Pay-performance Relationship Research Articles

Do sports analytics affect footballer pay?

Labor economists aspire to understand how workers' productivity impacts pay. While professional football is a well-established domain to explore this relationship, so far, research has relied on basic productivity measures. Football is now awash with advanced and granular performance metrics that can allow a deeper understanding of the pay-performance relationship. We specify a salary model considering the newly available data and use sophisticated performance measures to explain contracted salaries in the English Premier League and Italian Serie A. We make a methodological breakthrough by identifying a sample of players who are in the first year of a new contract only. This results in a much tighter relationship between pay and performance. We estimate different salary equations using both basic and advanced performance statistics. Our main findings are, first, that few of our advanced performance metrics help to explain player salary and, second, that there is misalignment between individual performance determinants of team points and player salaries.JEL codesJ41, Z22

Aligning CEO compensation with sustainability performance: the role of CEO duality, board size, and compensation committees

This study uses agency theory to examine how board size, compensation committee, and CEO duality align the pay-performance relationship with long-term sustainability performance. We examined companies from nine Asian emerging economies with a sustainability score greater than 0.50 between 2010 and 2019. The findings support the pay-performance relationship proposed by agency theory in the presence of a robust governance structure. The relationship is more significant in firms with high ESG scores. Our study claimed that the compensation committee has a significant role in aligning sustainability objectives with CEO compensation, which improves the firm's market and financial performance. However, board size has no discernible impact on the CEO pay-performance relationship. CEO duality negatively affects this alignment since the CEO misuses their power to influence the compensation committee's role in tying sustainability agendas with the CEO's pay performance framework. Furthermore, CEO compensation is significantly impacted by firm size, which is justified by the complexity and increased responsibilities associated with managing larger firms. Conclusively, this investigation suggests that the inconclusive evidence on CEO compensation around the world should be studied with governance mechanisms. This study advances knowledge of agency theory and the connection between sustainability performance and compensation. The findings of the study highlight the role of governance structure in aligning executive compensation with sustainability to improve long-term performance. These findings suggest policymakers promote strong governance mechanisms that reduce the CEO's power to influence the board and enhance the independence of the compensation committee to independently design the executive compensation package essential for aligning executive pay with sustainability performance.

The impact of institutional and managerial ownership on the pay-performance relationship: Evidence from JSE-listed firms

Abstract This study explores how institutional and managerial ownership influence the connection between executive directors’ pay and firm performance in South Africa. Employing panel linear regression models and Johnson-Neyman analysis, complex insights are revealed. This study revealed that institutional ownership acts as a double-edged sword, positively moderating the link between long-term and total incentive remuneration and Return on Assets (ROA), while negatively influencing the relationship with market-based metrics like Tobin’s Q. This suggests that institutional shareholders play a dual role in enhancing long-term alignment and tempering short-term performance pressures. Managerial ownership also demonstrates mixed impacts, positively moderating the relationship between both short-term and total incentive remuneration, and ROA, but negatively moderating the link between long-term incentive remuneration and Total Shareholder Return (TSR). These findings underscore the delicate balance between managerial incentives, shareholder interests, and long-term value creation. While higher managerial ownership aligns with short-term shareholder goals, it may also lead to managerial entrenchment and short-termism in certain contexts. This study contributes to literature on corporate governance and executive remuneration in an emerging market setting.. By revealing the nuanced effects of institutional and managerial ownership on the pay-performance relationship, the paper provides valuable insights for policymakers, investors and corporate leaders aiming to improve governance practices and foster sustainable value creation. Our study offers essential implications for corporate governance practices and sets the stage for further inquiry into the intricate relationship between ownership structure, executive compensation, and firm performance.

