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Tenure, firm's performance, and CEO's compensation

Mahmoud M. Nourayi (College of Business Administration, Loyola Marymount University, Los Angeles, California, USA)
Steven M. Mintz (Department of Economics, Claremont McKenna College, Claremont, California, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 4 July 2008

Abstract

Purpose

The purpose of this paper is to assess the association between Chief Executive Officer (CEO) tenure, compensation, and firm's performance.

Design/methodology/approach

The paper compares the influence firms' performance on CEOs' cash and total compensation based on the length of tenure. It also examines pay–performance relationship for new CEOs vs those serving their last year in such positions.

Findings

The firm size appears to be a significant explanatory variable for CEOs' cash and total compensation regardless of CEOs tenure and measure of performance. Additionally, firms' performance is a significant determinant of cash compensation for CEOs during the first three years of their work as CEOs and not significant for those with 15 years or more as the company's CEO. Both market‐based and accounting‐based performance measures are negatively correlated with CEOs' total compensation regardless of length of experience.

Research limitations/implications

This study did not differentiate routine CEO changes, i.e. normal retirement, from the non‐routine ones. Additionally, the results may be limited by the temporal nature of the sample. Future studies dealing with CEO turnover should cover a longer period of CEO' tenure and examine the nature of CEO's dismissal. Such a research design may provide additional insight to the CEO compensation and influence of performance measures in executive contracts.

Originality/value

This research offers some evidence in support of CEO incentives relative to the length of service as the firm's CEO. The findings indicate differences in pay–performance sensitivities on the basis of CEO's tenure. Comparing the pay–performance relationship for individuals serving their first year and those serving their last year as the firm's CEOs, the paper detects statistically significant differences in influence of performance on cash compensation.

Keywords

Citation

Nourayi, M.M. and Mintz, S.M. (2008), "Tenure, firm's performance, and CEO's compensation", Managerial Finance, Vol. 34 No. 8, pp. 524-536. https://doi.org/10.1108/03074350810874055

Publisher

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited