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Article
Publication date: 11 April 2008

Nina T. Dorata and Steven T. Petra

This study seeks to examine whether CEO duality further exacerbates CEOs' motivation of self‐interest to engage in mergers and acquisitions to increase their compensation.

Abstract

Purpose

This study seeks to examine whether CEO duality further exacerbates CEOs' motivation of self‐interest to engage in mergers and acquisitions to increase their compensation.

Design/methodology/approach

Regression tests using CEO compensation as the dependent variable, and CEO duality, firm size and firm performance as independent test and control variables. The regression tests are used for various sub‐samples of the firms, those that merge and those that have CEO duality.

Findings

The results indicate that for merging firms CEO compensation is positively associated with firm size. However, this association is unaffected by CEO duality. For non‐merging firms, the results indicate that CEO compensation is positively associated with firm size and firm performance. CEO duality moderates the positive association between CEO compensation and firm performance.

Research limitations/implications

This study is limited to the extent that it does not observe the deliberations of compensation committees in their setting of CEO compensation, but only examines the outcomes of those deliberations. A future area of research is to examine compensation schemes of merger/acquisition CEOs in the context of other government structures, such as board independence and composition.

Practical implications

Shareholders who desire to keep CEO compensation levels positively associated with firm performance may consider supporting the separation of the positions of CEO and Chairperson of the Board.

Originality/value

This study contributes to the literature by concluding that governance structure influences CEO compensation schemes and CEOs of merging firms command higher compensation in spite of governance structure and firm performance.

Details

Managerial Finance, vol. 34 no. 5
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 June 1997

Yu Hsing and Wen‐Jeng Lin

CEOs' compensation has received a great deal of attention in recent years. Some criticised that CEOs' compensation is not responsive to their performance, because some CEOs

Abstract

CEOs' compensation has received a great deal of attention in recent years. Some criticised that CEOs' compensation is not responsive to their performance, because some CEOs still received the same or more compensation even if their companies incurred losses. Others complained that the compensation received by some of the CEOs was so astronomical that it can not be justified with any rational explanations. Many also maintained that some CEOs do not care about employees' wellbeing and shareholders' interest in the determination of their compensation in view of the facts that many workers received pay cuts or declining compensation in real terms and are laid off in the re‐structuring of organisations in order for firms to become more competitive domestically and worldwide.

Details

Management Research News, vol. 20 no. 6
Type: Research Article
ISSN: 0140-9174

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Article
Publication date: 1 February 1995

Richard H. Fosberg and Joe F. James

Jensen and Murphy (1990) and others have found a small but statistically significant relationship between firm performance (as measured by change in shareholder wealth or…

Abstract

Jensen and Murphy (1990) and others have found a small but statistically significant relationship between firm performance (as measured by change in shareholder wealth or firm profits) and executive compensation. In this study we investigate the pay‐ performance relationship further by considering the relationship between an outside measure of firm performance (changes in the firm's bond rating) and the contemporaneous change in the compensation of the firm's CEO. We find that when a firm's bond rating is down‐graded, CEO total compensation declines by a relatively small amount ($165,500) and when a firm's bond rating is upgraded, CEO total compensation increases markedly ($3,202,900). Thus, while a positive pay‐performance relationship exists, the relationship is not symmetric. CEO compensation changes (increases) much more when firm performance improves than it changes (decreases) when firm performance declines. Further, most of the change in CEO compensation occurs in the stock gains (profits from the exercise of stock options) category for both firms experiencing bond rating upgrades and down‐grades.

Details

Managerial Finance, vol. 21 no. 2
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 26 November 2016

Yusuf Mohammed Nulla

Abstract

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The Theory and Practice of Directors’ Remuneration
Type: Book
ISBN: 978-1-78560-683-0

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Article
Publication date: 1 December 2003

Peter A. Stanwick and Sarah D. Stanwick

This study examines the relationship between ethical reputation, CEO compensation and firm performance for the top corporate citizens as rated by Business Ethics magazine…

Abstract

This study examines the relationship between ethical reputation, CEO compensation and firm performance for the top corporate citizens as rated by Business Ethics magazine. The results show that there was not a direct relationship between CEO compensation and firm performance, that a high level of CEO compensation combined with a high ethical reputation did not impact the financial performance of the firm, and firms with a high ethical reputation had only average financial results, while firms with low ethical reputations displayed both high and low financial performance. Furthermore, CEOs of unfirms had, on average, higher compensation levels than firms that were profitable. These findings bring useful inputs for CEO on how they can justify high levels of compensation even during periods when the firm is not profitable or has a low level of profitability. An interesting sidelight of the study is that three CEOs in the sample whose firms were profitable did not accept any compensation during 2002, probably because the financial performance was below expectations.

