Nader Elsayed and Hany Elbardan
While there have been extensive empirical investigations of pay-performance sensitivity, the perspective of performance-pay has received less attention to date. While executive…
Abstract
Purpose
While there have been extensive empirical investigations of pay-performance sensitivity, the perspective of performance-pay has received less attention to date. While executive compensation is sensitive to firm performance, firm performance is also likely to be affected by executive compensation. Adopting multiple theoretical perspectives, the purpose of this paper is to examine whether executive compensation has a greater influence on firm performance or whether the latter has a greater influence on compensation.
Design/methodology/approach
Using data from a five-year period (2010-2014) for Financial Times and Stock Exchange 350 companies, the authors employ a set of simultaneous equation modelling to jointly investigate, after accounting for endogeneity problem, the mutual association of executive compensation and firm performance by employing four control variables (board size, non-executive directors, leverage and boardroom ownership).
Findings
The authors find strong evidence for the greater influence of executive compensation on firm performance than the pay-performance framework. This finding supports the tournament theory compared with the agency perspective.
Research limitations/implications
Inevitably, there are limitations in a wide-ranging study of this nature that could be addressed in future research. As any empirical study utilising company data, there may be concerns to the effect of survivorship bias and the manner in which companies have reorganised, if there is any, themselves during the period under examination. There are also issues as to missing data, some measures relating to both executive compensation and corporate governance are not provided by the BoardEx database.
Practical implications
The study results provide evidence that using the tournament perspective by remuneration committees as a guide for determining executive compensation helps in achieving better performance. This helps in developing appropriate mechanisms for setting executive remuneration.
Originality/value
This paper combines an empirical investigation of the frameworks of pay-performance and performance-pay and develops a system of six simultaneous equations to examine the associations between executive compensation and firm performance.
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M.J. Conyon, S.I. Peck and G. Sadler
Looks briefly at theories underlying the correlation between company performance and executive compensation, develops a mathematical model and applies it to results which show a…
Abstract
Looks briefly at theories underlying the correlation between company performance and executive compensation, develops a mathematical model and applies it to results which show a significant positive link between the highest paid director’s compensation and total shareholder returns, but not with earnings per share. Considers consistency with other research, notes the influence of company size on executive pay and calls for further research on this important issue of corporate governance.
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This paper aims to explore an alternative approach to regulation for addressing governance problems relating to director and executive remuneration in publicly listed firms. The…
Abstract
Purpose
This paper aims to explore an alternative approach to regulation for addressing governance problems relating to director and executive remuneration in publicly listed firms. The author investigates the development of hybrid regulatory framework, composed of state regulation and self-regulation, for remuneration governance in Australia.
Design/methodology/approach
The synthesis of constructs borrowed from agency and institutional theories and its contextual analysis examines the effectiveness of formal (state regulation) and informal (self-regulation) institutions for the development of a hybrid of regulation. Thereafter, the author examines the impact of hybrid regulation on remuneration disclosure behavior in Australia.
Findings
The author finds that improvement in disclosure is primarily driven by the establishment of remuneration committees and separate role of chief executive officer (CEO) and chairperson but weakened by the presence of CEO at remuneration committee and presence of remuneration consultant.
Originality/value
Global crises have called for greater transparency and protection of investors through state regulation alone. However, corporate governance, being a social practice that is shaped by diverse interests, calls for a holistic approach. A useful contribution of this study is that through an in-depth examination into the stages and actors of the government interventions involving the balancing of tension between conflicting forces, it provides insights for developing an effective regulatory hybrid which has greater acceptance for corporate governance. In conclusion, it implies the significance of priming the social arena through active engagement of diverse market forces prior to introducing state regulation.
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Hao Liang, Luc Renneboog and Sunny Li Sun
We take a state-stewardship view on corporate governance and executive compensation in economies with strong political involvement, where state-appointed managers act as…
Abstract
Purpose
We take a state-stewardship view on corporate governance and executive compensation in economies with strong political involvement, where state-appointed managers act as responsible “stewards” rather than “agents” of the state.
