Pay-performance Relationship Research Articles

Interpreting the dynamic performance effect of intellectual capital through a value-added-based perspective

PurposeThe question of whether intellectual capital (IC) is beneficial to firm performance is debatable because of the diverse effects of IC and its components on firm performance. Building on the concept of pay–performance relation, this study aims to provide new insights into how changes in IC affect changes in firm performance.Design/methodology/approachData envelopment analysis is employed to measure firm performance, and value-added intellectual coefficient (VAIC™) is selected to evaluate the IC and its components, namely human capital efficiency (HCE), structural capital efficiency (SCE), and capital employed efficiency (CEE). Ordinary least squares regression is applied to study the relationship between changes in IC and changes in firm performance using 6,408 firm-year observations of electronics companies listed in Taiwan from 2006 to 2017.FindingsEmpirical results suggest that IC efficiency and CEE significantly and negatively affect firm performance, thereby suggesting a contradictory common sense with the resource-based view on the beneficial effects of IC. However, changes in IC efficiency and HCE are significantly and positively related to changes in firm performance, including changes in firm efficiency and sales growth.Practical implicationsThis study suggests that managers should continuously pay attention to adjusting their IC, especially human capital (HC) for better decisions that help grow firm performance. Moreover, investors can grasp how sensitive firm performance is to IC.Originality/valueThis study argues the relationship between IC and firm performance in the same vein as a pay-for-performance link, suggesting that future studies should account for increases or decreases in IC.

How do sovereign wealth funds pay their portfolio companies’ executives? Evidence from Kuwait

Sovereign wealth funds (SWFs) are major players in the global markets. We contribute to the corporate governance literature by examining the possible value SWFs bring to their domestic holdings. We specifically examine the impact of SWFs’ ownership on firm executive compensation. Using data on Kuwaiti SWFs, we find that the pay-performance relationship diminishes as the cash flow rights of the SWF are greater. Moreover, having the SWF as the ultimate owner in the ownership chain of the firm does not alleviate the adverse effects of the divergence in cash flow and control rights. This evidence supports the notion that SWFs impose agency costs on their targets.

Academic salaries and public evaluation of university research: Evidence from the UK Research Excellence Framework

SUMMARY We study the effects of public evaluation of university research on the pay structures of academic departments. A simple equilibrium model of university pay determination shows how the pay–performance relationship can be explained by the incentives inherent in the research evaluation process. We then analyse the pay–performance relationship using data on the salary of all UK university full professors, matched to the performance of their departments from the 2014 UK government evaluation of research, the Research Excellence Framework (REF). A cross sectional empirical analysis shows that both average pay level and pay inequality in a department are positively related to performance. It also shows that the pay–performance relationship is driven by a feature of the research evaluation that allows academics to transfer the affiliation of published research across universities. To assess the effect of the REF on pay structure, we take advantage of the time dimension of our data and of inherent uncertainty in the evaluation of the performance of academic departments generated by the rules of the exercise. Our results indicate that higher achieving departments benefit from increased subsequent hiring and higher professorial salaries with the salary benefits of REF performance concentrated among the highest paid professors.

Executive compensation and firm performance: a non-linear relationship

In order to ensure profitability for shareholders, optimal contracting recommends the alignment between executive compensation and company performance. Large organizations have therefore adopted executives remuneration systems in order to induce positive market reaction and motivate executives. Complex compensation schemes are designed by Boards of Directors using strong pay-performance incentives that explain high levels of executive pay along with company size, demand for management skills and executive influence. However, the literature remains inconclusive on the pay-performance relationship owing to the various empirical methods used by researchers. Additionally, there has been little effort in the literature to compare methodologies on the pay-performance relationship. Using the dominant agency theory framework, the purpose of this study is to establish and examine the relationship between firm performance and executive pay. In addition, it intends to assess the characteristic of model specifications commonly adopted. To this aim, a quantitative analysis consisting of three complementary methods was performed on panel data from South African listed companies. The results of the main unrestricted first difference model indicate a strong non-linear relationship where the impact of current and previous firm performance on executive pay can be observed over 2 to 4-year period providing support to the optimal contracting theoretical perspective in the South African business context. In addition, CEO pay is more sensitive to firm performance as compared to Director pay. Lastly, although it affects executive pay levels, company size is not found to improve the pay-performance relationship.