Does the Founder CEO Receive a Higher Pay for the Firm’s Performance? Evidence from Malaysia

This paper examines whether firms run by a founder chief executive officer (CEO) have higher pay and whether their power sources from chairing the board, remuneration committee, tenureship, or share ownership affect the pay-performance nexus. Data for the study was hand-collected amongst 362 family-owned firms listed in Bursa Malaysia from 2009 to 2015 and analysed via the generalized method of moments (GMM) system to address endogeneity. The results showed that initially there was a significant positive pay-performance relationship in Malaysian family-owned firms; however, the founder CEOs had a weak influence on the pay-performance nexus. Secondly, the founder CEOs’ influences on the pay-performance nexus mainly came from their ownership power and their structural power as the chairman of the board. Thirdly, the pay-performance nexus tended to be positive and stronger when the family member of the CEO was chairing the board of directors and remuneration committee, instead of themselves, but the relationship changed to negative when more independent directors sat on the board, including a remuneration committee. The findings offered some policy implications for the regulators to enhance corporate transparency on the directors’ remuneration and ownership.

Executive compensation and firm performance: Evidence from Nepalese commercial banks

NRB provision to relate executive’s fixed annual compensation with staff salary and total assets of the respective Banks is different from those of other country (Bhatta, 2010). This is the first study to examine the relationship between executive compensation and firm performance in Nepalese banking industry. Data are collected from 21 commercial banks from the study period 2014/15 to 2020/ 21. Panel data are analyzed through pooled OLS and fixed effect model by using three control variables (i.e. Leverage, size and risk). Result showed that executive compensation is not influenced by firms performance in Nepalese commercial banks. Result also revealed that pay performance relationship is not influenced by size of the firms. It is concluded that possible reason for this insignificant relationship is contradict and impractical compensation directives issued by NRB, as claimed by (Bhatta,2010)

Private Pre-Decision Information and the Pay–Performance Relation

ABSTRACTWe study how the precision of managers’ private post-contract pre-decision information affects the pay–performance relation. Endogenizing the information environment, we find that firms may optimally tie executive pay closer to firm performance as agency problems become more pronounced. Specifically, varying parameters measuring the severity of the agency problem, we identify parameter regions where firms with more pronounced agency problems optimally combine uninformative signals with a higher incentive rate than firms with less pronounced agency problems that optimally choose a perfect signal. We find this relation for various measures of the agency conflict such as the incongruency of the performance measure, its susceptibility to manipulation, or the agent’s degree of risk aversion. Because the pay–performance sensitivity is frequently used for measuring the efficiency of real-world compensation arrangements, our results provide relevant insights for empirical research studying the determinants of the relation between executive pay and firm performance.JEL Classifications: D81; D86; M12; M52.

Do financial constraints moderate the relationship between CEO compensation and firm performance: an emerging market evidence

PurposeThe current study aims to investigate the impact of firm performance on chief executive officer (CEO) remuneration in the context of an emerging market, i.e. Pakistan. Further, the interactive effect of financial constraints is investigated in the pay–performance relationship.Design/methodology/approachThe study's sample includes 173 non-financial firms listed on the Pakistan Stock Exchange. This study covers the years 2010–2019. The CEO compensation of the sample firms is measured in terms of salary and bonuses, perquisites and stock options paid to the CEO, whereas firm profitability is measured by return on assets, return on equity, Tobin's Q (Q) and earnings per share. The KZ Index measures the degree of financial constraint. The fixed effect model (FEM) and system GMM estimation techniques were used to conclude the study's findings. In addition, to test the robustness of the results, the authors computed the level of financial constraints using the WW Index.FindingsThe findings show that firm performance has a significant positive impact on CEO compensation in all profitability measures except Tobin's Q. Further financial constraints have a significant negative impact on CEO compensation. The interactive variables of FC with all profitability measures have a significant negative impact on CEO compensation.Originality/valueThis study examines the relationship between firm performance and CEO compensation. Furthermore, the current study expanded the analysis by incorporating the role of financial constraints in the pay–performance relationship, which has not previously been tested, particularly in the context of an emerging market.

