Executive Compensation Structure Research Articles

Corporate Governance: Exploring Key Concepts, Mechanisms, and Historical Evolution

Corporate governance involves several key concepts that help define its scope and purpose. Though review of key corporate governance concepts and historical evolution is widespread in the extant literature, detailed review across the globe is limited. Motivated by this dearth, this study reviewed these concepts and explored how firms rely on them to implement effective corporate governance. The study employed documentary and descriptive research methods to review concepts of corporate governance, systems, mechanisms and historical perspectives around the world. Our study discovered that understanding internal controls helps ensure compliance, minimize risks and safeguard the firm’s assets. Similarly, the study discovered that executive compensation structures help align management interests with shareholder value and external oversight through auditing and regulation which provides an unbiased assessment of the firm’s financial reports. Our historical perspective of corporate governance highlighted significant milestones that have shaped its evolution. Importantly, these include reports and acts aimed at addressing corporate scandals and improving governance practices. We also discovered that to improve corporate governance standards worldwide, multilateral organizations like the Organisation for Economic Cooperation and Development (OECD) among others have played a number of roles in developing international guidelines and codes of best practice. Further, the study explored the dynamic nature of corporate governance in response to evolving economic, social and technological trends. The study concluded that understanding the concepts, systems, mechanisms and historical perspectives of corporate governance is essential for firms and stakeholders to maintain transparency, accountability and sustainable performance.

Overseas Returnee Executives and Digital Transformation of Enterprises: From the Perspective of Executive Compensation Gap and Executive Overconfidence

This article selects panel data of A-share listed companies in Shanghai and Shenzhen from 2013 to 2022, uses a fixed effects model to study the relationship between overseas returnee executives and digital transformation of enterprises, and analyzes the moderating effects of executive compensation gap and executive overconfidence. The research results indicate that overseas returnee executives can significantly promote the digital transformation of enterprises; The salary gap and overconfidence of executives play a negative moderating role in the positive relationship between overseas returnees executives and digital transformation of enterprises; Heterogeneity analysis shows that overseas returnee executives have a greater impact on high-tech enterprises, low marketization areas, and enterprises in the eastern region than on non-high-tech enterprises, high marketization areas, and enterprises in the central and western regions. To better solve the problems of "not being able to transform", "unwilling to do", and "afraid to transform" in the process of enterprise digital transformation, firstly, it is necessary to effectively utilize the high-quality human resources of overseas returnee executives and provide them with reasonable care and support to better play their role; The second is to optimize the executive compensation structure and strengthen the correlation between compensation and performance; The third is to pay attention to leadership training and psychological counseling for executives, and ensure objective analysis and sufficient discussion in the decision-making process of digital transformation.

Executive Compensation Structure, Economic Cycle, and R&D Investment

Executive Compensation Structure, Economic Cycle, and R&D Investment

Influence of Executive Compensation on Firm Risk-Taking Behavior in Qatar

Purpose: The aim of the study was to assess the influence of executive compensation on firm risk-taking behavior in Qatar. Methodology: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries. Findings: The study indicated that the structure and magnitude of executive compensation can significantly impact the risk profile of a firm. When executives are rewarded with substantial stock options and performance-based incentives, they are often motivated to pursue riskier strategies that have the potential for higher returns, aligning their interests with those of shareholders. However, this can also lead to excessive risk-taking, which may jeopardize the firm's stability if not managed properly. Conversely, fixed salaries and lower levels of variable compensation tend to promote more conservative decision-making, reducing the propensity for risk. The balance and design of executive compensation packages are thus crucial in ensuring that executives take calculated risks that contribute to sustainable firm growth rather than engaging in hazardous financial behaviors that could lead to adverse outcomes. Implications to Theory, Practice and Policy: Agency theory, tournament theory and stewardship theory may be used to anchor future studies on assessing the influence of executive compensation on firm risk-taking behavior in Qatar. Implement compensation structures that strategically align executive incentives with organizational risk strategies. Collaborate with regulatory bodies to enhance governance frameworks that govern executive compensation.

PENGARUH PROFITABILITAS, ASSET QUALITY, CAPITAL STRUCTURE DAN MARKET RESPONSE TERHADAP KOMPENSASI EKSEKUTIF SEKTOR PERBANKAN YANG TERDAFTAR DI BURSA EFEK INDONESIA TAHUN 2015-2019

The purpose of this research is to determine the impact of profitability, asset quality,capital structure and market response on executive compensation of 33 banks sector in Indonesia Stock Exchange period 2015 -2019. Financial Performance of banks used in this study is Profitability measured by Return On Asset (ROA), Asset quality measured by Non Performing Loan (NPL), capital structure measured by Capital Adequacy Ratio (CAR), and Market Response measured by Price Earning Ratio (PER). The result of this study showed that Profitability (ROA) has a positive significant to executive compensation, Asset quality (NPL) and Capital structure (CAR) has no significant effect on executive compensation. While market response (PER) has a negative significant to executive compensation.

