An Empirical Examination of the Relationship between Top Executive Compensation and Firm Performance in the Post Sarbanes-Oxley Period

Abstract

Purpose

This paper investigates the impact of the Sarbanes-Oxley (SOX) Act on top executive compensation and empirically examines the changes in relationship between top executive compensation and corporate performance expectations.

Methodology/approach

A theoretical framework is presented based on previous literature and testable hypotheses are proposed. The Pearson correlation is calculated to examine the inter-correlation among various measures of performance and compensation variables. The Ordinary Least Square (OLS) Regression was conducted to test the hypotheses.

Findings

The results show that in the pre-SOX period CEO compensation is strongly related to market-based performance measures while in the post-SOX period accounting-based performance measures showed a significant positive relationship with CEO compensation. The results confirm the impact of the SOX Act where it requires stronger internal control systems and reliable financial reporting. The board relies heavily on accounting-based performance measures in determining top executive compensation in the post-SOX period.

Originality/value

This paper shows the composition and level of CEO compensation have changed following the SOX Act and provide important evidence in explaining changes in the relationship between top executive compensation and firm performance expectation in the post-SOX period.

Citation

Shim, E.D. and Kim, E. (2015), "An Empirical Examination of the Relationship between Top Executive Compensation and Firm Performance in the Post Sarbanes-Oxley Period", Advances in Management Accounting (Advances in Management Accounting, Vol. 25), Emerald Group Publishing Limited, Leeds, pp. 207-228. https://doi.org/10.1108/S1474-787120150000025007