Executive compensation and corporate governance in China

We investigate executive compensation and corporate governance in China's publicly traded firms. We also compare executive pay in China to the USA. Consistent with agency theory, we find that executive compensation is positively correlated to firm performance. The study shows that executive pay and CEO incentives are lower in State controlled firms and firms with concentrated ownership structures. Boardroom governance is important. We find that firms with more independent directors on the board have a higher pay-for-performance link. Non-State (private) controlled firms and firms with more independent directors on the board are more likely to replace the CEO for poor performance. Finally, we document that US executive pay (salary and bonus) is about seventeen times higher than in China. Significant differences in US-China pay persist even after controlling for economic and governance factors.     

Compensation consultants and CEO pay

The study examines the practice of employing multiple compensation consultants. Examining data of a sample of UK companies over the period 2003–2006 we find that CEOs receive higher equity-based pay when firms employ more than one compensation consultant. An increase in the number of compensation consultants is also associated with an increase in CEO equity-based pay, whereas no decline in CEO pay takes place when firms reduce the number of pay consultants. We also observe that the market shares of compensation consultant are positively related to CEO equity-based pay.     

Institutional Monitoring and REIT CEO Compensation

Our objective in this paper is to investigate the relationship between institutional ownership and CEO compensation structure of REITs. Based on detailed analyses of data on institutional ownership, performance, CEO and board characteristics over the 10 year period 1998–2007, we find significant evidence that large institutions influence governance through CEO compensation—greater institutional ownership is associated with greater emphasis on incentive-based compensation (higher pay-performance sensitivity of CEO compensation), and higher cash and total compensation for CEOs. Further, we find that institutions are less active when managers are performing in a superior fashion. Two important conclusions emerge from the analysis. First, similar to unregulated firms, institutional owners do act as monitors in REITs. Broadly, this result suggests that governance is necessary for REITs. Second, institutional investors set a high pay-performance sensitivity for CEOs, but are willing to pay higher cash compensation to induce managers to take risk.     

The efficiency of compensation contracting in China: Do better CEOs get better paid?

Over recent years, China adopted a number of ‘western-style’ reforms of corporate governance and executive compensation. We investigate whether boards of Chinese firms evaluate CEO ability and remunerate their CEOs accordingly, an essential tenet of efficient compensation contracting. Using Data Envelopment Analysis to measure CEO ability, we do not find any evidence that CEO ability matters in compensation contracting decisions—it does not lead to either higher pay, stronger pay-for-performance sensitivity, or a higher likelihood of equity grants. This is surprising, since we find evidence that higher ability CEOs achieve superior firm performance. In contrast, we find that powerful CEOs do not overperform, while they enjoy large abnormal pay. Overall, our results suggest that Chinese firms fail to embrace new corporate governance reforms and are unable to fully utilize the reforms’ benefits.

     

CEO compensation,family control,and institutional investors in Continental Europe

This paper investigates the impact of family control and institutional investors on CEO pay packages in Continental Europe, using a dataset of 754 listed firms with 3731 firm-year observations from 14 countries during 2001–2008. We find that family control curbs the level of CEO total and cash compensation, and the fraction of equity-based compensation. Moreover, we do not observe a significant effect of family control on the excess level of total and cash compensation. This evidence indicates that controlling families do not use CEO compensation to expropriate wealth from minority shareholders. We show that institutional ownership is associated with higher levels of CEO cash and total compensation in Continental Europe, especially in family firms. Also, foreign institutional investors have a positive and significant impact on CEO compensation level. Finally, results indicate that institutional investors affect CEO pay structure: they increase the use of equity-based compensation in both family and non-family firms.     

Governance structure and the weighting of performance measures in CEO compensation

We empirically examine how governance structure affects the design of executive compensation contracts and in particular, the implicit weights of firm performance measures in CEO’s compensation. We find that compensation contracts in firms with higher takeover protection and where the CEO has more influence on governance decisions put more weight on accounting-based measures of performance (return on assets) compared to stock-based performance measures (market returns). In additional tests, we further find that CEO compensation in these firms has lower variance and a higher proportion of cash (versus stock-based) compensation. We further find that CEOs’ incentives (measured as changes in CEO annual wealth which includes expected changes in the value of the CEO’s equity holdings in addition to yearly compensation) do not vary across governance structures. These findings are consistent with CEOs in firms with high takeover protection and where they have more influence on governance negotiating different contracts.