Corporate governance, firm performance and executive pay: A comparison of defense and non-defense firms

This study analyses pay-performance relationship and pay structure of executives and tests whether the pay structure of CEOs differs across firms in the defense and non-defense sector using econometric methodology. The empirical results based on ordinary least squares, Probit and Tobit methods show that on an average, executives in the defense firms earn more than their counterparts in the non-defense sector. However, when we control for governance structure, firm performance and other characteristics, the difference in executives’ remuneration vanishes. The important determinants of executive pay are the legal system, firm performance measured by Return on Assets (ROA), whether the CEO is also Chairman of the board, and size of the firm. The estimates of the determinants of restricted stock awards showed that firm performance, governance and other characteristics significantly influence the likelihood of obtaining restricted stock awards and also the value of the stock award.

Impact of Ownership Type and Board Characteristics on the Pay–Performance Relationship: Evidence from India

The present research has been undertaken to study the role of ownership type and board mechanisms in moderating the executive pay-corporate performance linkage in the Indian context. A sample of 209 companies listed on the S&P BSE 500 Index has been studied over the period 2008–2009 to 2012–2013. Rigorous statistical analysis of the panel data highlights that some of the governance mechanisms are, in practice, instrumental in improving the relationship between pay and performance. Whereas efforts must, indeed, be channelled towards the better functioning of certain other internal control mechanisms. Specifically, of noteworthy consequence is the difference in the way the shareholders and the board of directors ameliorate the pay–performance relationship with respect to accounting vis-à-vis market-based corporate performance. Further, the weak monitoring role discharged by the institutional investors warrant immediate policy concern. The study brings forth important implications for practitioners and policy makers in designing corporate performance-based pay keeping in view the predominant influence exerted by the institutional environment of the emerging economy of India.

The chief executive officer pay–performance relationship within South African state-owned entities

Orientation: Over the years, the increase in executive remuneration in state-owned entities (SOEs) has been the subject of intense discussions. The poor performance of some SOEs with highly remunerated executives begs the question of whether chief executive officers in South African SOEs deserve the high levels of remuneration they receive.Research purpose: This study examined the relationship between chief executive remuneration and several measures of company performance across Schedule 2 SOEs within South Africa.Motivation for the study: Notwithstanding the widely publicised poor performance of South African SOEs, their importance and relevance remains evident. Regrettably, the literature on what fundamentally drives their performance is lacking.Research design, approach and method: This quantitative, longitudinal study, conducted over a 9-year period, collected secondary data from the annual reports of 18 Schedule 2 SOEs. The primary statistical technique used in the study was ordinary least square (OLS) multiple regression analysis on a pooled dataset. Chief executive remuneration consisted of fixed salary and total remuneration.Main findings: A relationship was found between chief executive remuneration and company performance, although mainly an inverse relationship.Practical and managerial implications: The improved understanding and knowledge of the relationship between chief executive remuneration and SOE performance may be used by the organisation and HR practitioners to direct and inform strategies for organisational effectiveness and business excellence.Contribution or value-add: This research provides new knowledge to the limited research available on SOEs in South Africa. Further, it reveals an unexplored area of potential research, that is, the importance of irregular, fruitless and wasteful expenditure as a performance measure in SOEs.

Executive compensation: influence and reciprocity effects

PurposeThe purpose of this paper is to understand the effects of influence and reciprocity as the elements in the determination of executive compensation.Design/methodology/approachA purposive sample was drawn, which comprised of 13 respondents chosen for their expertise relating to the determination of executive compensation in state-owned enterprises (SOEs). A semi-structured interview guide was used as the data-gathering instrument. A thematic analysis technique was used for data analysis.FindingsThe findings in this study identified three themes resorting under influence as crucial in the process of determining executive compensation, namely an executive’s social capital, intellectual capital and social comparison. Two major themes emerged under reciprocity, namely the pay-performance relationship and role complexity. Finally, the political-symbolic role emerged as the main theme that described the relationship between influence and reciprocity.Practical implicationsThe findings provide a more detailed description of the process involved in determining executive compensation in SOEs.Originality/valueThere has been limited if any, empirical study on the process involved in setting executive compensation. The limited focus has always been on accounting measures. Incorporating the socio-psychological view attempts to provide a more comprehensive and conclusive explanation of the process of determining executive pay in theory and practice.

