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Article
Publication date: 30 September 2019

Richard A. Lord, Yoshie Saito, Joseph R. Nicholson and Michael T. Dugan

The purpose of this paper is to examine the relationship of CEO compensation plans and the risk of managerial equity portfolios with the extent of strategic investments in…

Abstract

Purpose

The purpose of this paper is to examine the relationship of CEO compensation plans and the risk of managerial equity portfolios with the extent of strategic investments in advertising, capital expenditures and research and development (R&D). The elements of compensation are salary, bonuses, options and restricted stock grants. The authors proxy the design of CEO equity portfolios by the price performance sensitivity of the holdings and the portfolio deltas.

Design/methodology/approach

The authors use the components of executive compensation and portfolio risk as the dependent variables, regressing these against measures for the level of strategic investment. The authors test for non-linear relationships between the components of CEO compensation and strategic investments. The sample is a broad cross-section from 1992 to 2016.

Findings

The authors find strong support for non-linear relationships of capital expenditures and R&D with CEO bonuses, option grants and restricted stock grants. There are very complex relationships between the components of executive compensation and R&D expenditures, but little evidence of a relationship with advertising expenditures. The authors also find strong complex relationships in the design of CEO equity portfolios with advertising and R&D.

Originality/value

Little earlier research has considered advertising, capital expenditures and R&D in a unified framework. Also, testing for non-linear associations provides much greater insight into the relationship between the components of executive compensation and strategic investment. The findings represent a valuable incremental contribution to the executive compensation literature. The results also have normative policy implications for compensation committees’ design of optimal annual CEO compensation packages to incentivize or discourage particular strategic investment behavior.

Details

Journal of Financial Economic Policy, vol. 12 no. 1
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 31 August 2010

Yudan Zheng

The paper aims to study the effect of tenure on the structure of CEO compensation. The relation between CEO compensation and CEO tenure provides a good testing bed for many…

3557

Abstract

Purpose

The paper aims to study the effect of tenure on the structure of CEO compensation. The relation between CEO compensation and CEO tenure provides a good testing bed for many effects: the managerial power effect, the portfolio consideration effect, the learning effect, and the career concern effect.

Design/methodology/approach

Tobit regressions were run of the percentage of equity‐based compensation on CEO tenure and the effect of tenure compared between inside CEOs and outside CEOs.

Findings

It was found that the percentage of equity‐based compensation increases during the early years of tenure for outside CEOs, and decreases during the later years of tenure for inside CEOs. Before they are tenured, outside CEOs have significantly higher and faster growing percentage of equity‐based compensation than inside CEOs. Furthermore, the portfolio consideration effect and the learning effect are the major effects in explaining the effect of tenure on the compensation structure.

Practical implications

The evidence that boards of directors take into account the CEOs’ holdings of equity incentives, the types of CEOs, and their years on tenure to adjust the structure of CEO compensation indicates that firms should, and do, try to optimize their CEO compensation structure on the basis of firm‐specific or CEO‐specific characteristics. It is suggested that there is no simple formulaic approach to governance reform.

Originality/value

The paper contributes to the literature by studying and explaining the different patterns of compensation structure over CEO tenure between inside CEOs and outside CEOs.

Details

Managerial Finance, vol. 36 no. 10
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 3 August 2012

Guy D. Fernando and Qiao Xu

The purpose of this paper is to investigate the way in which CEOs are shielded or rewarded for incurring R&D expenses. Strategic expenses such as R&D yield returns over a long…

1544

Abstract

Purpose

The purpose of this paper is to investigate the way in which CEOs are shielded or rewarded for incurring R&D expenses. Strategic expenses such as R&D yield returns over a long period of time even though GAAP requires them to be written off in the period they are incurred. Going beyond the existing shielding paradigm, the paper investigates whether compensation committees actively reward CEOs for incurring strategic expenses.

Design/methodology/approach

The paper uses empirical analysis by using regression analysis with CEO compensation (both cash and equity) as the dependent variable and firm size, firm performance, earnings risk, market‐to‐book ratio, R&D expenses, advertising expenses and governance variables as control, independent and test variables.

Findings

The paper shows that CEOs are not only shielded but are actively rewarded for incurring R&D expenses. The paper also shows that the shield/reward effects are stronger in manufacturing firms. Finally, the paper shows that independent compensation committees increase rewards for R&D expenses.

Research limitations/implications

Given the small sample of firms with advertising expense data, a larger sample, possibly using hand‐collected data will be required to arrive at definitive conclusions regarding shielding/rewarding for advertising. Furthermore, the shielding of both R&D and advertising expenses should be looked at in conjunction with the duration of the persistence of benefits of such strategic expenses.

Originality/value

This paper shows how compensation committees can use compensation to induce executives to undertake strategic expenses on behalf of the firm.

Details

Review of Accounting and Finance, vol. 11 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 18 July 2023

Arash Arianpoor and Somaye Efazati

The present study investigates the impact of accounting comparability on chief executive officer (CEO) incentive plans and the moderating role of board independence for companies…

Abstract

Purpose

The present study investigates the impact of accounting comparability on chief executive officer (CEO) incentive plans and the moderating role of board independence for companies listed in Tehran Stock Exchange (TSE).

