Level Of CEO Compensation Research Articles

CEO compensation risk and pay for luck asymmetry

Purpose This study aims to examine the effect of CEO compensation risk, as measured by the proportion of equity-based pay (option and stock awards) relative to total compensation and pay sensitivity to stock volatility, on CEO pay for luck asymmetry. This paper also empirically examines CEO compensation risk as a mediating variable between the regulatory changes and CEO pay for luck asymmetry. Design/methodology/approach This paper test the proposed two hypothesis that CEO compensation risk is positively associated with the degree of CEO pay for luck asymmetry; and the pay related regulations implemented around 2006 could mitigate the degree of CEO pay for luck asymmetry using the fixed-effects regression models. Findings Consistent with the managerial talent retention hypothesis, this paper finds that CEO compensation risk, as measured by the equity-based pay as a proportion of CEO total compensation and CEO pay sensitivity to stock volatility, is positively associated with the degree of CEO pay for luck asymmetry. In addition, this paper find that CEO pay for luck asymmetry is significantly reduced by the major regulatory changes on executive compensation implemented around 2006. Research limitations/implications This study is among the very few studies exploring the impact of CEO compensation risk on pay for luck asymmetry in the literature. While the major purpose of the widely used stock options is to align executive interests and shareholder values, it also tends to increase the risk level of CEO compensation. So, a well-designed CEO pay package should protect risk-averse CEOs from bad luck for the retention purpose, which is also beneficial to shareholder wealth maximization. Therefore, future research on executive compensation needs to examine the issue from various perspectives. Practical implications For board of directors who is responsible for the compensation of CEOs, it is necessary to consider a broad range of factors when designing an optimal CEO pay package. Social implications The findings on the impact of regulations on CEO pay for luck asymmetry suggest that the executive-pay-related regulations around 2006 have indeed achieved some of their intended goals to significantly lower pay for nonperformance asymmetry, whereby CEO pay sensitivity to stock volatility has been identified as a major mediating variable. Originality/value This study contributes to the literature on executive pay for luck asymmetry in several perspectives. First, this paper finds that CEO compensation risk has a positive impact on the degree of CEO pay for luck asymmetry. Second, this paper finds that the CEO pay for luck asymmetry has been mitigated after 2006 when various regulatory changes on executive compensation began to be implemented in the USA. To the best of the authors’ knowledge, this study is among the very few studies investigating these issues in the literature.

CEO Stock Ownership, Recall Timing, and Stock Market Penalties

Problem definition: Firms often delay the decision to recall faulty medical devices long after they become aware of a defect, thereby putting public safety at heightened risk. However, the factors contributing to these delays are not well-understood. To help address this gap, we examine whether and how CEO stock ownership influences the speed with which faulty medical devices are recalled and whether this influence varies with recall severity. We then examine whether the stock market penalizes firms differently based on recall decision-making speed and whether this penalty also varies with recall severity. Methodology/results: We collect data on 2,144 medical device recalls across 50 public medical device firms from 2002 to 2015. We use accelerated failure time models to test the effects of CEO stock ownership on the time-to-recall and event study methodology to examine how the time-to-recall influences stock market returns. Supplementary analyses shed further light on underlying mechanisms. Robustness checks demonstrate consistent results, including coarsened exact matching, reverse causality tests, Cox proportional hazard models, generalized linear regression models, and a mediation analysis. Firms whose CEOs possess greater ownership stakes recall medical devices more slowly, and this recall-slowing effect is accentuated for high-severity recalls. Delaying recalls magnifies the stock market penalty attributable to the recall, particularly for high-severity recalls. Managerial implications: Our study highlights an ownership characteristic of firms that are more likely to delay recalling faulty medical devices. Boards of directors can use insights from our study as they oversee product-quality decisions and determine the level and form of CEO compensation, and the FDA can use our findings to identify firms that might warrant extra scrutiny and better allocate its limited monitoring resources.Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2021.0175 .

Technological Fit and the Market for Managerial Talent

AbstractWe show that the similarity of a firm’s technological expertise with that of other firms affects managerial labor market outcomes. Using each firm’s patent portfolio to estimate its technological expertise, we find that its similarity in technological expertise with other firms is strongly related to the benchmark group used for CEO compensation and job transitions. Furthermore, we show that a firm’s CEO pay is positively associated with the CEO compensation levels of technologically similar firms. Our results thus demonstrate the crucial role of technological similarity in determining the value of outside options and the boundaries of the managerial labor market.