Does CEO Power Affect the Relations between CEO Compensation and Risk-Taking?

Purpose - This study investigates the effect of incentive compensation and CEO power on a firm’s risk-taking behavior, leveraging stock return volatility and earnings volatility as the key indicators of risk-taking.
 Design/Methodology/Approach - A comprehensive analysis is conducted using data from 1,958 U.S. firms over a 28-year period (1992- 2019). The study employ both ordinary least square (OLS) regression and two-stage least square (2SLS) regression for analysis. Pay-volatility sensitivity (PVS) and CEO-pay slice (CPS) are used as proxies for incentive compensation and CEO power, respectively.
 Findings - The findings offer solid empirical proof that PVS and CPS have a negative influence on both earnings volatility and stock return volatility. Furthermore, the detrimental effect of PVS on managerial risk-taking is significantly more pronounced for CEOs with lower CPS compared with those with higher CPS. While incentive compensation appears to deter CEOs from embracing higher risks, CEOs with more power are less risk-averse when offered incentive compensation compared to their less powerful counterparts.
 Research Implications - This study significantly contributes to existing literature by revealing the interactive effects between CEO power and incentive compensation on a firm’s risk-taking behavior. Understanding these dynamics is pivotal as it offers a nuanced view of how CEO compensation structures and power hierarchies within a firm influence its risk-taking propensity, which is critical for both firm performance and broader financial stability considerations. The insights derived from this analysis can inform more balanced executive compensation structures and governance models that ensure an optimal level of risk-taking.

Integrating Corporate Governance Practices into New Financing Projects and Executive Pay Structures

Purpose: This study aims to explore the integration of corporate governance practices into new financing projects and executive pay structures, highlighting their impact on organizational performance, transparency, and stakeholder trust. It addresses the growing need for robust governance mechanisms to align executive incentives with long-term value creation and effective decision-making in financing projects. Research Design and Methodology: A quantitative descriptive research design was employed, utilizing survey instruments, statistical analysis, and regression modeling to examine the integration of governance practices across diverse corporations. The study focused on the prevalence, determinants, and outcomes of governance integration in financing projects and executive compensation structures. Findings and Discussion: The findings reveal that robust corporate governance mechanisms significantly influence firms' financing decisions and executive compensation structures. Effective governance practices enhance transparency, accountability, and risk management, leading to lower financing costs, greater investor confidence, and improved project outcomes. The study also highlights the role of performance-based executive compensation schemes in aligning executive incentives with shareholder interests, fostering long-term value creation. Implications: The research underscores the importance of integrating corporate governance practices into financing and compensation frameworks to enhance organizational performance and stakeholder trust. It offers practical insights for policymakers, practitioners, and scholars on developing governance mechanisms that ensure prudent decision-making and value optimization. The findings advocate for continuous improvement in governance practices to meet evolving regulatory, shareholder, and societal expectations.

Environmental claims and executive compensation plans: Is there a link? An empirical investigation of Italian listed companies

This paper moves from the relevance that greenwashing has assumed in recent years and aims to investigate whether the environmental claims made by companies truly reflect their actions. Specifically, it analyzes the relationship between environmental claims and strategic intentionality toward environmental sustainability, proxied by the use and weight of incentives linked to environmental targets in executive compensation plans. By adopting this approach, the study offers a more nuanced perspective on greenwashing, addressing the limitations of the prevalent performance-based view. Based on the analysis of the companies listed on the FTSE Italia All-share index 2021, the paper highlights that companies that draft sustainability plans and declare carbon neutrality goals tend to include environmental targets in their executive compensation plans more frequently and with greater weights compared to other companies. Conversely, merely reporting environmental performance in sustainability (or integrated) reports is not associated with the use of environmental targets in executive compensation plans, suggesting the potential existence of greenwashing practices. The study emphasizes the relevance of considering the executive compensation structure when examining potential signs of greenwashing. It also provides evidence of the need for standardized and transparent corporate compensation disclosure as a significant implication.

