Journal articles: 'CEO Pay-performance Sensitivity'

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Cho, MyoJung, and Salma Ibrahim. "Non-financial performance measures and pay-performance sensitivity." Journal of Financial Reporting and Accounting 20, no. 2 (October 11, 2021): 185–214. http://dx.doi.org/10.1108/jfra-01-2021-0018.

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Purpose This study aims to examine whether chief executive officer (CEO) pay-performance sensitivity to shareholder wealth is related to the use of non-financial performance measures in incentive contracts. Design/methodology/approach Using hand-collected performance measure data in a sample of S&P 500 firms across the period 1994–2010, this study investigates the sensitivity of CEO bonus and cash pay to shareholder wealth of firms that use non-financial performance (NFPM) measures of varying types and contractual weights in their bonus contracts along with financial measures (NFPM firms) in comparison to that of firms using financial measures only (FPM firms). Findings This study finds evidence that the pay-performance sensitivity is stronger in NFPM firms than in FPM firms. These results are driven by the use of CEO individual goals and operational efficiency. Furthermore, when using environmental, social and governance factors, the pay-performance sensitivity is stronger in terms of accounting performance only. This study also finds that using NFPM enhances pay-performance sensitivity more as their contractual weights increase and as financial risk increases. Practical implications These findings are important to stakeholders, and especially regulators in understanding incentive effects of alternative performance measures. This study also sheds light on what types of non-financial measures are better in helping firms align CEOs’ incentives to shareholders’ interests. Originality/value This study contributes to prior research on benefits of non-financial information within the context of executive compensation. This study presents original results about the effects of contractual weights of non-financial measures and financial risk on CEO pay-performance sensitivity. This study also presents new insights regarding how different types of non-financial measures affect CEO pay-performance sensitivity.

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Amzaleg, Yaron, Ofer H. Azar, Uri Ben-Zion, and Ahron Rosenfeld. "CEO control, corporate performance and pay-performance sensitivity." Journal of Economic Behavior & Organization 106 (October 2014): 166–74. http://dx.doi.org/10.1016/j.jebo.2014.07.004.

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Gong, James Jianxin. "Examining Shareholder Value Creation over CEO Tenure: A New Approach to Testing Effectiveness of Executive Compensation." Journal of Management Accounting Research 23, no. 1 (December 1, 2011): 1–28. http://dx.doi.org/10.2308/jmar-10105.

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ABSTRACT This paper examines the relationship between CEO compensation and shareholder value added over CEO tenure. The research design exploits two fundamental attributes of CEO compensation and shareholder value added: (1) both CEO compensation and shareholder value added aggregate naturally over CEO tenure, and (2) extending the time interval over which the two variables are measured is likely to result in a better match between CEO compensation and shareholder value created by the CEO. I measure CEO compensation with nominal value of CEO pay, ex post realized pay, and ex ante pay-for-performance sensitivity. I find that CEOs receiving higher nominal or realized pay create more shareholder value. Further, higher median pay-for-performance sensitivity during CEO tenure is associated with higher aggregate market value changes and cumulative abnormal stock returns. Finally, CEO pay efficiency (calculated as the ratio of shareholder value added to CEO pay, both aggregated over CEO tenure) is higher if median pay-for-performance sensitivity during CEO tenure is higher. Data Availability: The data are available from public sources identified in this study.

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Abraham, Rebecca, Judith Harris, and Joel Auerbach. "CEO Pay-Performance Sensitivity: A Multi-Equation Model." Technology and Investment 05, no. 03 (2014): 125–36. http://dx.doi.org/10.4236/ti.2014.53013.

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Aaen, Thomas, and Rainer Lueg. "Performance pay sensitivity: Do top management incentives align with shareholder value creation?" Corporate Ownership and Control 19, no. 3 (2022): 168–81. http://dx.doi.org/10.22495/cocv19i3art13.

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Arising from the principal-agent consideration, Jensen and Murphy (1990b) studied the pay-performance sensitivity (including pay, options, stockholdings, and dismissal) for chief executive officers (CEOs) in the 1980s. They found that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. In this study, we revisit the issue of the linkage between CEO pay and performance but with the difference that we only include observable measures in the pay-performance sensitivity estimate. Our data on executive compensation stems from the ExecuComp database on S&P 1500 firms, and the performance data from the Center for Research in Security Prices (CRSP) database (total: 23,737 firm-year observations). We find that CEO wealth changes $5.34 for every $1,000 change in shareholder wealth. Almost all of this sensitivity is attributed to compensation through stock options and the CEO’s inside stockholdings. Today, the incentives generated by stock options have increased thirteen times, and the total pay-performance sensitivity has almost doubled in value, compared to when Jensen and Murphy (1990b) estimated the pay-performance sensitivity in the 1980s for the first time. Despite the increased pay performance sensitivity, we hypothesize that internal and external political forces negatively affect the CEO’s performance incentives. Compensation constraints reduce the pay performance sensitivity and hereby the incentives for the CEO to maximize shareholder wealth. Further research on how CEO wealth varies with absolute and relative corporate performance is required to determine if the CEO’s incentives are consistent with shareholder wealth maximization.

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Kim, Taekyu, and Injoong Kim. "CEO Pay-performance Sensitivity in KOSPI and KOSDAQ Firms." Korean Data Analysis Society 22, no. 4 (August 30, 2020): 1291–301. http://dx.doi.org/10.37727/jkdas.2020.22.4.1291.

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Abraham, Rebecca, Judith Harris, and Joel Auerbach. "Disruptive Technology as Antecedent to CEO Pay-Performance Sensitivity." Technology and Investment 06, no. 02 (2015): 83–92. http://dx.doi.org/10.4236/ti.2015.62009.

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Bussin, Mark. "CEO pay-performance sensitivity in the South African context." South African Journal of Economic and Management Sciences 18, no. 2 (May 28, 2015): 232–44. http://dx.doi.org/10.4102/sajems.v18i2.838.