Design/methodology/approach

The information about 177 companies in 2014–2021 was examined. In this study, equity-based compensation and cash-based compensation were used as the CEO incentive plans. The equity-based compensation was calculated through the ownership of the CEO shares.

Findings

The results suggest that the higher accounting comparability increases not only CEO equity-based compensation, but also cash-based compensation. Board independence also strengthens the relationship between accounting comparability and CEO compensation. Hypothesis testing based on robustness checks confirmed these results.

Originality/value

The paper is pioneering, to the authors' knowledge, in identifying how board independence moderates the impact of accounting comparability on CEO compensation. The findings provide insights into economic consequences to the firm related to accounting comparability and board monitoring. The results have important practical implications for international investors to evaluate accounting comparability, corporate governance mechanisms and CEO incentives.

Details

Asian Review of Accounting, vol. 32 no. 1
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 20 November 2017

Linlin Wang and Wan Jiang

The purpose of this paper is to examine how the magnitude of strategic change may be influenced by Chief executive officer (CEO) underpayment relative to comparison CEOs. Based on…

1352

Abstract

Purpose

The purpose of this paper is to examine how the magnitude of strategic change may be influenced by Chief executive officer (CEO) underpayment relative to comparison CEOs. Based on equity theory, the authors propose that compensation inequity motivates underpaid CEOs to restore equity, which can take the form of making a greater magnitude of strategic change. In addition, this study proposes three important moderators of the relationship between CEO underpayment and strategic change.

Design/methodology/approach

Results from a sample covered in the Standard & Poor’s (S&P) ExecuComp database for the years 1996-2014 provide support for these theoretical predictions.

Findings

CEO underpayment has a positive effect on the magnitude of strategic change. Top management team compensation gap and firm slack are proposed to weaken the impact of CEO underpayment on strategic change, while environmental complexity is predicted to strengthen the relationship between CEO underpayment and strategic change.

Originality/value

This study contributes to strategic change literature by linking research on CEO relative compensation to strategic change studies. This study contributes to equity theory and CEO relative compensation literature by extending its implications to firms’ decisions on strategic change. Moreover, it also contributes to equity theory by revealing the boundary conditions that mitigate or aggravate the impacts of CEO underpayment on firms’ strategic decisions.

Details

Management Decision, vol. 55 no. 10
Type: Research Article
ISSN: 0025-1747

Keywords

Open Access
Article
Publication date: 13 February 2024

Luigi Nasta, Barbara Sveva Magnanelli and Mirella Ciaburri

Based on stakeholder, agency and institutional theory, this study aims to examine the role of institutional ownership in the relationship between environmental, social and…

Abstract

Purpose

Based on stakeholder, agency and institutional theory, this study aims to examine the role of institutional ownership in the relationship between environmental, social and governance practices and CEO compensation.

Design/methodology/approach

Utilizing a fixed-effect panel regression analysis, this research utilized a panel data approach, analyzing data spanning from 2014 to 2021, focusing on US companies listed on the S&P500 stock market index. The dataset encompassed 219 companies, leading to a total of 1,533 observations.

Findings

The analysis identified that environmental scores significantly impact CEO equity-linked compensation, unlike social and governance scores. Additionally, it was found that institutional ownership acts as a moderating factor in the relationship between the environmental score and CEO equity-linked compensation, as well as the association between the social score and CEO equity-linked compensation. Interestingly, the direction of these moderating effects varied between the two relationships, suggesting a nuanced role of institutional ownership.

Originality/value

This research makes a unique contribution to the field of corporate governance by exploring the relatively understudied area of institutional ownership's influence on the ESG practices–CEO compensation nexus.

Book part
Publication date: 1 January 2014

Ranjan D’Mello and Mercedes Miranda

We investigate the impact of the creation of a new incentive structure for CEOs resulting from firms introducing equity-based compensation (EBC) as a means of paying top…

Abstract

We investigate the impact of the creation of a new incentive structure for CEOs resulting from firms introducing equity-based compensation (EBC) as a means of paying top executives on policy decisions. Contrasting a firm’s stock and operating performance in the period the CEO is compensated with EBC (EBC period) and the period when EBC is not a component of the same executive’s pay (No EBC period) leads us to conclude that awarding stock options and restricted shares to executives is not associated with improved firm performance. However, firms initiate EBC after superior performance suggesting that CEOs are awarded compensation in this form as a reward for past performance. Firms have higher unsystematic and total risk levels in the EBC period suggesting EBC influences CEOs’ risk-taking behavior and reduces agency costs arising from managerial risk aversion. While there is no change in R&D expenses and cash ratios there is a decrease in capital expenditures in the EBC period, which is consistent with reduced overinvestment agency costs. Finally, leverage and payout ratios are similar in both periods implying that firms’ financing policy is not influenced by changes in CEOscompensation structure.