Optimal incentives for managerial innovation

An agency model is proposed that identifies the optimal executive compensation scheme for a business where the owner’s delegation of investment decision-making to the manager gives rise to a two-dimensional moral hazard problem relating to the levels of managerial effort and innovation, respectively. The optimal executive compensation structure is shown to depend on which of the two moral hazard dimensions predominates, thus accounting for the coexistence in the real-world of bonus-like plans with different convexity degrees and risk-reward schemes. The model also identifies the conditions under which the efficient investment policy involves high innovation, highlighting the role played by the delegation of investment decisions in the coexistence of high-tech and more traditional industries.

MNEs' Incentives Under a Global Minimum Tax Based on Accounting Standards

The Organisation for Economic Co-operation and Development has proposed a pillar two global minimum tax (GMT) for which the tax base is the jurisdiction-specific effective tax rate (ETR), an accounting metric calculated under the rules of accrual accounting. History has shown that when tax is imposed on accounting numbers, taxpayers often use the discretion available in accounting to manage their tax liability. This paper argues that the discretion that multinational enterprises (MNEs) can exercise within accounting rules to change their ETRs will be limited because increasing ETR (to reduce GMT) also reduces accounting income, which in turn could impose higher financial reporting costs on firms. Financial reporting costs are the costs to firms of reporting lower accounting income, and could include higher borrowing costs or more restrictive covenants imposed by lenders. Firms generally prefer to report sustainable net incomes with a steady growth rate to impress their capital market stakeholders. Lower sustainable accounting income can also adversely impact a firm's stock price through the price-earnings ratio. While planning opportunities available to MNEs to avoid the GMT are not limited to shifting accounting profits across jurisdictions, the alternative of shifting factors of production is likely to be more complex and more expensive to implement, and is likely to remove some of the first-order income tax savings from locating intangible factors of production in low-tax jurisdictions. Avoiding GMT at the affiliate level by inflating ETRs could therefore conflict with firms' overarching objectives of maximizing reported earnings and stock prices. These objectives are also currently aligned with established executive compensation structures that motivate management to increase firms' stock prices.

Does executive compensation mechanism balance performance with risk-taking? Evidence from China's banking system

PurposeIn this study, the authors demonstrate the inherent connections between bank risk-taking, performance and executive compensation in the banking sector of China by developing a theoretical model and performing empirical tests with simultaneous equation models.Design/methodology/approachThe authors construct a multi-task principal-agent model to capture agency problems in China, and the model can be extended to various cases. In empirical tests, simultaneous equation models are used to examine the theoretical predictions by eliminating endogenous concerns efficiently compared with the methods in the existing literature.FindingsThe results indicate that the regulator fails to provide bank managers with positive incentives to control risk, whereas the compensation guidance policy (2010) proposed by the CBRC alleviates this problem in China. Additionally, the authors established that shareholders reward bank managers for better and more stable performance. The authors propose the introduction of restricted stock options into the compensation design, as the existing compensation design fails to balance the performance and risk-taking of banks.Research limitations/implicationsFirst, the executive compensation structure and details in China are not available. In addition, the equity-based incentive compensation is forbidden. Therefore, this paper cannot provide more details about how the compensation structure affects bank manager behaviours. Secondly, the database consists only 25 listed commercial banks. Luckily, the assets of these banks could account for the vast majority of China's banking assets. The authors also expect that new methodologies such as machine learning and deep learning will be adopted in the research on bank risk management.Practical implicationsFirst, the regulator should optimise the compositions and payment rule of bank executive compensations. Secondly, it is advisable to adopt restricted deferred share reward or stock option compensation in due course. Thirdly, the regulator can require the banks that undertake excessive risks and troubled by moral hazard to increase the independent director proportion on the bank board according to the authors' empirical tests that higher independent proportion prevents the risk accumulations effectively. Fourthly, except for absolute compensation, the gap between executives' salary and average employee's income should be taken account.Originality/valueThis study provides a theoretical framework that incorporates the manager behaviours, executive compensation and bank regulations, and it provides empirical tests by solving endogenous concerns. Additionally, this study examines the effects of China's compensation guidelines issued in 2010. The authors believe that this study adds value to the existing literature by illustrating the compensation mechanism in China.