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The topic of executive pay-performance sensitivity has resulted in mixed research findings. Literature related to executive remuneration constructs, company performance measures and the underlying theories is critically reviewed in this article. The literature is compared to research findings within the South African context pre, during and post the Global Financial Crisis of 2008. The researcher found similar results in the South African context compared to research in other countries and industries. The research challenges the notion that there is one dominant theory driving CEO compensation. The principal-agent theory, supported by the optimal contract theory, are foremost during periods of strong economic performance, while the influence of managerial power and other behavioural theories appear to prevail during periods of weak economic performance. This article proposes some critical considerations in order to manage this tension.

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Shin, Jae Yong, and Jeongil Seo. "Less Pay and More Sensitivity? Institutional Investor Heterogeneity and CEO Pay." Journal of Management 37, no. 6 (June 11, 2010): 1719–46. http://dx.doi.org/10.1177/0149206310372412.

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In this article, the authors develop and test a theory on the effect of institutional investor heterogeneity on CEO pay. Their theory predicts that institutional investors’ incentives and capabilities to monitor CEO pay are determined by the fiduciary responsibilities, conflicts of interest, and information asymmetry that institutional investors face. Their theory suggests, in contrast to previous literature, that public pension funds and mutual funds exert different effects on CEO pay at their portfolio firms because they do not have the same monitoring incentives and capabilities. Using a longitudinal sample of S&P 1500 firms for the years 1998 to 2002, the authors find that public pension fund ownership is more negatively—indeed, oppositely—associated with both the level of CEO pay and CEO pay-for-performance sensitivity than mutual fund ownership. Their findings suggest that (a) researchers’ use of institutional investor classifications that do not distinguish public pension fund ownership and mutual fund ownership can be misleading and (b) while CEO pay critics have called for pay plans that are in line with the “less pay and more sensitivity” principle, this may be an ineffective goal to pursue.

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Tinaikar, Surjit, and Kun Yu. "Pay performance sensitivity and earnings restatements." Corporate Ownership and Control 11, no. 3 (2014): 273–93. http://dx.doi.org/10.22495/cocv11i3c2p5.

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We examine whether the board of directors adjusts the sensitivity of CEO compensation to earnings following an earnings restatement. Using a sample of 598 restating firms and 2,065 non-restating firms during the period of 1995-2011, we find that firms decrease the sensitivity of cash compensation to accounting earnings after restatements and that this decrease is more pronounced for firms that appoint new CEOs after restatements than those whose CEOs continue to remain in office after restatements. Furthermore, the results suggest that the decrease in the sensitivity of cash compensation to earnings for restating firms with new CEOs is more pronounced for firms with a higher level of institutional ownership. This highlights the monitoring role of institutional investors in the redesign of compensation contracts following restatements. Overall, our results are consistent with the argument that the board adjusts the sensitivity of cash compensation to earnings downwards following restatements to constrain earnings management and recover public confidence in the firm.

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Bussin, Mark, and Sean Barrett. "The effect of race on CEO pay-performance sensitivity in South Africa." African Journal of Employee Relations (Formerly South African Journal of Labour Relations) 40, no. 2 (February 18, 2019): 8–29. http://dx.doi.org/10.25159/2520-3223/5850.

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South Africaâ€™s labour policies and the growing societal calls to better explain executive remuneration create a unique opportunity to examine the effects of race on CEO pay. This empirical research study sought to investigate the effects of race on the sensitivity of executive pay to corporate performance. The study aims to contribute to the literature by providing an evidence-based approach to understanding the effect of race on CEO remuneration. The research design was quantitative, descriptive and longitudinal in nature, utilising validated secondary data sources. The sample consisted of 19 black CEOs and a random sample of 45 white CEOs. All components of South African CEO remuneration studied were found to correlate strongly with PAT (Profit after Tax) and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) and to a lesser degree with ROE (Return on Equity) and HEPS (Headline Earnings per Share). Black and white CEO mean remuneration was found to show no significant difference as a result of race. A notable difference found was the higher degree of payperformance sensitivity and variability seen within the black CEO sample. The study showed that race does not affect the level of CEO remuneration but does impact on pay-performance sensitivity and variability.

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Seo, Jeongil. "Board Effectiveness and CEO Pay: Board Information Processing Capacity, Monitoring Complexity, and CEO Pay-for-Performance Sensitivity." Human Resource Management 56, no. 3 (November 20, 2015): 373–88. http://dx.doi.org/10.1002/hrm.21769.

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Mishra, Chandra S., and James F. Nielsen. "The association between bank performance, board independence, and CEO pay‐performance sensitivity." Managerial Finance 25, no. 10 (October 1999): 22–33. http://dx.doi.org/10.1108/03074359910766208.

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Rosser, Bruce A., and Jean M. Canil. "Is there a firm-size effect in CEO stock option grants?" Corporate Ownership and Control 6, no. 1 (2008): 115–26. http://dx.doi.org/10.22495/cocv6i1p12.

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Schaefer (1998) and Baker and Hall (2004) posit a firm size effect for regular executive compensation but not specifically for executive stock option grants. They propose an inverse relation between pay-performance sensitivity and firm size along with a positive relation between the marginal productivity of executive effort and firm size. The product of pay-performance sensitivity and executive productivity is „incentive strength‟. They find a weakly positive association between incentive strength and firm size. We substitute Hall and Murphy‟s (2002) pay-performance sensitivity metric to detect a firm size effect in CEO stock option grants. After adjusting for small-firm risk aversion and private diversification „clienteles‟, we document evidence of a residual small-firm effect impacting on incentive strength principally through grant size. Given lower small-firm deltas, grant size appears to have been increased by compensation committees to ensure small-firm CEOs are not under-compensated relative to their large-firm counterparts. We also find that firm complexity influences pay-performance sensitivity as well, but not labor productivity (proxying for CEO productivity). No evidence is found that firm smallness and complexity impact on labor productivity. However, we empirically confirm a negative relation between pay-performance sensitivity and firm smallness and, by implication, firm complexity.