Details

Corporate Governance in the US and Global Settings
Type: Book
ISBN: 978-1-78441-292-0

Keywords

Article
Publication date: 21 February 2020

Andrea Gouldman and Lisa Victoravich

The purpose of this study is to examine the possibility of adverse consequences regarding the recently enacted Dodd–Frank Act (DFA) pay-equity disclosure requirement in the USA…

Abstract

Purpose

The purpose of this study is to examine the possibility of adverse consequences regarding the recently enacted Dodd–Frank Act (DFA) pay-equity disclosure requirement in the USA, which will likely lead to lower levels of perceived Chief Executive Officer (CEO) pay fairness by subordinates. Specifically, the study examines whether the pay-equity disclosure leads to increased earnings management when business-unit managers have friendship ties with the CEO.

Design/methodology/approach

An experiment is conducted wherein participants assume the role of a business-unit manager and are asked to provide an estimate for future warranty expense, which is used as a proxy for earnings management. The study manipulates friendship between the CEO and a business-unit manager and the saliency of CEO compensation pay-equity.

Findings

CEO friendship ties, which are associated with lower levels of social distance, result in less earning management in the absence of the DFA CEO pay-equity ratio disclosure. However, CEO friendship may result in negative repercussions in terms of higher earnings management in the post-DFA environment when managers are provided with the pay-equity disclosure.

Research limitations/implications

Future research may expand this study by examining how the adverse consequences of the CEO compensation saliency disclosure can be mitigated.

Practical implications

Management, audit committees and internal auditors should consider the possibility of unintended consequences of the increased transparency of CEO pay-equity while designing management control systems.

Social implications

This study highlights the importance of understanding how employees’ social relationships with leaders may influence their behavior.

Originality/value

Unlike prior research, which focuses on senior executives’ direct incentives to manipulate earnings and subsequently increase their compensation, this study provides evidence regarding the earnings management behavior of business-unit managers.

Details

Managerial Auditing Journal, vol. 35 no. 3
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 1 February 2016

Enoima Abraham and Gurcharan Singh

The purpose of this paper is to focus on comparing the influence of majority and minority shareholders on executive compensation under conditions of CEO duality, examining…

Abstract

Purpose

The purpose of this paper is to focus on comparing the influence of majority and minority shareholders on executive compensation under conditions of CEO duality, examining majority and minority shareholder influences by measuring their investment and return activity. The paper seeks to uncover how CEO duality changes the impact the two categories of shareholders have on executive compensation, especially in an emerging nation.

Design/methodology/approach

In total, 30 corporations out of the 70 corporations listed on the BM&F Bovespa (a Brazilian stock market) were used for the paper. Quarterly data were collected on the companies from the Datastream database. The paper conducted a moderated regression analysis on the data to determine the conditional effects of majority and minority holders’ investment and returns on executive compensation.

Findings

There are incentives for executives meeting majority shareholder objectives, but minority shareholders’ influences act as a disincentive for executives. Only the influence of blockholders by their returns is affected by the separation of the roles of CEO and Chairman. The effect is such that firms with a separation of the roles have their executives rewarded in line with increments to the returns made to blockholders, but firms that have the roles merged pay a high wage that is inconsistent with managerial performance. Finally, the majority of variation in executive pay levels can be attributed to individual company traits.

Research limitations/implications

The paper’s sample is biased to firm which had publicly available data on the total compensation payable to their top executives.

Practical implications

Advocates of minority shareholder rights may need to exercise patience with the implementation of more formalised governance structure, as they are not providing protection for minority shareholders within the period studied.

Originality/value

The paper provides empirical evidence within the Brazilian context of minority shareholder effects on executive compensation and the effect of CEO duality on the relationship.

Details

Corporate Governance: The International Journal of Business in Society, vol. 16 no. 1
Type: Research Article
ISSN: 1472-0701

Keywords

Book part
Publication date: 11 August 2014

Zhan Jiang, Kenneth A. Kim and Yilei Zhang

The change in CEO pay after their firms make large corporate investments is examined. Whether the change in CEO pay is a beneficial practice or harmful practice to firms is…

Abstract

Purpose

The change in CEO pay after their firms make large corporate investments is examined. Whether the change in CEO pay is a beneficial practice or harmful practice to firms is investigated.

Design/Methodology/Approach

A sample of firms that make large corporate investments is identified. For this sample, we identify the change in CEO pay before and after the investment, and we also measure the pay-for-size sensitivity of these investing firms.

Findings

For firms that make large corporate investments, CEOs get significantly more option grants when their firms’ stock returns are negative after the investments and these investing CEOs get more option grants than noninvesting CEOs.

Research Limitations/Implications

The present study suggests that firms may have to increase CEO pay after large corporate investments to encourage investment. However, the results may also be consistent with an agency cost explanation. Future research should try to distinguish between the two explanations.

Social Implications

The study reveals a potential way to prevent CEOs from underinvesting.

Originality/Value

The study provides important insights to shareholders on how to encourage CEOs to get their firms to invest, and on how to view CEO pay increases after their firms invest.

Details

Advances in Financial Economics
Type: Book
ISBN: 978-1-78350-120-5

Keywords

1 – 10 of over 5000