Optimal CEO turnover

We study a dynamic principal-agent/firm-CEO relationship that is subject simultaneously to moral hazard, limited commitment, and shocks to the CEO's market value. Termination is used as (a) an incentive instrument to punish the CEO for bad performance, (b) a cost minimization device that uses the CEO's outside value as an external means for compensation, and (c) as a means for replacing the incumbent CEO with a less expensive new CEO. Termination occurs after the CEO receives either a sufficiently high or a sufficiently low outside value. The model generates both voluntary and involuntary/forced turnovers, and counter-offers occur on the equilibrium path. The model is calibrated to the U.S. data to capture the key observed features of CEO pay and turnover. It shows that increased moral hazard offers an explanation for the observed increase in the level and variance of CEO compensation, as well as the increase in forced CEO turnover.

Confucian culture and executive compensation: Evidence from China

AbstractResearch Question/IssueThis study investigates how traditional Confucian culture affects executive compensation from three dimensions: CEO compensation level, CEO pay gap (the pay gap between CEO and other management members), and the gender pay gap.Research Findings/InsightsWe find that firms' exposure to stronger Confucianism is associated with less CEO compensation, a smaller CEO pay gap, and a larger gender pay gap in China. These findings are consistent with the core values of moderatism, collectivism, and patriarchalism rooted in the Confucian culture. Our findings are robust to different firms' exposure to Confucian culture measures. Endogeneity concerns are further addressed with a subsample of firms that experienced headquarters relocation. Cross‐sectional analyses show that the influence of traditional Confucian culture is more pronounced for firms facing less industry competition, owned by the state, or with a higher concentration of power. Additional analyses show that the Confucian culture also reduces the CEO's pay‐for‐performance sensitivity, weakens pay incentives, and leads to lower firm risk‐taking; however, it also mitigates firm agency problems by reducing firm earnings management and managerial perk consumption. The combination of these positive and negative effects reduces the firm's overall value.Theoretical/Academic ImplicationsThis study expands our understanding of the role of informal institutions in corporate behavior. Corporate governance is embedded in the market's formal institutions, which, in turn, are embedded in local informal institutions. Academically, our study suggests further corporate governance research on informal institutions, especially in emerging markets where institutional development is not yet complete and informal institutions play a particularly important role.Practitioner/Policy ImplicationsThis study could help practitioners better understand the business culture and compensation contract design in Confucian nations. It also suggests that policymakers consider the effect of informal institutions when designing formal institutions.

The impact of relative CEO compensation on not-for-profit contributions

PurposeThe authors extend research suggesting that external funders reduce their contributions to not-for-profit (NFP) organizations in response to media-reported CEO compensation levels.Design/methodology/approachEmploying a maximum archival sample of 44,807 observations from US Form 990s, the authors comprehensively assess the extent that high relative NFP CEO compensation is associated with decreases in future contributions.FindingsThe authors find that donors and grantors react negatively to high relative CEO compensation but do not react adversely to high absolute executive compensation. Contributors seem to take issue with CEO compensation when they perceive it absorbs a relatively large portion of the organizations’ total expenses, which may hinder the NFP’s mission. Additional findings suggest that excess cash held by the NFP significantly exacerbates the negative baseline relationship between future contributions and high relative CEO compensation. Finally, both individual donors and professional grantors are sensitive to cash NFP CEO compensation levels, but grantors are more sensitive to CEO noncash compensation.Research limitations/implicationsThe authors’ data are focused on larger NFP organizations, so this limits the generalizability of the study. Furthermore, survivorship bias potentially influences their time-series investigations because a current year large-scale decrease in funding due to high relative CEO compensation may cause some NFP firms to drop out of the sample the following year due to significant funding reductions.Originality/valueThe study makes three noteworthy contributions to the literature. First, the study documents that the negative association between high relative CEO compensation levels and future donor and grantor contributions is much more widespread than previous literature suggested. Second, the authors document that high relative CEO compensation levels that trigger reductions in future contributions are significantly exacerbated by excess cash held by the NFP. Finally, the authors find that more sophisticated grantors are more sensitive to noncash CEO compensation levels as compared with donors.

Terrorist attacks, CEO overconfidence, and CEO compensation

This study examines how terrorist attacks and CEO confidence levels impact CEO compensation structures. Terrorist attacks in the United States from 1999 to 2018 are examined as negative exogenous shocks affecting CEO compensation. The findings indicate that overconfident CEOs of affected firms are likely to receive higher equity compensation than overconfident CEOs of firms located far from attacks, while non-overconfident CEOs of affected firms receive higher cash compensation than CEOs located far from attacks. This study contributes to the literature by examining how CEO compensation levels and structures vary according to nonfinancial shocks and CEO confidence levels.