The moderating role of ESG disclosure scores in determining the impact of firm performance on CEO pay: a dynamic panel approach

This paper aims to empirically examine the moderating role of ESG disclosure while determining performance-based CEO pay. The compensation pay given to the CEOs must be linked to corporate sustainability so as to motivate them to act towards non-economic goals vis-à-vis earning profits. A total of 67 companies listed in the NSE Nifty 100 ESG index spanning six years from 2014 to 2019 have been taken as the panel data sample. As a baseline methodology, the PCSE model is applied and further two-step system GMM model has been considered for robustness check. The findings reveal that ESG disclosure scores show a significant positive effect in moderating the CEO pay-performance relationship. Stand-alone ESG measures indicate that except for social disclosure scores, all the other indicators depict a significant impact in determining the effect of firm performance on CEO pay. This study implies consideration of non-financial performance measures while determining CEO Pay.

Vice-Chancellor Pay and Performance: The Moderating Effect of Vice-Chancellor Characteristics

This article investigates the association between UK higher education institutions (HEIs) long- and short-term performance measures, and the pay of vice-chancellors/principals (VCs) in an era of intense neoliberalism/financialisation of HEIs, and consequently ascertains the extent to which the VC pay–performance nexus is moderated by VC characteristics. Using a longitudinal sample of UK HEIs, our baseline findings suggest that HEIs that prioritise meeting long-term social performance targets tend to pay their VCs low pay packages, whereas HEIs that focus on achieving short-term reputational performance targets pay their VCs high pay packages. We show further that the VC pay–performance relationship is moderated/explained largely by VC characteristics. Our findings are robust to controlling for alternative governance mechanisms, endogeneities, alternative performance measures and different estimation techniques. Our findings offer empirical support for optimal contracting and prestige theories with significant implications for the sector.

Corporate governance, CEO compensation, and corporate performance: evidence from India

PurposeThe purpose of this study is to examine the impact of corporate governance (CG) on chief executive officer compensation (CEO COMP) and pay–performance relationship (PPR) in Indian listed firms.Design/methodology/approachA sample of 196 companies listed on the S&P BSE 500 (Standard and Poor's Bombay Stock Exchange 500) Index has been analyzed using the panel (random effects) regression technique over the period 2010–2019. In addition, the system GMM technique was used to deal with the endogeneity issue.FindingsThe study found that block ownership and ownership concentration negatively impact COMP measures and PPR. Board size also had a negative direct and moderating impact on CEO COMP; however, the linkages were generally insignificant, especially for total pay. Similarly, outsider blockholders were found to be playing an insignificant role. Further, board independence positively influences COMP levels and PPR, though the results were mixed with respect to significance. Finally, CEO duality positively and significantly influences CEO COMP and PPR. A comparison before and after the new Indian Companies Act 2013 also revealed similar results, particularly in the after period. It suggests that the new legislative initiative was not effective enough in improving the CG and, hence, the alignment of pay with performance.Originality/valueThis study investigates the direct and moderating impact of CG on CEO COMP in the context of emerging economy India. Further, it makes a comparison before and after the introduction of the new governance reform, that is, the Indian Companies Act, 2013. Moreover, providing support to the entrenchment effect, the study reveals that large shareholders expropriate minority shareholders’ wealth by not aligning CEO pay with performance, making agency problems graver in emerging economies like India.

CEO Compensation in Korea: Is It Different than in the US? A Comparison between Korean Non-Life Insurance Firms and US Property-Liability Insurance Firms

This study investigates the level, structure, and pay-for-performance relationship of CEO compensation in Korean non-life insurance companies. We find that seniority plays an important role in setting CEO compensation practices and that performance-based pay, such as bonus, is more effective than base salary in enhancing shareholder value for Korean non-life insurers. Unlike previous studies that show that international differences in executive pay have been diminished considerably since the 2000s, our evidence shows that there is a remarkable difference in CEO compensation between Korean non-life insurers and U.S. property-liability insurers. Furthermore, we provide evidence that the pay-performance relationship is weaker in Korean non-life insurance companies relative to US counterparts, suggesting that it is necessary for Korean non-life insurers to tie performance-based compensation more closely to shareholder value in the design of CEO compensation.