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Huang, Jianhui, Ling Liu, and Ingrid C. Ulstad. "Growth options and relative performance evaluation." International Journal of Accounting and Information Management 24, no. 1 (March 7, 2016): 38–55. http://dx.doi.org/10.1108/ijaim-10-2014-0067.

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Purpose – The purpose of this study is to investigate the cross-sectional associations between growth options and the peer pay–performance sensitivity of CEO compensation. Design/methodology/approach – This study includes analytical analysis and multivariable regression analysis. Findings – It is predicted in this study that there is a non-linear concave relation between peer pay–performance sensitivity and a firm’s growth options. Results based on the executive compensation data from ExecuComp are consistent with the hypothesis presented in this study. Research limitations/implications – Future scholars need to consider the non-linear impact of growth options on peer pay–performance sensitivity when they conduct research related to CEO compensation by differentiating the company’s growth options to be at a low, medium and high level. In an industry, when a compensation committee decides on the peers for performance comparison purposes, the committee needs to make sure that the peer firms they select have similar operational environments, for example, they face similar growth options (e.g. low, medium or high) and idiosyncratic variances. Practical implications – This study contributes to the managerial compensation literature by revealing the important role growth options, as well as idiosyncratic variances, play on peer pay–performance sensitivity. The results of this study have implications for both future researchers as well as industrial practitioners. Social implications – It gives guidance on designing CEO compensation contracts. Originality/value – This is an original work from the coauthors listed on this study.

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Ikram, Atif, Zhichuan (Frank) Li, and Travis MacDonald. "CEO Pay Sensitivity (Delta and Vega) and Corporate Social Responsibility." Sustainability 12, no. 19 (September 25, 2020): 7941. http://dx.doi.org/10.3390/su12197941.

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We use CEO pay sensitivity to stock performance (delta) and stock volatility (vega) to provide empirical evidence that CEO compensation structure influences firm Corporate Social Responsibility (CSR) performance. We find that delta has no significant effect on CSR, while vega has a strong, causal relationship with CSR. Our findings suggest that CEOs do not view CSR as value enhancing, but as a way to increase their own compensation through vega. Firms that want to improve their social performance should consider vega as an important compensation incentive for executives.

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Laux, Christian, and Volker Laux. "Board Committees, CEO Compensation, and Earnings Management." Accounting Review 84, no. 3 (May 1, 2009): 869–91. http://dx.doi.org/10.2308/accr.2009.84.3.869.

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ABSTRACT:We analyze the board of directors' equilibrium strategies for setting CEO incentive pay and overseeing financial reporting and their effects on the level of earnings management. We show that an increase in CEO equity incentives does not necessarily increase earnings management because directors adjust their oversight effort in response to a change in CEO incentives. If the board's responsibilities for setting CEO pay and monitoring are separated through the formation of committees, then the compensation committee will increase the use of stock-based CEO pay, as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management.

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Hooy, Chee-Wooi, and Chwee-Ming Tee. "Director’s monitoring effectiveness and CEO compensation." Corporate Ownership and Control 11, no. 2 (2014): 136–43. http://dx.doi.org/10.22495/cocv11i2p10.

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This paper examines the monitoring effectiveness of independent and non independent directors on a CEO pay-performance of Malaysian financial firms from 2002-2009. It is based on the agency and managerial power theory. The former states that under optimal contract pay should be aligned to performance, while the latter postulates that powerfully entrenched CEO can influence captive directors to award generous compensation package. Our empirical results show (1) a high CEO pay-dividend sensitivity while market measurement plays no part in influencing CEO pay; (2) both the independent and non independent directors have failed in their fiduciary role as internal monitor, suggesting the dominance of managerial power in the board; (3) the appointment of independent directors is merely a move to fulfill the minimum standards of the best practices of corporate governance.

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Feng, Liu. "The Impact of Governance Mechanism of Financial Listed Companies on the Pay and the Pay-Performance Sensitivity of Executives." International Journal of Business and Management 13, no. 3 (February 25, 2018): 233. http://dx.doi.org/10.5539/ijbm.v13n3p233.

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The corporate governance mechanism is very important to solve the principal-agent problem effectively. Based on the particularity of the financial industry, this paper uses the panel data of 45 listed companies in China's financial industry from 2007 to 2015, the empirical results show that the degree of ownership concentration, the duality of CEO and chairman of the board and the independent directors proportion have a significant negative impact on executive pay, and the size of the board of supervisors has no marked impact on executive pay. The degree of ownership concentration has a significant positive impact on the pay-performance sensitivity, and the duality of CEO and chairman of the board, the independent directors proportion and the size of the board of supervisors have a significant negative impact on the pay-performance sensitivity. For the listed companies in the financial sector, they should pay attention to the executive pay disclosure system, the board of supervisors governance mechanism and the independent director system. We can use the degree of ownership concentration to improve the pay-performance sensitivity, and make corporate governance more effective.

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Gao, Ning, and Kenneth Small. "Evidence on board size and its impact on CEO pay-performance sensitivity." Corporate Ownership and Control 7, no. 4 (2010): 223–51. http://dx.doi.org/10.22495/cocv7i4c2p1.

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Recent literature asserts that board size is one of the crucial determinants in board monitoring. We conjecture optimal board size leads to effective and efficient decision-making. Using a U.S. firm sample from year 1996 to 2005, we examine whether board size has any impact on one of the main tasks of board monitoring – appropriate compensation for CEOs. Specifically, we investigate if board size is associated with CEOs’ pay-performance sensitivity. Agency theory suggests top managers’ compensation be structured in alignment with shareholder wealth. If a board is vigilant, managers who create (destroy) wealth should be rewarded (penalized). By using value added models, we construct a new sensitivity measure of CEO compensation to wealth added per share. Our findings indicate that there is a non-linear relationship between board size and CEO pay-performance sensitivity. As the board size becomes bigger, the pay-performance sensitivity follows a pattern that first increases and then decreases.