Details

Management Decision, vol. 41 no. 10
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 24 August 2021

Mehtap Aldogan Eklund

The purpose of this study is to examine whether chief executive officer (CEOs) are paid for the systematic and/or unsystematic risks and whether there is any optimum risk…

Abstract

Purpose

The purpose of this study is to examine whether chief executive officer (CEOs) are paid for the systematic and/or unsystematic risks and whether there is any optimum risk premium level in the executive pay.

Design/methodology/approach

Firm and year fixed effect panel data regression was used to estimate the relationship between total CEO compensation and systematic (market) and unsystematic (firm) risks.

Findings

There is no nexus between CEO pay and unsystematic (diversifiable) risk; however, the association between CEO compensation and systematic (undiversifiable) risk is positively significant in line with agency theory. Moreover, it is revealed that this positive relationship has an optimum point (curvilinear).

Research limitations/implications

This paper contributes to the controversial argument in the literature by investigating the situation in the Swiss market. Switzerland is an exemplary country because of its direct democracy (consensus) structure for executive pay. This study is limited by the fact that only total CEO compensation is analyzed.

Practical implications

As a practical implication, it is shown that after the optimal point, the higher compensation does not motivate the CEOs to take higher risks and does not provide the organizations with any additional benefit.

Originality/value

The finding of this study supports agency theory’s risk premium assumption and provides additional evidence to the contradictory results in the literature with a new country setting that has paramount importance in executive compensation phenomena. It is a comparative finding with prior literature also outlines the future research area in the risk and compensation literature.

Details

Corporate Governance: The International Journal of Business in Society, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1472-0701

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Book part
Publication date: 30 March 2017

John S. Howe and Scott O’Brien

We examine the use of relative performance evaluation (RPE), asymmetry in pay for skill/luck, and compensation benchmarking for a sample of firms involved in a spinoff…

Abstract

We examine the use of relative performance evaluation (RPE), asymmetry in pay for skill/luck, and compensation benchmarking for a sample of firms involved in a spinoff. The spinoff affects firm characteristics that influence the use of the identified compensation practices. We test for differences in the compensation practices for the pre- and post-spinoff firms. We find that RPE is used for post-spinoff CEOs, but not pre-spinoff CEOs. Post-spinoff CEOs are also paid asymmetrically for luck where they are rewarded for good luck but not punished for bad luck. Both pre- and post-spinoff CEOs receive similar levels of compensation benchmarking. The study provides additional evidence on factors that influence compensation practices. Our spinoff sample allows us to examine how compensation practices are affected by changes in firm characteristics while keeping other determinants of compensation constant (i.e., the board and, in many cases, the CEO). Our findings contribute to the understanding of how the identified compensation practices are used.

Details

Global Corporate Governance
Type: Book
ISBN: 978-1-78635-165-4

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Article
Publication date: 16 February 2021

Raghavan J. Iyengar and Malavika Sundararajan

This study aims to investigate whether compensation committees provide the chief executive officers (CEOs) with incentives to undertake “income-decreasing” but potentially…

Abstract

Purpose

This study aims to investigate whether compensation committees provide the chief executive officers (CEOs) with incentives to undertake “income-decreasing” but potentially “value-enhancing” innovation expenditures. The authors specifically analyze pay–performance relationships for innovative firms relative to all other firms. This study is critical because innovation is expensive and has uncertain outcomes.

Design/methodology/approach

Using alternative accounting performance measures and market performance measures, the authors estimate an econometric model of CEO compensation in innovative firms that incorporates the interaction of endogenous innovation and firm performance.

Findings

The authors document an incremental positive association between changes in accounting performance measures and CEO compensation changes in innovative firms relative to other firms. This sensitivity of executive pay to firm performance is higher for firms that innovate. These results support the hypothesis that compensation committees provide incentives to carry out risky innovation by tying executive compensation more closely to firm performance. This finding survives a battery of sensitivity tests.