Methodology/approach
We test this view on China and find that Chinese managers are remunerated not for maximizing equity value but for increasing the value of state-owned assets.
Findings
Managerial compensation depends on political connections and prestige, and on the firms’ contribution to political goals. These effects were attenuated since the market-oriented governance reform.
Research limitations/implications
Economic reform without reforming the human resources policies at the executive level enables the autocratic state to exert political power on corporate decision making, so as to ensure that firms’ business activities fulfill the state’s political objectives.
Practical implications
As a powerful social elite, the state-steward managers in China have the same interests as the state (the government), namely extracting rents that should adhere to the nation (which stands for the society at large or the collective private citizens).
Social implications
As China has been a communist country with a single ruling party for decades, the ideas of socialism still have a strong impact on how companies are run. The legitimacy of the elite’s privileged rights over private sectors is central to our question.
Originality/value
Chinese executive compensation stimulates not only the maximization of shareholder value but also the preservation of the state’s interests.
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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 and the…
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.
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Roberto Pascual and Martí Larraza‐Kintana
The control role of the Board of Directors is aimed at monitoring the decisions and actions undertaken by managers in order to protect stockholders’ interests. Considerable…
Abstract
The control role of the Board of Directors is aimed at monitoring the decisions and actions undertaken by managers in order to protect stockholders’ interests. Considerable theoretical and empirical research has analyzed whether directors’ behavior is consistent with their fiduciary responsibility, but this research has reported inconsistent findings. This paper offers a comprehensive review of both theoretical and empirical literature on the control role of the board and suggests several guidelines for future research.
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Martin J. Conyon and Mark R. Muldoon
In this chapter we investigate the ownership and control of UK firms using contemporary methods from computational graph theory. Specifically, we analyze a ‘small-world’ model of…
Abstract
In this chapter we investigate the ownership and control of UK firms using contemporary methods from computational graph theory. Specifically, we analyze a ‘small-world’ model of ownership and control. A small-world is a network whose actors are linked by a short chain of acquaintances (short path lengths), but at the same time have a strongly overlapping circle of friends (high clustering). We simulate a set of corporate worlds using an ensemble of random graphs introduced by Chung and Lu (2002a, 2002b). We find that the corporate governance network structures analyzed here are more clustered (‘clubby’) than would be predicted by the random-graph model. Path lengths, though, are generally not shorter than expected. In addition, we investigate the role of financial institutions: potentially important conduits creating connectivity in corporate networks. We find such institutions give rise to systematically different network topologies.
Muhammad Usman, Muhammad Abubakkar Siddique, Muhammad Abdul Majid Makki, Ammar Ali Gull, Ali Dardour and Junming Yin
In this paper, the authors investigate whether an independent and gender-diverse compensation committee strengthens the relationship between top managers' pay and firm performance…
Abstract
Purpose
In this paper, the authors investigate whether an independent and gender-diverse compensation committee strengthens the relationship between top managers' pay and firm performance in Chinese companies. The authors also investigate whether the independent compensation committee composed of all male directors is effective in designing the optimal contract for executives.
Design/methodology/approach
The authors use data from A-share listed companies on the Shenzhen and Shanghai stock exchanges from 2005 to 2015. As a baseline methodology, the authors use pooled ordinary least square (OLS) regression to draw inferences. In addition, cluster OLS regression, two-stage least square regression, the two-stage Heckman test and the propensity score matching method are also used to control for endogeneity issues.
Findings
The authors find evidence that an independent or gender-diverse compensation committee strengthens the link between top managers' pay and firm performance; that the presence of a woman on the compensation committee enhances the positive influence of committee independence on this relationship; that a compensation committee's independence or gender diversity is more effective in designing top managers' compensation in legal-person-controlled firms than they are in state-controlled firms; that gender diversity on the compensation committee is negatively associated with top managers' total pay; and that an independent compensation committee pays top managers more.
Practical implications
The study results highlight the role of an independent compensation committee in designing optimal contracts for top managers. The authors provide empirical evidence that a woman on the compensation committee strengthens its objectivity in determining top managers' compensation. The study finding supports regulatory bodies' recommendations regarding independent and women directors.