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Yang, Daecheon, and Kyoungwon Mo. "Institutional Monitoring Of Sticky CEO Compensation." Journal of Applied Business Research (JABR) 34, no. 2 (February 21, 2018): 309–24. http://dx.doi.org/10.19030/jabr.v34i2.10131.

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This study examines the monitoring role of institutional investors in both mitigating the degree of downward-sticky CEO compensation and alleviating the undesirable effects of the sticky compensation on shareholder wealth. Particularly, we parallel the literature on “pay for performance” and institutional monitoring role to critically examine the measure of fluctuating pay-for-performance sensitivity, re-characterize the asymmetric compensation-performance link, and then capture managerial rent extraction. We find that sticky CEO compensation is significantly and negatively associated with firm value. Further, we find that institutional ownership decreases the compensation stickiness in underperforming firms and ameliorates its value-deteriorating effect.

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Ndayisaba, Gilbert, and Abdullahi D. Ahmed. "CEO remuneration, board composition and firm performance: empirical evidence from Australian listed companies." Corporate Ownership and Control 13, no. 1 (2015): 534–52. http://dx.doi.org/10.22495/cocv13i1c5p2.

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Classical economic theories establishing a relationship between CEO remuneration and firm performance has paid particular attention to solve conflict of interest between managerial team and firm shareholders, by designing an optimum CEO remuneration that motivate executives to work in the best interest of shareholders. Many international and less Australian empirical researches suggest that there is overwhelming evidence that firm performance is strongly linked with CEO remuneration. In this paper, we reassess the association of firm performance and CEO remuneration variables using dynamic econometric models and comprehensive data from Australian Stock Exchange (ASX). We find a positive and strong association between CEO pay of top 200 Australian public listed companies and company performance. Obtained findings are similar to USA, UK and Canada studies results. We further test the effect of board and ownership features on CEO remuneration–performance sensitivity in the top 200 Australian public companies listed on ASX. Specifically, for the period of 2003-2007, our results highlight the importance of ownership structure in influencing remuneration–performance relationship. Monitoring block holders boost the responsiveness of long term incentives (LTI) remuneration to performance, thus straightening shareholder and manager welfares. However, based on a short term investment horizon strategy, insider block holders increase (decrease) the sensitivity of short-term incentives remuneration (long term incentives pay). Surprisingly, for the period 2008-2013, our findings suggest that ownership and board features did not influence significantly CEO pay-performance sensitivities. Finally, we find that larger boards increase (decrease) the responsiveness of CEO’s known remuneration (long term incentives) to performance.

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Zhang, Chang-Zheng, Yue-Fan Lv, and Gen-Lin Zhang. "CEO discretion, CEO tenure and executive pay-performance sensitivity: A dynamic model based on game theory." Journal of Interdisciplinary Mathematics 20, no. 3 (April 3, 2017): 701–13. http://dx.doi.org/10.1080/09720502.2016.1259887.

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Wang, Isabel Yanyan, Xue Wang, and Daniel Wangerin. "Consequences of Increased Compensation Disclosure Transparency: Evidence From CEO Pay in Acquiring Firms." Journal of Accounting, Auditing & Finance 35, no. 4 (January 23, 2018): 667–95. http://dx.doi.org/10.1177/0148558x17752815.

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We investigate the consequences of increased compensation disclosure transparency on the pay for chief executive officers (CEOs) in firms that are more prone to a misalignment between manager and shareholder interests. Prior research documents that acquiring CEOs’ pay is insensitive to poor post-deal performance after firms complete large acquisitions. Using the 2006 Securities and Exchange Commission (SEC) compensation disclosure regulation as our empirical setting, we find that this result disappears after firms begin to provide more transparent compensation disclosure. Our cross-sectional analyses show that acquiring firms with higher quality compensation disclosure exhibit greater CEO pay sensitivity to poor post-deal performance after 2006. Our findings indicate that increased compensation disclosure transparency helps strengthen the relation between CEO pay and poor performance in acquiring firms.

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Madanoglu, Melih, and Ersem Karadag. "CEO Pay for Performance Sensitivity in the Restaurant Industry: What Makes it Move?" Journal of Foodservice Business Research 11, no. 2 (June 13, 2008): 160–77. http://dx.doi.org/10.1080/15378020801995580.

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Cieślak, Katarzyna. "Agency conflicts, executive compensation regulations and CEO pay-performance sensitivity: evidence from Sweden." Journal of Management and Governance 22, no. 3 (March 19, 2018): 535–63. http://dx.doi.org/10.1007/s10997-018-9410-3.

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Gao, Huasheng, and Kai Li. "A comparison of CEO pay–performance sensitivity in privately-held and public firms." Journal of Corporate Finance 35 (December 2015): 370–88. http://dx.doi.org/10.1016/j.jcorpfin.2015.10.005.

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Li, Qianqian, Yong Jae Shin, and Unyong Pyo. "Impacts of CEO Incentives and Power on Employee Wages." International Academy of Global Business and Trade 18, no. 6 (December 31, 2022): 33–57. http://dx.doi.org/10.20294/jgbt.2022.18.6.33.

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Purpose - This study investigates the impact of CEO incentive compensation and power on employee wages. While CEO compensation negatively affects employee wages, powerful CEOs may care for employees, and their compensation can have positive impacts on employee wages. Design/Methodology/Approach - Using data from US capital markets during 1992 - 2017, we employ pay-performance sensitivity to measure incentive compensation and CEO pay slices to proxy CEO power. We also examined the potential interaction effects between CEO compensation and CEO power. We conduct a Heckman two-step analysis to address potential sample bias and two-stage regression to address potential endogeneity. Findings - While incentive compensation negatively affects employee wages, CEO power positively affects employee wages. When examining the interaction effect between incentive compensation and CEO power, we note that the incentive effect is negative on employee wages only when the CEO is less powerful. However, when the CEO is more powerful, the incentive effect is positive on employee wages. Research Implications - When firms grant incentive compensation to CEOs for firm performance, they must also consider CEO power. Our results imply that CEO incentive compensation has a positive impact on employee wages when a CEO becomes more powerful. More incentive compensation to less-powerful CEOs could suppress employee wages and hurt firm performance in the long run.