Practical implications

The implications of this study are significant. Capital needs to support risky research and development investments (Tidd and Besant, 2018; Baldwin and Johnson, 1995) form the basis of innovative firms' operations. Considering these expenses, if CEOs, who play a critical role in the scanning, adapting and implementing innovative needs in a firm, are not protected and compensated for making risky choices, the entire investment itself will be threatened. Hence, the findings reiterate and support earlier findings that speak to the importance of compensating CEOs to make high-risk investments that will lead to long-term economic and financial gains for the firm when the innovative behaviors result in competitive market shares and profits.

Originality/value

The original work is related to the investigation of pay–performance sensitivity in the presence of innovation, which has not been fully investigated in prior literature.

Details

Benchmarking: An International Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1463-5771

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Article
Publication date: 5 April 2021

Ahmed Bouteska and Salma Mefteh-Wali

The purpose of this paper is to examine the determinants of CEO compensation for sample of the US firms. It emphasizes the presence of executive compensation persistence…

Abstract

Purpose

The purpose of this paper is to examine the determinants of CEO compensation for sample of the US firms. It emphasizes the presence of executive compensation persistence and the importance of CEO power besides performance while setting CEO pay.

Design/methodology/approach

The empirical analysis is conducted on a large sample of US firms during the period 2006–2016. It is based on the generalized method of moments (GMM) models to assess the impact of numerous factors on CEO compensation.

Findings

The main findings reveal that firm performance proxied by accounting-based proxies, as well as market-based proxies, plays a significant role in explaining variations in levels of executive compensation. Moreover, there is a significant persistence in executive compensation among the US sample firms. The authors also document that poor governance conditions (managerial power hypothesis) lead to high compensation levels offered to CEO.

Research limitations/implications

At the end, without a doubt, the analysis has some limitations that prompt the authors to consider future research directions. One future research avenue that can help better explain the effect of firm performance on the CEO compensation is to study this issue using an international sample to determine whether country-level characteristics (e.g. creditor rights, shareholder rights and the enforcement climate) can influence this relationship. Furthermore, it can be worthwhile to deepen the analysis of CEO power and its impact on CEO compensation. It will be interesting to emphasize how the CEO power interacts with the other governance characteristics and some CEO attributes as CEO gender.

Practical implications

The paper's findings have implications for practitioners, policymakers and regulatory authorities. First, the findings inform regulators that performance is not the only determinant of CEO pay level. This may warrant increased firm disclosure of the details of the pay structure. Second, the study offers insights to policymakers and members of boards of directors interested in enhancing the design of executive compensation and internal corporate governance, to better align managerial incentives to shareholder interests. Firms should strengthen the board independence and properly constitute the board committees (compensation, risk, nomination…).

Originality/value

This paper presents a comprehensive overview of the CEO compensation determinants. It supplements the classic pay-for-performance sensitivity predictions with insights gained from the dynamics of wage setting theory and managerial power theory. The authors develop a composite index to measure the CEO power in order to test the impact of CEO attributes on CEO pay. Additionally, it verifies whether the determinants of CEO pay depend on firm age and size.

Details

Journal of Applied Accounting Research, vol. 22 no. 4
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 29 January 2021

Ruonan Liu

This study aims to examine whether compensation committees dominated by co-opted directors are less effective in mitigating the CEO horizon problem.

Abstract

Purpose

This study aims to examine whether compensation committees dominated by co-opted directors are less effective in mitigating the CEO horizon problem.

Design/methodology/approach

The author uses a sample of 7,280 firm-year observations from 1998 to 2011.

Findings

In this study, the author finds evidence of opportunistic research and development (R&D) reduction and accruals management in firms with retiring CEOs and compensation committees dominated by co-opted directors. Moreover, it is found that R&D reduction and income-increasing accruals are less discouraged when determining the compensation for retiring CEOs by compensation committees that are dominated by co-opted directors. The results suggest that compensation committees dominated by co-opted directors are less effective in adjusting CEO compensation to mitigate the CEO horizon problem.

Originality/value

The study reveals that co-opted directors are weak monitors. Moreover, the study adds empirical evidence to the debate of organizations’ CEO horizon problem. Finally, the study adds to the literature on corporate governance, revealing that compensation committees play an important role in mitigating an organization’s CEO horizon problem by adjusting CEO compensation.

Details

Accounting Research Journal, vol. 34 no. 1
Type: Research Article
ISSN: 1030-9616

Keywords

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