The Moderating Role of Country-specific Characteristics on Pay-performance Relationship in Asian Markets: A Meta-Analysis Approach

The purpose of this study is to integrate the findings of the studies related to the relationship between CEO compensation and firm performance in Asian countries. The second concern of the paper is to explore the moderating role of country-specific characteristics on the pay-performance relationship in Asian markets. In order to achieve the study’s objective, meta-analysis technique is utilized through CMA. Basically, the results are analyzed with both the fixed effect and random effect models. however, the assumption of the fixed effect model regarding same true effect size was not fulfilled. Moreover, a higher level of heterogeneity was detected. Therefore, this study ignores the results denoted by the fixed effect model and follows the results prescribed by the random effect model. After eliminating outliers, the findings from 22 studies revealed that CEO compensation in Asian markets is aligned with firm performance but with the small magnitude. Furthermore, the results from the method of moments suggested that there is a positive effect of country’s development and literacy on the pay-performance link, however, the negative effect of gender inequality and Islamic practices are evaluated. Conversely, no significant effect of corruption on the pay-performance relationship is purported in the study. As the authors find the influence of country-specific characteristics on the pay-performance relationship in Asian markets, this study confirms the need for enhancing pay-performance sensitivity in Asian markets to mitigate potential agency conflicts.

Incentive Contracts and Downside Risk Sharing

This paper seeks to characterize incentive compensation in a principal-agent moral hazard setting in which the principal is prudent, or downside risk averse, as many situations (such as that of a patient in hospital or a regulator dealing with food safety) suggest she should be. We show that optimal incentive pay should then be ‘approximately concave’ in performance, the approximation being closer the more downside risk averse the principal is compared to the agent. Limiting the agent’s liability would improve the approximation, but taxing the principal would make it coarser. The notion of an approximately concave function we introduce here to describe the pay-performance relationship is relatively recent in mathematics; it is intuitive and translates into concrete empirical implications, notably for the composition of incentive pay. We also clarify which measure of prudence - among the various ones proposed in the literature - is relevant to investigate the tradeoff between downside risk sharing and incentives.

Mixed Ownership Structures and Firm Performance in China Listed Firms

China has achieved impressive economic growth since market reforms. The design of appropriate compensation structures is imperative so as to incentivize top managers, but little research has been done to examine the top management compensation structure in China. This study investigates how listed firms in China relate executive compensation to their firm performance and how such relationships are influenced by firm ownership structure. The results provide evidence showing strong link between compensation and performance varies across firms with different ownership structure. Private ownership enhances the link between firm performance and top CEOs compensation, while government ownership weakens executive pay-performance relation and thus makes the firms less effective in solving the agency problem between shareholders and management. It suggests enterprise reform in China will need to be supplemented by change in ownership structure in order to ensure fully success by transforming its State Owned Enterprises (SOEs) to corporations in the direction of converting state shares to public shares.

Top-executives Compensation: The Role of Corporate Ownership Structure in Japan

This paper explores the impact of corporate control, measured by ownership structure, on top-executives' compensation in Japan. According to agency theory, the pay-performance link is expected to be affected by the firm's ownership structure. Using a sample of 4,411 firm-year observations (401 firms for the 11-years period from 2001 to 2011) for Japanese non-financial firms publicly traded on the first section and second section of the Tokyo Stock Exchange (TSE), this study demonstrates that institutional ownership (both financial and corporate) is negatively related to the level of executives' compensation. Such finding is in line with efficient monitoring hypothesis which claims that the presence of institutional shareholders provides direct monitoring over managers, limits managerial self-dealing and curves the increase in top-executives pay. On the other hand, the results also show that managerial ownership is positively related to their compensation which supports managerial power theory hypothesis, i.e. management-controlled firms are more likely to extract more compensation from the business than other firms. Overall, this study confirms that corporate control has significant impact on cash compensation paid to Japanese top-executives after controlling the conventional pay-performance relationship.