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Darrough, Masako N., Linna Shi, and Ping Wang. "Do Peer Warnings Affect CEO Compensation?" Accounting Horizons 31, no. 4 (June 1, 2017): 71–91. http://dx.doi.org/10.2308/acch-51836.

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SYNOPSIS In this study, focusing on the period 1996–2010, we conduct an empirical investigation of how warnings by industry peer firms about future earnings affect CEO compensation structure. These warnings contain information about the industry, signaling dim industry prospects and possibly triggering negative spillovers on stock prices. We predict that firms respond to industry-wide negative information by changing the compensation mix to make it more future oriented and by reducing pay-performance sensitivity to shield CEOs from negative factors beyond their control. We find that (1) for firms that issue warnings, peer warnings are associated with a reduction in pay-performance sensitivity; and (2) for firms that do not issue warnings, peer warnings are associated with a modification in compensation mix, such that it becomes more equity based and future oriented, similar to the adjustment made to CEO compensation in the wake of self-warnings. Our results are robust to different definitions of warnings and to the exclusion of annual earnings warnings. However, the results do not hold after 2005, which may be due to factors such as a decline in the use of option compensation, a decrease in the issuance of warnings outside of the announcement window, and changing patterns in management guidance behavior.

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Chen, Qi, Shane S. Dikolli, and Wei Jiang. "Career-Risk Concerns, Information Effort, and Optimal Pay-for-Performance Sensitivity." Journal of Management Accounting Research 27, no. 2 (June 1, 2015): 165–95. http://dx.doi.org/10.2308/jmar-51165.

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ABSTRACT Prior work has established that managers' concerns about the level of their future compensation (i.e., implicit incentives from career concerns) may substitute for explicit incentives in compensation contracts offered to the managers in a single-task setting (Gibbons and Murphy 1992). We show that the substitution effect can be weakened, and even reversed, when managers (1) exert effort, in addition to production effort, to influence information about their ability, and (2) are concerned about both the level and variability of their reputation. We also find that managerial concern about the variability of reputation can lead to the optimal pay-for-performance sensitivity increasing in the underlying risk measure, rather than decreasing in risk, as in standard incentive-risk trade-offs. We test these predictions using a large sample of CEO compensation outcomes. Results are consistent with our model predictions.

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McConaughy, Daniel L. "Family CEOs vs. Nonfamily CEOs in the Family-Controlled Firm: An Examination of the Level and Sensitivity of Pay to Performance." Family Business Review 13, no. 2 (June 2000): 121–31. http://dx.doi.org/10.1111/j.1741-6248.2000.00121.x.

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This study examines CEO compensation in 82 founding-family-controlled firms; 47 CEOs are members of the founding family and 35 are not. It tests the family incentive alignment hypothesis, which predicts that family CEOs have superior incentives for maximizing firm value and, therefore, need fewer compensation-based incentives. Univariate and multivariate analyses show that family CEOs' compensation levels are lower and that they receive less incentive-based pay—confirming the family incentive alignment hypothesis and suggesting the possible need for family firms to increase CEO compensation when they replace a founding family CEO with a nonfamily-member CEO.

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Bouteska, Ahmed, and Salma Mefteh-Wali. "The determinants of CEO compensation: new insights from United States." Journal of Applied Accounting Research 22, no. 4 (April 5, 2021): 663–86. http://dx.doi.org/10.1108/jaar-08-2020-0176.

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PurposeThe 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/approachThe 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.FindingsThe 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/implicationsAt 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 implicationsThe 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/valueThis 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.

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Basuroy, Suman, Kimberly C. Gleason, and Yezen H. Kannan. "CEO compensation, customer satisfaction, and firm value." Review of Accounting and Finance 13, no. 4 (November 4, 2014): 326–52. http://dx.doi.org/10.1108/raf-11-2012-0120.

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Purpose – The purpose of this article is to examine whether the design of chief executive officer (CEO) compensation generates incentives to engage in managerial behavior that enhances customer satisfaction and whether these incentives, in turn, lead to higher firm value. Design/methodology/approach – A unique dataset combining customer satisfaction and executive compensation data was used, and the relationship between option sensitivity, customer satisfaction and performance was modeled using simultaneous equations modeling with industry and year fixed effects. Findings – Findings suggest that CEO compensation plays an important role in explaining the variation in customer satisfaction and firm value. Specifically, CEO short-term compensation (salary or bonus) has no affect on customer satisfaction or firm value; the sensitivity of CEO wealth from long-term incentive compensation to stock price changes is positively related and also exhibits an inverted U-shaped relationship with customer satisfaction; the sensitivity of CEO wealth from long-term incentive compensation to stock price changes interacts negatively with CEO longevity and industry concentration but positively with advertising expenses in affecting customer satisfaction; the sensitivity of CEO wealth from long-term incentive compensation to both stock price changes and customer satisfaction positively affect firm value; and the sensitivity of CEO wealth from long-term incentive compensation to stock price changes interacts positively with customer satisfaction to affect firm value. Research limitations/implications – This study suffers from several limitations. First, the sample is limited to firms with ACSI scores available. Second, this study is limited to only publicly traded firms, which limits our ability to generalize regarding customer satisfaction, option sensitivity and firm value. Practical implications – This study has several important implications for researchers and managers. The first is that the corporate board appears to view investment in customer satisfaction as similar to an investment in other intangible assets or technology, in that they reward managers with a nonlinear payoff profile. To encourage managers to invest discretionary funds wisely, incentive compensation is important. Second, compensation committees of corporate boards should not allow the option sensitivity to reach extreme levels because, at some point, managers’ incentives appear to shift more toward short-term earnings objectives and away from investment in intangibles, which have a longer-term payoff. Third, if boards are concerned about customer satisfaction and market value, when designing compensation packages, they should shift their focus from the structure of pay to the sensitivity of pay to performance. The exception to this is that for CEOs with very long tenures (or for those close to retirement), high levels of option sensitivity may distort incentives away from a focus on customer satisfaction. Finally, our results indicate that strategies that enhance customer satisfaction provide an incremental benefit in terms of firm value, beyond incentive compensation strategies. Social implications – The results indicate that a “stakeholder focus” which includes customers is value adding for shareholders as well. The results also imply that perhaps using a “balanced scorecard” approach to assessing performance in terms of customer satisfaction outcomes, or at least acknowledging the drives of customer satisfaction explicitly, could be an alternative to using highly sensitive incentive-based compensation when such compensation schemes are less desirable. Originality/value – Prior research has found that the structure of fixed versus incentive-based compensation impacts customer satisfaction. However, this is one of the first papers to investigate the relationship between the sensitivity of CEO compensation and customer satisfaction. Findings have important implications for boards who seek to structure CEO pay so that CEOs have incentives to enact policies that benefit customers and, in turn, firm performance.