Executive Compensation Schemes: Accelerants of Agency and Corporate Governance Problems in South Africa

Executive remuneration has been less analysed and there is need for scrutiny on executive compensation structures and their implications on corporate governance. The study aimed to ascertain the role of executive compensation in accelerating agency and governance problems for FTSE/JSE Top-40 companies from 2008 - 2016. A Generalised Method of Moments was employed, and the results revealed that executive compensation structures can be accelerants of agency and corporate governance problems as the performance was found to negatively affect directors' remuneration. Also, governance had a negative impact on remuneration. Share option trading results confirm agency conflict as net trades and the number of directors that traded on their share options were found to deteriorate with improvement in remuneration. Therefore, it is recommended that the remuneration of executives must be aligned with performance and corporate governance. Moreover, executive directors must exercise their share options after the vesting period and in years they meet predetermined performance targets. Companies should adopt the proposed executive remuneration model in their policies to ensure that executive remuneration considers the governance of the companies they lead. The study's proposed model can be modified in future studies to incorporate other performance matrices such as the six capitals. Keywords: Remuneration Model, Executive Compensation, Governance, Share Options

Compensation structure impact on executive value judgment shift resulting in occurrence of fraud

PurposeThe purpose of this study is to examine whether executive compensation structure is a predictor of a value judgment shift facilitating fraud. The Raval (2018) disposition-based fraud model theorizes that in a fraud, a judgment shift occurs that results in an intentional action. Judgment shifts are influenced by intertemporal rewards, an executive compensation structure comprising salary (immediate reward) and delayed compensation in performance-based incentives.Design/methodology/approachUsing an archival data set consisting of frauds identified through Securities and Exchange Commission Accounting and Auditing Enforcement Releases, the compensation structure of executives involved in frauds is compared against the compensation structure of executives in a peer control group.FindingsThere was a significant difference in the intertemporal rewards of the compensation structures between the two groups, indicating that compensation structure presents intertemporal choices leading to a judgment shift that influences the deliberate action of fraud.Research limitations/implicationsThis study represents the first empirical test of the disposition-based fraud model using intertemporal rewards leading to judgment shift.Practical implicationsExecutive compensation structure should reduce intertemporal rewards for executives reducing judgment shifts that can result in risk of fraud.Originality/valueThis study addresses how executive compensation structure can result in fraud.

Managerial risk aversion and the structure of executive compensation

AbstractResearch question/issueWe examine how chief executive officers' (CEOs) innate risk aversion influences the size and structure of their compensation contracts. In so doing, we estimate managerial risk aversion based on the Big Five personality traits—openness, conscientiousness, extraversion, agreeableness, and neuroticism—inferred using IBM's Personality Insights service.Research findings/insightsWe provide evidence that executives' inherent risk aversion is related to their compensation structure. Contrary to agency theory predictions, we find that more risk‐averse CEOs receive more cash‐based and less equity‐based compensation but receive lower total compensation. This relationship is moderated by differences in firms' resource advantages.Theoretical/academic implicationsDespite the theoretical prediction that managerial risk aversion is a key factor determining the structure of executives' compensation contracts, there is limited empirical evidence on whether firms adjust the components of compensation based on CEOs' risk preferences. Our results help us better understand the interplay between CEO personality and executive compensation.Practitioner/policy implicationsThis study offers important implications for organizations in that knowledge about executives' inherent risk aversion is important and relevant for designing effective compensation contracts.

The cooperative identity at U.S. credit unions

• Despite significant growth, U.S. credit unions continue to reflect cooperative principles and the cooperative identity. • Credit union executive compensation structures are more aligned with prosocial goals and outcomes. • 51 % of credit union CEOs are female versus just 3% of CEOs at similarly sized banks. • Credit unions offer lower loan rates to observably similar households that borrow from banks. • Credit unions avoid risky lending practices, leading to a more stable financial sector. With over 5,000 credit unions and 127 million members, U.S. credit unions are the largest network of financial cooperatives in the world. To what extent do U.S. credit unions follow cooperative principles, reflect the cooperative identity, and distinguish themselves from other financial institutions? As credit unions grow and diversify their membership, many argue that credit unions will lose their cooperative identity and become more akin to their counterparts in the for-profit banking sector. This paper presents evidence that U.S. credit unions continue to differentiate themselves from other forms of banks. In their governance structure, credit unions rely on volunteer directors and CEOs are significantly less incentivized by performance-based compensation relative to commercial bank CEOs. Moreover, 51 % of credit union CEOs are female versus only 3% of CEOs at similarly sized community banks. Credit unions also offer better interest rates, provide higher quality loans, avoid overly risky lending practices (e.g., subprime mortgages), and are more likely to open and retain branches in low-income and diverse areas.