Social implications
The study findings contribute to the recent debate about gender equality around the globe. Given the discrimination against women, many regulatory bodies mandate a quota for women on corporate boards. The study findings support the regulatory bodies' recommendations by highlighting the economic benefit of having women in top management positions.
Originality/value
This study contributes to literature by investigating the largely overlooked questions of whether having a gender-diverse or independent compensation committee strengthens the relationship between top managers' pay and firm performance; whether an independent compensation committee is more efficient in setting executives' pay when it is gender-diverse; and whether the effect of independent directors and female directors on top managers' compensation varies based on the firm's ownership structure. Overall, the main contribution of the study is that the authors provide robust empirical evidence in support of the managerial power axiom.
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María Consuelo Pucheta‐Martínez and Cristina Narro‐Forés
The purpose of this paper is to analyze if the composition and activity of the appointment and remuneration committee have a significant effect in the remunerations of the members…
Abstract
Purpose
The purpose of this paper is to analyze if the composition and activity of the appointment and remuneration committee have a significant effect in the remunerations of the members of the board of directors.
Design/methodology/approach
To achieve the paper's objective the authors proposed four hypotheses in order to analyze the repercussions of independent, institutional and executive directors in the Appointment and Retribution Committee (ARC) and its activity in the directors’ remunerations.
Findings
The results put into evidence that the composition (independent, institutional and executive members) of the ARC is not associated with the variation of the directors remuneration mean, while the activity of the ARC influences positively this remuneration mean, contrary to what was expected.
Originality/value
The ARC in Spain is not effective in fixating the directors’ remunerations.
Propósito
El objetivo de este artículo es analizar si la configuración y actividad de las comisiones de nombramientos y remuneraciones (CNR) tienen un efecto significativo en las remuneraciones de los miembros del consejo de administración.
Diseño/metodología/enfoque
Para alcanzar el objetivo del artículo hemos planteado cuatro hipótesis con la finalidad de analizar la repercusión de los consejeros independientes, dominicales y ejecutivos de las CNR y la actividad de las mismas en las remuneraciones de los consejeros.
Hallazgos
Los resultados ponen de manifiesto que la composición (miembros independientes, dominicales y ejecutivos) de las CNR no se asocian con la variación de las remuneraciones medias de los consejeros, mientras que la actividad de las CNR influye de manera positiva, contrario a lo pronosticado, en las variaciones de las retribuciones medias de los consejeros.
Originalidad/valor
Las CNR en España no son efectivas en la fijación de las retribuciones de los consejeros.
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Caiyu Yan, Hongqu He, Juan Li, Shuang Cheng and Yanjun Zhang
This paper aims to propose a strategy to analyze management governance in China.
Abstract
Purpose
This paper aims to propose a strategy to analyze management governance in China.
Design/methodology/approach
This paper incorporates data on 989 Chinese listed firms over 2006 to 2016. A fixed effects model with panel data and an F-test are applied to exploit the relationship between management ownership and firm performance. A threshold model is introduced to explore the impacts of other governance mechanisms on management governance.
Findings
This paper finds an inverted U-shaped relationship between management ownership and firm performance. Furthermore, the threshold model demonstrates that large shareholders strengthen the positive effects of management governance and attenuate its negative effects; board size strengthens the positive effects of management governance but cannot attenuate its negative effects; and independent directors attenuate the negative effects of management governance.
Practical implications
This paper indicates that increasing management ownership could motivate managers to ameliorate the agent’s moral hazard problem which link the firm value premium when management ownership is less than 20.286 per cent. However, equity incentives are very rare in China. Thus, the authors expect that equity incentives will be a common phenomenon in Chinese listed firms.
Originality/value
This paper contributes to corporate governance literature by shedding some light on management ownership to explore the effects of management ownership. Specifically, this paper explores the effects of management ownership on firm performance and the impacts of other governance mechanisms on management governance to shape the management governance in China.