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Dhole, Sandip, Saleha B. Khumawala, Sagarika Mishra, and Tharindra Ranasinghe. "Executive Compensation and Regulation-Imposed Governance: Evidence from the California Nonprofit Integrity Act of 2004." Accounting Review 90, no. 2 (October 1, 2014): 443–66. http://dx.doi.org/10.2308/accr-50942.

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ABSTRACT This study examines the impact of the California Nonprofit Integrity Act of 2004 on CEO compensation costs in affected organizations. Contrary to the stated objective of the Act that executive compensation is “just and reasonable,” we find that CEO compensation costs for affected nonprofits during the post-regulation periods have increased by about 6.3 percent when compared with a control group of comparable unaffected nonprofits. In addition, the relative increase in CEO compensation appears to come from nonprofits that have experienced greater regulatory cost increases. We do not find evidence that the Act resulted in a change in CEO pay performance sensitivity. The observed CEO pay increase is not systematically different across nonprofits that underpaid versus those that overpaid their CEOs during pre-Act periods. Overall, this paper highlights the unintended consequences of regulatory attempts to enhance governance in the not-for-profit sector.

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Jayaraman, Sudarshan, and Todd T. Milbourn. "The Role of Stock Liquidity in Executive Compensation." Accounting Review 87, no. 2 (October 1, 2011): 537–63. http://dx.doi.org/10.2308/accr-10204.

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ABSTRACT We explore the role of stock liquidity in influencing the composition of CEO annual pay and the sensitivity of managerial wealth to stock prices. We find that as stock liquidity goes up, the proportion of equity-based compensation in total compensation increases while the proportion of cash-based compensation declines. Further, the CEO's pay-for-performance sensitivity with respect to stock prices is increasing in the liquidity of the stock. Our main findings are supported by additional tests based on shocks to stock liquidity and two-stage least squares specifications that mitigate endogeneity concerns. Our results are consistent with optimal contracting theories and contribute to the ongoing debate about the increasing trend of both equity-based over cash-based compensation and the sensitivity of total CEO wealth to stock prices rather than earnings. Data Availability: Data used for this study are derived from publicly available sources.

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Lippert, Robert L., and Gayle Porter. "Understanding CEO pay: A test of two pay-to-performance sensitivity measures with alternative measures of alignment and influence." Journal of Business Research 40, no. 2 (October 1997): 127–38. http://dx.doi.org/10.1016/s0148-2963(96)00283-4.

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Handschumacher, Franziska, Maximilian Behrmann, Willi Ceschinski, and Remmer Sassen. "Do board interlocks support monitoring effectiveness?" Management Research Review 42, no. 11 (November 18, 2019): 1278–96. http://dx.doi.org/10.1108/mrr-11-2018-0434.

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Purpose This paper aims to investigate the relationship between board interlocks and monitoring effectiveness for listed German companies in a context of risk governance. While agency-theory and resource-dependence-theory suggest a positive association between board interlocks and monitoring effectiveness, reasons such as limited temporal resources of busy board members may suggest a negative association. Design/methodology/approach By using panel data regression, the authors examined the association between board interlocks and monitoring effectiveness, which was approximated by excessive management compensation, pay-for-performance-sensitivity and CEO turnover-performance-sensitivity. The data set comprises 3,998 directorships for 132 listed German companies covering the period 2015-2017. Findings The authors find that board interlocks are associated with not only a more excessive management pay and less performance-sensitive turnover but also a higher pay-for-performance-sensitivity. Originality/value The study examines the impact of multiple directorships based on a German panel data set that includes both multiple appointments of members to national supervisory boards and all other appointments to national and international executive and supervisory bodies. The authors compile three measures to operationalize monitoring effectiveness.

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Graefe-Anderson, Rachel, Unyong Pyo, and Baoqi Zhu. "Does CEO compensation suppress employee wages?" Review of Accounting and Finance 17, no. 4 (November 12, 2018): 426–52. http://dx.doi.org/10.1108/raf-04-2017-0065.

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Purpose This study aims to examine the impact of CEO equity-based compensation (EBC) on employee wages. It also examines the impact of EBC on average employee wages in different industries and business cycles. Design/methodology/approach The authors use pay-performance sensitivity (PPS) to measure for CEO EBC and run OLS models with year and industry dummies. As many firms do not report labor expenses, the authors conduct the two-step analysis as in Heckman (1979) to overcome the potential selection bias. Findings The authors find that CEOs with higher EBC tend to pay their employees lower wages. They also find that such an impact is more evident in non-technology firms than in technology firms. Finally, they find that CEOs with higher PPS are more likely to depress employee wages when the business cycle shows a downturn. Originality/value No study examines the impact of EBC on employee wages directly to date. The authors add to the existing stream of literature regarding employee wages and managerial compensation. Hence, they purport that the findings support existing literature suggesting EBC contributes to, rather than alleviates, the classic agency conflict. Finally, the evidence suggests an unexplored manifestation of that agency conflict and an additional source of CEO rent extraction.