A Configurational Exploration of How Female and Male CEOs Influence Their Compensation

The issues of excessive CEO compensation and gender pay gaps garner much attention from management scholars and the general public. In this study, we integrate these topics and explore the complex interdependent nature of how CEOs influence directors’ evaluative perceptions about appropriate levels of CEO compensation and whether female and male CEOs do so in different ways. Drawing from role congruity theory and previous research on executive compensation, we use a configurational approach to identify how CEOs achieve high levels of compensation through different combinations of influence arising from their power, origin, tenure, similarities with evaluators, and organizational conditions. Using fuzzy set qualitative comparative analysis with a matched pair sample of female and male CEOs from 2010 to 2016, we find there are multiple configurations of influence conditions by which female and male CEOs achieve high compensation. Our inductive analysis, unpacking how these configurations differ between female and male CEOs, shows four distinct influence mechanisms: leveraging power and role empathy, trailblazer responsibility, leveraging power and similarity, and leveraging role empathy. These mechanisms highlight the ways influence conditions complement or mutually reinforce one another in different ways for female and male CEOs. Implications for theory and research about the unique challenges female executives face in achieving equitable treatment in the workplace are also discussed.

Does CEO Power Affect the Association Between CEO Compensation and Tangible Assets Impairments?

This paper examines the association between CEO compensation and tangible long-lived assets impairment. We find that the level of CEO compensation is negatively associated with the tangible long-lived assets impairment charges. We also document that in firms with CEOs who have more decision-making power, the negative association between CEO compensation and tangible long-lived assets impairment charges is mitigated. Specifically, the negative association between CEO compensation and tangible long-lived assets impairment charges is less pronounced (1) when CEO chairs the board, (2) when CEO is the founder of the firm, (3) when the CEO is involved in the director selection process, and (4) when overall board independence is low.

Are Superstar Directors Effective in Corporate Governance?

In this paper, I hand-collected a sample of prestigious business award-winner directors based on the four types of awards discussed by Chen, Wu, and Zhivotova (2017) and use them to represent reputable board of directors. I examine how awardee directors would influence management monitoring effectiveness and corporate governance by testing with CEO compensation level, pay-performance sensitivity, risk-taking behavior, accounting conservatism, and turnover-performance sensitivity. The results show that with award-winner directors sitting in the boards, CEOs receive more incentive compensation, have higher risk-taking incentives, and the firm adopts higher level of accounting conservatism. The findings suggest that reputable directors are effective in performing monitoring and advising duties.

Technological Similarity and the Market for Managerial Talent

We show that the similarity of a firm’s technological expertise with that of other firms affects managerial labor market outcomes. Using each firm’s patent portfolio to estimate its technological expertise, we find that its similarity in technological expertise with other firms is strongly related to the benchmark group used for CEO compensation and to job transitions. Furthermore, we show that a firm’s CEO pay is positively associated with the CEO compensation levels of technologically-similar firms. Our results thus demonstrate the crucial role of technological similarity in determining the value of outside options and the boundaries of the managerial labor market.

Examining the Immediate Effects of Recent Tax Law Changes on the Structure of Executive Compensation

As part of the “Tax Cuts and Jobs Act” (TCJA), Congress repealed a long-standing exception that allowed companies to deduct executives’ qualified performance-based compensation in excess of $1 million. The reason for the change was to reverse a shift in executive compensation away from cash compensation and towards performance pay, which Congress believed led executives to focus on short-term results rather than the long-term success of the company. The purpose of this study is to test the efficacy of this provision as part of the TCJA. Across a battery of tests, including a difference-in-differences design that exploits the staggered time-series implementation of the deduction limit, we find little evidence that the average firm changed the level or structure of CEO compensation after the TCJA as Congress intended. Overall, our findings suggest this change was ineffectual as enacted. Our results have implications for future policymakers who endeavor to adjust pay inequality or managerial myopia through tax laws targeted at executive compensation.

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.

The nexus between effective corporate monitoring and CEO compensation

Managerial compensation to top executives, particularly to CEO, has remained a topic of continuing interest in corporate finance literature. Corporations are required to pay a handsome amount to attract and motivate competent business executives to get their jobs done in a befitting manner. Accordingly, executives try to grab higher level of compensation for themselves which might be at the cost of harming firm value and shareholders' interests. In this context, various governing mechanism have been introduced to effectively monitor this opportunistic behaviour of executives. In this context, the current study empirically evaluates the impact of different corporate governance monitoring mechanisms such as institutional shareholders ownership and activism, independence of boards and audit committees, and presence of blockholders in company on level of compensation paid to CEO. The results revealed that more independent board and audit committee members meeting more frequently are helpful in mitigating the higher level of CEO compensation. Moreover, higher financial institutional ownership found positively related to CEO compensation which is in accordance with strategic alliance hypothesis between managers and sponsoring financial institutions.