Does the Strength of Incentives Matter for Elected Officials? A Look at Tax Collectors

Abstract In Pennsylvania local property taxes are collected by elected officials, known as tax collectors, whose compensation varies widely in both structure and level across municipalities. This paper analyses the existence of a pay-performance relationship for these officials. Using data on the percentage of property taxes that are actually collected at the municipal level, the paper finds that as the compensation tax collectors receive goes up, they collect more in taxes. This relationship is however true only for collectors who are compensated on a commission basis and not for collectors compensated on the basis of a flat salary.

Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia

PurposeThe purpose of this study is to analyze the CEO compensation sensitivity to firm performance, termed as the pay-for-performance sensitivity (PPS) in the Tunisian context and to test the robustness of this relationship when corporate governance (CG) mechanisms are considered.Design/methodology/approachThe consideration of past executive pay as one of the explanatory variables makes this estimation model a dynamic one. Furthermore, to avoid the problem of endogeneity, this study uses the system-GMM estimator developed by Blundell and Bond (1998). For robustness check, this study aims to use a simultaneous equation approach (three-stage least squares [3SLS]) to estimate the link between performance and CEO pay with a set of CG mechanisms to control for possible simultaneous interdependencies.FindingsUsing a sample of 336 firm-years from Tunisia over the 2009–2015 periods, this study finds strong evidence that the pay-performance relationship is insignificant and negative, and it becomes more negative or remains insignificant after introducing CG mechanisms consistently with the managerial power approach. The findings are robust to the use of alternative performance measures. This study provides new empirical evidence that CEOs of Tunisian firms abuse extracting rents independently of firm performance.Originality/valueThis study contributes to the unexamined research on PPS in a frontier market. This study also shows the ineffectiveness of the Tunisian CG structure and thus recommends for the legislator to impose a mandatory CG guide.

CEO pay sensitivities in innovative firms

PurposeThis study aims to investigate whether compensation committees provide the chief executive officers (CEOs) with incentives to undertake “income-decreasing” but potentially “value-enhancing” innovation expenditures. The authors specifically analyze pay–performance relationships for innovative firms relative to all other firms. This study is critical because innovation is expensive and has uncertain outcomes.Design/methodology/approachUsing alternative accounting performance measures and market performance measures, the authors estimate an econometric model of CEO compensation in innovative firms that incorporates the interaction of endogenous innovation and firm performance.FindingsThe authors document an incremental positive association between changes in accounting performance measures and CEO compensation changes in innovative firms relative to other firms. This sensitivity of executive pay to firm performance is higher for firms that innovate. These results support the hypothesis that compensation committees provide incentives to carry out risky innovation by tying executive compensation more closely to firm performance. This finding survives a battery of sensitivity tests.Practical implicationsThe implications of this study are significant. Capital needs to support risky research and development investments (Tidd and Besant, 2018; Baldwin and Johnson, 1995) form the basis of innovative firms' operations. Considering these expenses, if CEOs, who play a critical role in the scanning, adapting and implementing innovative needs in a firm, are not protected and compensated for making risky choices, the entire investment itself will be threatened. Hence, the findings reiterate and support earlier findings that speak to the importance of compensating CEOs to make high-risk investments that will lead to long-term economic and financial gains for the firm when the innovative behaviors result in competitive market shares and profits.Originality/valueThe original work is related to the investigation of pay–performance sensitivity in the presence of innovation, which has not been fully investigated in prior literature.