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Cai, Jie, Yixin Liu, Yiming Qian, and Miaomiao Yu. "Information Asymmetry and Corporate Governance." Quarterly Journal of Finance 05, no. 03 (September 2015): 1550014. http://dx.doi.org/10.1142/s2010139215500147.

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We examine the impact of a firm’s asymmetric information on its choice of three mechanisms of corporate governance: The intensity of board monitoring, the exposure to market discipline, and CEO pay-for-performance sensitivity. We find that firms facing greater asymmetric information tend to use less intensive board monitoring but rely more on market discipline and CEO incentive alignment. These results are consistent with the monitoring cost hypothesis. In addition, we find that high information-asymmetry firms that have to substantially increase board monitoring intensity after the Sarbanes–Oxley Act suffer poor stock performance. Our evidence therefore suggests that regulators should use caution when imposing uniform corporate governance requirements on all firms.

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Lei, Qianhua, Rui Lu, and Liuyang Ren. "Non-CEO top managers’ monitoring power and CEO pay-performance sensitivity in state-owned enterprises: Evidence from Chinese state-owned listed firms." China Journal of Accounting Research 12, no. 4 (December 2019): 411–30. http://dx.doi.org/10.1016/j.cjar.2019.10.001.

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Graefe-Anderson, Rachel. "CEO Turnover and Compensation: An Empirical Investigation." Quarterly Journal of Finance 04, no. 02 (June 2014): 1450008. http://dx.doi.org/10.1142/s2010139214500086.

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Because CEO turnover events provide the board of directors with a unique opportunity to potentially completely restructure CEO compensation packages, changes to CEO compensation following a turnover event could prove to inform the ongoing debate regarding CEO compensation. This paper investigates what happens to CEO compensation when a turnover event occurs. Specifically, I examine CEO compensation levels and pay-performance sensitivity for incoming and outgoing CEOs involved in turnover events at public companies in the United States. My main findings are as follows: (1) incoming CEOs are paid as much as or more than those they replace, (2) outsider replacements are paid more than their predecessors even after controlling for education and skills, and (3) CEOs who are forced out are not paid differently from those who replace them, while CEOs who leave voluntarily are paid significantly less than their replacements. Further analysis reveals that proxies for managerial power including CEO tenure, CEO centrality, founder status, and high CEO ownership cannot explain these results. Overall, these findings are difficult to reconcile with the view that managerial power is the primary determinant of CEO compensation.

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Balsam, Steven, and David H. Ryan. "Limiting Executive Compensation: The Case of CEOs Hired after the Imposition of 162(m)." Journal of Accounting, Auditing & Finance 22, no. 4 (October 2007): 599–621. http://dx.doi.org/10.1177/0148558x0702200406.

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This study analyzes the effect of Internal Revenue Code section 162(m) on the compensation package of those chief executive officers (CEOs) hired after the imposition of this code section. Research documents that CEO compensation has increased dramatically since the imposition of section 162(m); yet, this research has not distinguished between the effects on the compensation of CEOs already in place when section 162(m) was imposed from those CEOs hired post-162(m) imposition. We focus our analysis on the compensation of CEOs hired after the imposition of section 162(m), because when firms hire a new CEO, they have a better opportunity to redesign the executive pay package. Consequently, we posit that section 162(m) will have its greatest effect when the affected companies change CEOs. Our analysis provides evidence that the increase in salary normally associated with the hiring of a new CEO has been mitigated and there has been an increase in the sensitivity of firm performance to bonus pay for CEOs appointed after 1994 in affected firms.

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Alam, Zinat S., Mark A. Chen, Conrad S. Ciccotello, and Harley E. Ryan. "Does the Location of Directors Matter? Information Acquisition and Board Decisions." Journal of Financial and Quantitative Analysis 49, no. 1 (February 2014): 131–64. http://dx.doi.org/10.1017/s002210901400012x.

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AbstractUsing data on over 4,000 individual residential addresses, we find that geographic distance between directors and corporate headquarters is related to information acquisition and board decisions. The fraction of a board’s unaffiliated directors who live near headquarters is higher when information-gathering needs are greater. When the fraction of unaffiliated directors living near headquarters is lower, nonroutine chief executive officer (CEO) turnover is more sensitive to stock performance. Also, the level, intensity, and sensitivity of CEO equity-based pay increase with board distance. Overall, our results suggest that geographic location is an important dimension of board structure that influences directors’ costs of gathering information.

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Jaggia, Sanjiv, and Satish Thosar. "Pay-for-performance incentives in the finance sector and the financial crisis." Managerial Finance 43, no. 6 (June 12, 2017): 646–62. http://dx.doi.org/10.1108/mf-05-2016-0160.

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Purpose The purpose of this paper is to investigate executive compensation in the finance sector during the periods surrounding the crisis with a view to determining whether compensation incentives were associated with excessive risk taking. Design/methodology/approach The authors compare pay-for-performance sensitivity (PFPS) parameters for the finance sector before, during, and after the financial crisis. The authors also employ the technology sector as a comparison benchmark. Findings The authors find that CEO compensation is strongly associated with the accounting-based return on assets performance measure in the finance sector particularly in the pre-crisis period; the relationship is amplified in larger firms. In contrast, the technology sector exhibits PFPS only for the market-based stockholder return measure with smaller firms displaying greater sensitivity. Originality/value From a public policy perspective, it is desirable that PFPS for senior executives in the finance sector is muted. This is due to the risk-shifting incentives specific to the sector whereby profits flow to managers/stockholders while catastrophic losses can be socialized through taxpayer funded bailouts. The findings imply that compensation practices in the finance sector remain a potential concern for systemic stability. In addition to academics and practitioners, the paper may be of interest to financial regulators. In the authors opinion they should consider monitoring PFPS in addition to capital ratios, credit default swap spreads, and other metrics in their risk containment strategies.

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Zhang, Liang, Zhe Zhang, Ming Jia, and Yeyao Ren. "Do outside directors matter? the impact of prestigious CEOs on firm performance." Chinese Management Studies 11, no. 2 (June 5, 2017): 284–302. http://dx.doi.org/10.1108/cms-10-2016-0199.