HOW RESPONSIVE EXECUTIVE COMPENSATION IS TO CORPORATE PERFORMANCE? AN INDIAN PERSPECTIVE

Based on the principal-agent framework, the present research puts to empirical scrutiny the responsiveness of executive pay to corporate performance in a sample of 209 companies listed on the S&P BSE 500 Index. Both sensitivity and elasticity models have been formulated to measure the strength and magnitude of the pay-performance relationship over the period 2008-09 to 2012-13. Using robust statistical tools, the results of the present study reveal a positive, yet weak strength of such relationship. The stronger responsiveness of pay to accounting-based performance vis-a-vis to market-based performance suggests remedial compensation policies further aligning executive pay to increase in shareholders’ wealth in the sample Indian firms. Future research can explore additional theoretical underpinnings of the pay paradigm.

Executive compensation among Australian mining and non-mining firms: Risk taking, long and short-term incentives

How firms determine the pay of their executive employees is a vital research area. In the Australian context, mining firms form a large portion of listed companies. These miners tend to have more volatile earnings, operate with less certainty and higher risk in relation to capital investment. We look at a sample of ASX listed miners and non-miners from 2005 to 2013. We note that miners pay their CEOs less (AUD 1m vs AUD 1.5m for non-miners) overall. However, we also note that miners tend to use enhanced contingent long-term remuneration arrangements to significantly boost the pay-performance relationship compared to non-miners particularly during the pre-GFC period. Curiously, non-miners tend to have more generous short-term contingent arrangements linking executive pay and performance. The GFC, as an event, has adversely impacted these arrangements, lessening the generosity of pay-performance among miners, while enhancing these arrangements among non-miners. Overall, the results of the study provide support for optimal contracting theory and do not generally support the managerial power approach for both mining and non-mining firms.

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

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.

The enhanced disclosure of executive compensation in Korea

In Korea, with the amendment of the Financial Investment Services and Capital Markets Act (FISCMA) in 2013, the disclosure rule of executive compensation has been enhanced. The new legislation requires listed firms to disclose pay information for registered directors who earn more than 500 million Korean won in compensation per year. Using individual compensation data, we investigate whether the amended disclosure rule affects compensation level and pay–performance relation. We find no reduction in executive pay level. Rather, executives receive higher compensation after the enhanced disclosure rule. We also find that for executives who earned less than the optimal pay level in the ex ante period, pay growth rates are higher in the ex post period, suggesting that the availability of information about others' pay level affects pay changes for directors in the lower pay group. Moreover, the enhanced disclosure rule brings little improvement in pay–performance relation. Pay–market performance link has improved only for firms with good governance. Our results suggest that compensation disclosure rules need to be accompanied by good governance mechanisms in order to achieve effective compensation systems.

Compensation goals and firm performance

Using a large data set of performance goals employed in executive incentive contracts, we find that a disproportionately large number of firms exceed their goals by a small margin as compared to the number that fall short of the goal by a similar margin. This asymmetry is particularly acute for earnings goals, when compensation is contingent on a single goal, when the pay-performance relationship around the goal is concave-shaped, and for grants with non-equity-based payouts. Firms that exceed their compensation target by a small margin are more likely to beat the target the next period and CEOs of firms that miss their targets are more likely to experience a forced turnover. Firms that just exceed their Earnings Per Share (EPS) goals have higher abnormal accruals and lower Research and Development (R&D) expenditures, and firms that just exceed their profit goals have lower Selling, General and Administrative (SG&A) expenditures. Overall, our results highlight some of the costs of linking managerial compensation to specific compensation targets.

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.

How Much is that Star in the Window? Professorial Salaries and Research Performance in UK Universities

Using individual level data on the salary of all UK university professors, matched to results on the performance of academic departments from the 2014 Research Excellence Framework, we study the relationship between academic salaries and research performance. The UK higher education sector is particularly interesting because professorial salaries are unregulated and the outcome of the official research evaluation is a key financial concern of universities. To frame our analysis, we present a simple model of university pay determination, which shows that pay level and pay inequality in a department are positively related to performance. Our empirical results confirm these theoretical predictions; we also find that the pay-performance relationship is weaker for the more established and better paying universities. Our findings are also consistent with the idea that higher salaries have been used by departments to recruit academics more likely to improve their performance.

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.