国企薪酬改革政策的指向性，本文据此提出了多层次治理建议，对国企薪酬制度的进一步完善具有参考意义。 In this paper, the sample of the models includes 2561 China’s state-owned listed companies from 2006 to 2013 (including the 1001 state-owned listed companies). By constructing the panel data regression models, this research compares the difference between the executive pay performance sensitivity of central state-owned enterprise and that of local state-owned enterprises, as well as the difference of executive pay performance sensitivity of state-owned financial institutions and state-owned non-financial institutions. The study result shows that: (1) there is a significant cor-relation between the executive pay and company performance of China’s state-owned listed com-panies, but the executive PPS of state-owned listed companies is evidently lower than that of non- state-owned listed companies. (2) Executive PPS of central state-owned companies was significantly lower than that of local state-owned companies. (3) Executive pay performance sensitivity of state-owned financial enterprises was significantly lower than that of state-owned non-financial enterprises. When it comes to policy on executive compensation regulation of state-owned enter-prises, items should also be more targeted. This study offers reference for further optimization for executive performance appraisal system in state-owned companies.

CEO pay-performance sensitivity in the South African context

The topic of executive pay-performance sensitivity has resulted in mixed research findings. Literature related to executive remuneration constructs, company performance measures and the underlying theories is critically reviewed in this article. The literature is compared to research findings within the South African context pre, during and post the Global Financial Crisis of 2008. The researcher found similar results in the South African context compared to research in other countries and industries. The research challenges the notion that there is one dominant theory driving CEO compensation. The principal-agent theory, supported by the optimal contract theory, are foremost during periods of strong economic performance, while the influence of managerial power and other behavioural theories appear to prevail during periods of weak economic performance. This article proposes some critical considerations in order to manage this tension.

Social Responsibility and Executive Pay Performance Sensitivity in State-Owned Enterprises in China

Social Responsibility and Executive Pay Performance Sensitivity in State-Owned Enterprises in China

CEO pay-performance sensitivity in the South African context

The topic of executive pay-performance sensitivity has resulted in mixed research findings. Literature related to executive remuneration constructs, company performance measures and the underlying theories is critically reviewed in this article. The literature is compared to research findings within the South African context pre, during and post the Global Financial Crisis of 2008. The researcher found similar results in the South African context compared to research in other countries and industries. The research challenges the notion that there is one dominant theory driving CEO compensation. The principal-agent theory, supported by the optimal contract theory, are foremost during periods of strong economic performance, while the influence of managerial power and other behavioural theories appear to prevail during periods of weak economic performance. This article proposes some critical considerations in order to manage this tension.

Executive Pay–Performance Sensitivity and Litigation

Although the standard principal-agent model predicts a negative relation between incentive strength (i.e., pay-performance-sensitivity or PPS) and firm risk, the empirical evidence is mixed (Prendergast, 2002). This study revisits this prediction. Using carefully selected litigation events to conduct a comparative static analysis, we show that firm risk, post lawsuit filing, increases by about 11% for our sample. We then document that the incremental PPS (measured by the correlation between executive’s annual compensation and shareholders’ wealth) drops after the company is sued, although the total value of compensation remains relatively unchanged. Once a lawsuit case is closed, we find that both firm risk and the incremental PPS revert back (risk goes down and incremental PPS goes up). Finally, we use the instrumental variable approach to test the relation between PPS level (measured by the sensitivity between executive’s wealth and shareholders’ wealth) and firm risk directly, and again find that, cross-sectionally, firm risk is negatively correlated with PPS level. Our evidences suggest that the standard principal-agent model prediction holds well and that executive’s incentives are indeed negatively related to firm risk.

Top executive pay and firm performance in China

The sensitivity of executive pay to share price performance has been the main focus of Western executive pay studies, reflecting shareholders’ efforts to reduce agency problems by better aligning the rewards of executives with their own. However, these studies have ignored motivational effects and possible two-way pay–performance causation. This paper reports Chinese executive pay–performance sensitivity, with international comparisons, to examine whether China's unique institutional environment has produced outcomes consistent with those for Western market economies. This same unique environment makes possible the first estimates of two-way causation based on panel data analysis. The results show that executive pay and firm performance mutually affect each other through both reward and motivation.