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Purpose The effect of prestigious CEOs on firm performance is not clear. By integrating resource dependence and agency theories, this paper aims to focus on how prestigious CEOs affect firm performance and how informal relations between the CEO and outside directors affect agency costs and resource benefits associated with prestigious CEOs. Design/methodology/approach The authors use ordinary least squares (OLS) regression to analyze their data set, which is conducted by a sample of 4,226 Chinese listed firms from 2009 to 2013. The authors also use OLS regression to assess the sensitivity and robustness of their findings. Findings The findings indicate that prestigious CEOs are significantly and positively associated with firm performance. Moreover, the authors find the effect of prestigious CEOs on firm performance is more pronounced when prestigious outside directors interact with prestigious CEOs. Guanxi – a Chinese concept similar to camaraderie – attenuates this association, particularly when the CEO and outside directors share the same surname. Research limitations/implications Future research should consider whether there is a mediating link between prestigious affiliates (i.e. CEOs) and firm performance. Practical/implications This paper provides two practical implications. First, China Securities Regulatory Commission policymakers should pay more attention to outside directors’ quality and ability and their informal guanxi with the CEO. Second, prestigious CEOs may also have potential costs. Originality/value This study contributes to corporate governance literature and CEO-board relations literature by shedding light on how resource dependence and agency theories apply to corporate governance.

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Forst, Arno, Myung Seok Park, and Benson Wier. "Insider Entrenchment and CEO Compensation: Evidence from Initial Public Offering Firms." Journal of Management Accounting Research 26, no. 1 (September 1, 2013): 101–20. http://dx.doi.org/10.2308/jmar-50622.

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ABSTRACT We examine how insider entrenching governance choices of firms conducting their initial public offering (IPOs) influence the CEOs compensation contracts post-IPO. Using ten legal provisions affecting insider entrenchment, we find that entrenching governance decisions have a significant effect on CEO compensation post-IPO. Specifically, we observe a positive association between entrenchment and levels of post-IPO salary, total compensation, and pay-for-performance sensitivity. We also find a negative relation between entrenchment and the proportion of CEOs' salary to total compensation. Our observed relationships are principally driven by takeover readiness provision choices rather than voting rights limitation choices. Our results are robust to controlling for potential confounding effects. JEL Classifications: M41; M52; G34; G32.

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Yahya, Farzan, Ghulam Abbas, Ammar Ahmed, and Muhammad Sadiq Hashmi. "Restrictive and Supportive Mechanisms for Female Directors’ Risk-Averse Behavior: Evidence From South Asian Health Care Industry." SAGE Open 10, no. 4 (October 2020): 215824402096277. http://dx.doi.org/10.1177/2158244020962777.

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This article aims to understand the impact of gender diversity on a firm’s equity volatility along with the moderating effect of chief executive officer (CEO) pay–performance sensitivity, institutional activism, and corporate social responsibility (CSR) activities. The sample consists of 200 South Asian health care firms over the period 2010 to 2018. After confirming the prevalence of endogeneity, we rely on the results of system generalized method of moments (GMM) rather than any static model. The results show that a higher representation of women on the board can mitigate the firm’s equity volatility. The findings of the study also purport that CEOs with higher pay–performance sensitivity exploit female directors to take the excessive risk, whereas institutional investors support the risk-averse behavior of these directors. However, we find no statistical evidence that CSR activities moderate the relationship between gender diversity and firm’s equity volatility. Our results theoretically support both stakeholder and agency perspectives that South Asian capital markets should enhance the representation of women on board to mitigate agency conflicts and to improve long-term firm’s sustainability.

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Canil, Jean M., and Bruce A. Rosser. "Tests of two optimal incentive models for executive stock options." Corporate Ownership and Control 9, no. 1 (2011): 136–55. http://dx.doi.org/10.22495/cocv9i1art9.

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Using a unique data set, we test theoretical propositions relating to grant size and exercise price in determination of optimal executive compensation. For Hall and Murphy, pay-performance sensitivity does not behave as predicted with respect to CEO risk aversion and diversification, but the latter supports observed grant size while ATM grants exhibit positive abnormal returns as predicted. Consistent with Choe, exercise price is found inversely related to leverage. The unexpected positive relation between grant size and stock volatility is conjectured driven by CEOs’ influencing large grants, which are found associated with weak corporate governance but ameliorated by outside directors.

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Kwon, Sewon, Natalie Kyung Won Kim, Jae Yong Shin, and Sun-Moon Jung. "The Determinants of Pay-for-Performance Sensitivity and Convexity of CEO Bonus Contracts: Evidence from S&P 1500 Firms." korean management review 49, no. 1 (February 29, 2020): 183–214. http://dx.doi.org/10.17287/kmr.2020.49.1.183.

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Yang, Simon. "CEO Compensation and Acquired and Acquiring Companies in Large Corporate Acquisitions." GIS Business 11, no. 3 (May 26, 2016): 01–13. http://dx.doi.org/10.26643/gis.v11i3.3433.

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This paper examines the relative sensitivity of CEO compensation of both acquiring and acquired firms in the top 30 U.S. largest corporate acquisitions in each year for the period of 2003 to 2012. We find that total compensation and bonus granted to executive compensation for acquired companies, not acquiring companies, are significantly related to the amount of acquisition deal even after the size and firm performance are controlled for. Both acquiring and acquired CEOs are found to make the significantly higher compensation than the matched sample firms in the same industry and calendar year. We also find that executives with higher managerial power, as measured by a lower salary-based compensation mix, prior to a corporate acquisition are more likely to receive a higher executive pay in the year of acquisition. The association between executive compensation and managerial power seems to be stronger for acquired firms than for acquiring firms in corporate acquisition. Overall, our findings suggest that corporate acquisition has higher impacts on executive compensation for acquired firm CEOs than for acquiring firm CEOs.

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Journal articles on the topic 'CEO Pay-performance Sensitivity'

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