The nexus between effective corporate monitoring and CEO compensation

Managerial compensation to top executives, particularly to CEO, has remained a topic of continuing interest in corporate finance literature. Corporations are required to pay a handsome amount to attract and motivate competent business executives to get their jobs done in a befitting manner. Accordingly, executives try to grab higher level of compensation for themselves which might be at the cost of harming firm value and shareholders' interests. In this context, various governing mechanism have been introduced to effectively monitor this opportunistic behaviour of executives. In this context, the current study empirically evaluates the impact of different corporate governance monitoring mechanisms such as institutional shareholders ownership and activism, independence of boards and audit committees, and presence of blockholders in company on level of compensation paid to CEO. The results revealed that more independent board and audit committee members meeting more frequently are helpful in mitigating the higher level of CEO compensation. Moreover, higher financial institutional ownership found positively related to CEO compensation which is in accordance with strategic alliance hypothesis between managers and sponsoring financial institutions.

CEO compensation and government ownership

AbstractResearch Question/IssueDespite the benefits of privatization (i.e., divestiture of government‐owned enterprises), governments still own substantial stakes in economically important firms. Given public concern about excessive compensation and frequent government responses, this paper compares the level and structure of CEO compensation in privatized firms, including those still partially owned by governments, to firms never owned by the government.Research Findings/InsightsUsing a multinational sample of firms, we find that privatized firms have lower total CEO compensation than private firms never owned by governments. CEO equity‐linked wealth in privatized firms is less sensitive to stock performance, and equity compensation is negatively related to government ownership stakes. Privatized companies engage in less risk‐taking than nonprivatized companies, suggesting that government risk aversion could explain differences in CEO compensation.Theoretical/Academic ImplicationsThis study finds that the role government ownership plays in the level and structure of executive compensation is broadly consistent with pay regulations governments periodically impose. It provides empirical support for the argument that government owners are risk‐averse and associated with lower equity‐linked executive pay, which discourages CEO risk‐taking.Practitioner/Policy ImplicationsThis study encourages corporate boards to consider the degree of government involvement in their firms when setting CEO compensation packages and policies. Government concerns about excessive compensation may require boards to find other ways to incentivize CEOs, particularly given the weaker governance linked to state‐influenced firms. Additionally, governments should analyze their influences on CEO compensation, and how these can affect performance, when considering their ownership stakes in public companies.

CEO compensation in EU telecom companies: Does the state design the right incentives?

This paper analyzes the structure of CEO pay in European fixed telecommunication companies, focusing on the impact of state ownership. Results show that, under the (partial or total) control of the state, the level of CEO compensation is lower and pay-performance sensitivity is higher than in privately-controlled firms. This finding suggests the state provides an incentive as well as a monitoring effect. However, when the state holds the majority of the shares, the pay level is significantly affected by the CEO power, suggesting that in these firms, CEOs are more likely to be entrenched with boards and succeed in raising their pay.

CEO Attributes, Compensation, and Firm Value: Evidence from a Structural Estimation

We present and estimate a dynamic model in which a board of directors and a CEO interact to set CEO compensation, equity ownership, and effort levels. CEOs in the model have four attributes: risk aversion, effort aversion, a reservation value and influence over the board. The intent is to evaluate the importance of these CEO attributes on compensation, incentives and firm value. We find that variation in CEO attributes explains the majority of variation in compensation, but little of the variation in firm value. All of the attributes have significant effects on compensation in isolation, but, because of correlations among the attributes, the main drivers of cross-sectional compensation are risk aversion and influence on the board. We estimate the impact of CEOs having influence over their own pay, finding that removing the influence increases shareholder value in the typical firm by 1.7%.

Determinants of CEO Compensation in the U.S. General Merchandise Sector

The purpose of this study is to examine the relationships between CEO compensation and firm level performance in the U.S. General Retail Store Sector. We performed cross sectional regressions on the entire sample and found no significant relationship existed between the level of CEO compensation and a set of independent variables that proxy for firm performance. We then performed a Stepwise regression and found that Market Capitalization and Gross Margin were significantly related to the level of CEO compensation and a set of independent variables that proxy firm performance. Our findings suggest that CEO compensation is positively related to market capitalization and gross profit margin.

A New Perspective on Incredible Growth of CEO-worker Pay Gap: Risk Aversion on Potential Loss of Firm Value

Facing the incredible growth of CEO-worker pay gap (CWPG) in business practices across the world, the traditional principal-agent theory and the tournament theory cannot explain it to a satisfied degree. In order to deal with such a research gap, a new perspective named risk aversion is proposed to investigate the forming mechanism of CWPG by building a theoretical model. The model proves that the firm determines CEO compensation level according to the potential loss of firm value that may be produced by the CEO with under-utilizing or misusing his/her discretion, which depends on the relative level of CEO compensation to the average CEO compensation in the professional manager market, while the firm sets employee compensation level according to his/her marginal outputs. The repeated dynamic game among all the CEOs and the firms in various industries would naturally make the average CEO compensation level increase rapidly, while the increase rate of the employee’s marginal outputs is much slower. In this way, EWPG would inevitably and reasonably experience explosive growth.