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Does corporate governance matter in determining CEO compensation in the publicly listed companies in New Zealand? An empirical investigation

Krishna Reddy (Department of Finance, University of Waikato, Hamilton, New Zealand)
Sazali Abidin (Department of Finance, University of Waikato, Hamilton, New Zealand)
Linjuan You (Department of Finance, University of Waikato, Hamilton, New Zealand)

Managerial Finance

ISSN: 0307-4358

Article publication date: 9 March 2015




The purpose of this paper is to investigate the relationship between Chief Executive Officers’ (CEOs) compensation and corporate governance practices of publicly listed companies in New Zealand for the period 2005-2010.


Prior literature argues that corporate governance systems and structures are heterogeneous, that is, corporate governance mechanisms that are important tend to be specific to a country and its institutional structures. The two corporate governance mechanisms most important for monitoring CEO compensation are ownership structure and board structure. The authors use a generalised least squares regression estimation technique to examine the effect ownership structure and board structure has on CEO compensation, and examine whether ownership structure, board structure, CEO and director compensation have an effect on company performance.


After controlling for size, performance, industry and year effects, the authors report that internal features rather than external features of corporate governance practices influence CEO compensation. Companies that have their CEO on the board pay them more than those who do not sit on the board, suggesting CEOs on boards have power to influence board decisions and therefore boards become less effective in monitoring CEO compensation in the New Zealand context. Companies that pay their directors more tend to reward their CEOs more as well, thus supporting the managerial entrenchment hypothesis.

Research limitations/implications

The results confirm the findings reported in prior studies that institutional investors are ineffective in monitoring managerial decisions and their focus is on decisions that benefit them on a short-term basis.

Practical implications

The findings indicate that although the proportion of independent directors on boards does not significantly influence CEO compensation, it does indicate that outside directors are passive and are no more effective than insiders when it comes to the oversight and supervision of CEO compensation.


Being a small and open financial market with many small- and medium-sized listed companies, New Zealand differs from large economies such as the UK and the USA in the sense that CEOs in New Zealand tend to be closely connected to each other. As such, the relationship between pay-performance for New Zealand is found to be different from those reported for the UK and the USA. In New Zealand, the proportion of institutional and/or block shareholders is positively associated with CEO compensation and negatively associated with company performance, suggesting that it is not an effective mechanism for monitoring CEO compensation.



JEL Classification – G11, G15


Reddy, K., Abidin, S. and You, L. (2015), "Does corporate governance matter in determining CEO compensation in the publicly listed companies in New Zealand? An empirical investigation", Managerial Finance, Vol. 41 No. 3, pp. 301-327.



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