Duration of executive compensation and maturity structure of corporate debt

While recent studies show that long vesting periods in managerial compensation increase corporate investments, these investments such as research and development contribute to information asymmetry and therefore may affect the maturity structure of corporate debt. We find that firms with longer CEO pay duration have shorter debt maturity, which is consistent with the notion that firms shorten debt maturity to mitigate information asymmetry. This effect is stronger for firms with larger bid-ask spread, less analyst coverage, more growth options, more volatile returns, and lower default risk and for firms in R&D intensive industries. Firms with longer CEO pay duration prefer debt issuance over equity issuance, and they also exhibit higher future investment growth and Tobin's Q. We strengthen the identification by exploiting the quasi-randomly staggered compliance of a regulatory change (FAS 123-R) and the enforceability of noncompetition agreements as exogenous shocks to CEO pay duration. Our paper shows that the duration of executive compensation affects corporate financing decisions.

Do sustainable institutional investors influence senior executive compensation structures according to their preferences? Empirical evidence from Europe

AbstractThis paper examines whether sustainable institutional investors promote corporate social responsibility (CSR)‐contingent components (e.g., environmental or social aspects) in senior executive compensation in order to align top management interests in the promotion of sustainability with their own. Empirical analyses of a sample of 5979 firm‐year observations from European firms over the 2010–2017 period showed that the presence of sustainable institutional investors positively predicts the likelihood of firms offering CSR‐contingent compensation contracts. This paper significantly contributes to prior empirical research, which predominantly focuses on the effectiveness of CSR‐contingent components within compensation structures. Sustainable institutional investors as a potential driver of CSR‐contingent components have not yet been examined. We specifically investigate institutional investors that have either a substantial or a time‐dependent belief in CSR. Our results indicate that sustainable institutional investors represent a central external corporate governance mechanism and tend to align top management preferences with their own via compensation structures.

A Literature Review on the Dual Effect of Corporate Tax Planning and Managerial Power on Executive Compensation Structure*

ABSTRACTIn this study, we review the extant literature on factors affecting the level and structure of executive compensation, with a specific focus on the power dynamic between firms and their executives. In doing so, we explore the competing effects of corporate tax planning and managerial power on executive compensation structure. We consider the theoretical underpinnings and related empirical findings regarding executive compensation structure and propose new avenues for future research that may deepen our understanding of factors influencing executive compensation structure.

Do credit unions have distinct objectives? Evidence from executive compensation structures

AbstractCredit unions compete directly with commercial banks in markets for consumer financial services yet receive an exemption from federal corporate income tax. Commercial banks claim that credit unions are no different than banks and that the credit union tax exemption represents an unfair competitive advantage. Credit unions counter that while they offer similar products and services, they differ from commercial banks in terms of structure and mission, given their not‐for‐profit, cooperative status. In this paper, we test for substantive differences in the objective functions of commercial banks and nonprofit credit unions by comparing CEO compensation structures. Drawing on the relevant principal–agent literature, we provide several arguments to support the hypotheses that credit union boards of directors establish lower‐powered incentive contracts with their CEOs relative to similarly sized commercial banks, and offer lower total compensation. We find that credit union CEOs receive approximately 250% less performance‐based compensation relative to CEOs of similarly sized community banks. Bank CEOs also earn approximately 15% to 20% more total compensation on average. The results are generally robust to controlling for CEO‐ and board‐level characteristics, local economic conditions, and institution‐level indicators of size, growth, complexity, liquidity and risk. The findings suggest important differences in incentive structures and objectives between banks and credit unions.

A commitment to change? CEO pay and alignment with environmental, social, and governance objectives

In the 2019 Business Roundtable “Statement on the Purpose of a Corporation”, over two hundred executives committed to expanding the focus of their respective corporations beyond shareholder primacy. Following advice from agency theory, compensation committees traditionally seek to align executive pay with desired organizational outcomes. Our qualitative study examines whether the signatories made discernible changes to executive compensation structures to align executive incentives with a broader stakeholder view. We observe the compensation committee reports of 135 signatory firms’ proxy statements for the fiscal year ending 2020, to identify whether each firm’s incentive compensation structure included measures aligned with the firm’s commitment to a stakeholder focus. Nearly half of the sample firms continued to reward executives exclusively using measures to assess financial objectives, although thirteen made promises to include stakeholder corporate performance measures in their 2021 compensation programs. Although most leaders say they act in all stakeholder interests, we do not find evidence that these leaders are incentivized to implement the strategic and organizational changes to ensure their firms consider the environmental, social, and sustainable implications of their decisions. Future research should follow these firms’ financial performance to observe strategic consequences to action versus inaction to change.