Pay, Productivity and Management

Using confidential Census matched employer-employee earnings data we find that employees at more productive firms, and firms with more structured management practices, have substantially higher pay, both on average and across every percentile of the pay distribution. This pay-performance relationship is particularly strong amongst higher paid employees, with a doubling of firm productivity associated with 11% more pay for the highest-paid employee (likely the CEO) compared to 4.7% for the median worker. This pay-performance link holds in public and private firms, although it is almost twice as strong in public firms for the highest-paid employees. Top pay volatility is also strongly related to productivity and structured management, suggesting this performance-pay relationship arises from more aggressive monitoring and incentive practices for top earners. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Executive pensions and the pay–performance relation—Evidence from changes to pension legislation in the UK

Abstract This article evaluates the role of executive pensions in the relationship between executive compensation and corporate performance. As a natural experiment, we exploit a major change to the tax-free allowances governing executive pensions. This reform affected the cost of pensions for firms whose executives had accumulated pension benefits in excess of the prescribed limit. We find a strong reaction to the reform. After 6 April 2006, many executives saw their defined benefit pension schemes replaced with risk-free cash payments. This imposition of an exogenous constraint on the contracting over CEO pay significantly decreased the relationship between executive pay and firm performance.

Pay me a single figure! Assessing the impact of single figure regulation on CEO pay

In this paper, we examine the relation between quantitative disclosure of CEO pay and the optimality of pay structure in terms of 1) level of pay, 2) pay-performance relationship, and 3) CEO-to-employee pay ratio. We use the new reporting regulation in 2013, requiring large and medium-sized companies and groups in the UK to report a single figure of total pay, as an exogenous shock to pay disclosure. Our results are based on a hand-collected sample of FTSE 100 firms over the period of 2010–2017. The main findings are threefold: Firstly, we find that CEO total pay stays roughly the same before and after the new regulation. In addition, firms that voluntarily adopt the regulation early have higher pay increases than their counterparts that do not adopt early in univariate tests. Secondly, pay-performance sensitivity actually declines after the new regulation by more than 50%. This effect is particularly evident in firms with weak corporate governance. Thirdly, the effect of the reform on the CEO-to-employee pay ratio is minimal, whereby it declined slightly following the reform, but this is only significant in univariate tests. Our results suggest that the 2013 regulation which increases the reporting transparency has limited impact on total pay and pay-performance in the UK.

Hedge fund activism, CEO turnover and compensation

This paper examines the governance role of hedge fund activists by analyzing the impact of these activists on CEO turnover, CEO pay, and CEO pay-performance link in targeted companies. Using the difference-in-difference approach, we first find significantly higher CEO turnover following hedge fund activism. After we split target companies into the CEO-turnover and non-CEO-turnover sub-samples, we find that only new CEOs in targeted companies get more compensation following hedge fund activism while incumbent CEO pay does not significantly change. The relationship between CEO bonuses and return on assets following hedge fund activism also differs across the subsamples split by CEO turnover. Pay-performance relationship is enhanced by hedge fund activism for new CEOs, but not for incumbent CEOs. In additional analyses, we document that CEO turnover is positively associated with Tobin’s Q and shareholder votes on Say on Pay in target companies after hedge fund activism.

Performance sensitivity of non-executive compensation in China: The role of economic policy uncertainty

This paper examines the impact of economic policy uncertainty on non-executive employees from the perspective of pay-performance sensitivity (PPS). Economy-wide uncertainty can trigger adverse impacts for businesses, and in response enterprises may adjust employee pay to maintain their level of activity. Using firm-level data on A-share companies listed on the Shanghai and Shenzhen Stock Exchanges during 2003–2016, this paper finds that better-performing firms pay higher wages on average, which they adjust only during uncertain times. We also show that the impact of economic policy uncertainty on PPS is more pronounced in the context of labor-intensive, highly competitive industries and state-owned enterprises, because they tend to respond to uncertainty via wage adjustment. The evidence demonstrates that the pay-performance link is much weaker during uncertain times, when different subgroups react differently. However, our finding of a robust pay-performance relation holds, even with a range of firm-level controls and accounting for different levels of firm heterogeneity.

Ex-Post Equity Awards and Measurement of the Pay-Performance Relation

Ex-Post Equity Awards and Measurement of the Pay-Performance Relation