The Impact of Corporate Governance on Executive Compensation

This paper examines the relationship between the compensation of the top five executives at a set of over 400 publicly listed Canadian firms and various internal and external corporate governance‐related factors. The media is full of stories suggesting a relationship between large executive compensation packages and failures in governance at various levels within organisations, but there exists little formal analysis of many of these relationships. Our analysis provides empirical evidence supporting some of these assertions, refuting others and documenting new relationships. We find that variances in internal governance related to differences across firms in the characteristics of the CEO, compensation committee and board of directors do influence both the level and composition of executive compensation, especially for the CEO. Considering external measures of corporate governance, we find that different types of shareholders and competitive environments impact executive compensation. We do not find that either the internal or external governance characteristics dominate.     

Compensation discussion and analysis (CD&A): Readability and management obfuscation

This paper examines the relationship between the readability of the CD&A section in proxy statements and management motives to obfuscate executive compensation disclosures. Using the CD&As in the 2007 and 2008 proxy statements, we examine whether the CD&A readability is associated with the proportion of CEO pay not related to the economic determinants of compensation. We note that the average CD&A is difficult to read. We find that firms with CEO pay exceeding the benchmark pay have a more difficult to read CD&A in the 2007 proxy season. The result suggests that, in its first CD&A report, top management tends to cloak its compensation practices when the practices are not tied to the economic determinants of pay. However, we also find those firms with CEO pay exceeding the benchmark pay improve the readability of their CD&As in the 2008 proxy season, suggesting that executive compensation disclosure improves under regulatory oversight and public pressure.     

Do corporate governance mechanisms influence CEO compensation? An empirical investigation of UK companies

The aim of this paper is to empirically examine the influence of corporate governance mechanisms, that is, ownership and board structure of companies, on the level of CEO compensation for a sample of 414 large UK companies for the fiscal year 2003/2004. The results show that measures of board and ownership structures explain a significant amount of cross-sectional variation in the total CEO compensation, which is the sum of cash and equity-based compensation, after controlling other firm characteristics. We find that firms with larger board size and a higher proportion of non-executive directors on their boards pay their CEOs higher compensation, suggesting that non-executive directors are not more efficient in monitoring than executive directors. We also find that institutional ownership and block-holder ownership have a significant and negative impact on CEO compensation. Our results are consistent with the existence of active monitoring by block-holders and institutional shareholders. Finally, the results show that CEO compensation is lower when the directors’ ownership is higher.     

Corporate governance or globalization: What determines CEO compensation in China?

This paper examines the relationship between corporate governance and CEO compensation in China. In contrast to results derived from U.S. data, we find little evidence that Chinese CEOs take advantage of weaker board structures or less demanding shareholders to extract higher compensation packages. Instead, our results lend support to the view that the increasingly global managerial labor market and compensation standards have a greater impact on CEO pay level. Our study suggests that CEOs in developing economies like China, in our case, benefit more from their degree of exposure to these changes than from corporate governance imperfections.     

Should I stay or should I go? Former CEOs as monitors

In the German two-tiered system of corporate governance, it is not uncommon for chief executive officers (CEOs) to become the chairman of the supervisory board of the same firm upon retirement. This practice has been the subject of controversial debate because of potential conflicts of interest. As a member of the supervisory board, the former CEO must monitor his successor and former colleagues and is involved in setting their pay. We analyze a panel covering 150 listed firms over a 10-year period. Consistent with a leniency bias, we find evidence that firms in which a former CEO serves on the supervisory board pay their executives more. We further find weak evidence that the compensation of the members of the supervisory board is also higher. Short-run event study results indicate that the announcement of the transition of a retiring CEO to the supervisory board is considered good news. Thus, despite the increases in executive compensation we document, CEO transitions are not a cause of concern for shareholders.     

Compensation consultants: Does reputation matter?

In this paper, we analyze the role of hiring a reputable compensation consultant for firms wanting to secure affirmative Say on Pay (SoP) votes. We provide evidence that reputation influences shareholders voting behavior positively when CEO pay is excessive and when peer CEOs are paid less. We employ two methods to account for endogeneity, instrumental variables as well as examining firms switching up to more reputable compensation consultants. Our results are robust with respect to CEO pay and complexity as well as fees and alternate measures of reputation. Firms concerned with the negative feedback associated with negative SoP votes should factor reputation in their decision to hire consultants, especially if trying to adopt compensation packages that may appear excessive.     

CEO Compensation and Firm Performance: an Empirical Investigation of UK Panel Data

This paper examines the link between CEO pay and performance employing a unique, hand‐collected panel data set of 390 UK non‐financial firms from the FTSE All Share Index for the period 1999–2005. We include both cash (salary and bonus) and equity‐based (stock options and long‐term incentive plans) components of CEO compensation, and CEO wealth based on share holdings, stock option and stock awards holdings in our analysis. In addition, we control for a comprehensive set of corporate governance variables. The empirical results show that in comparison to the previous findings for US CEOs, pay‐performance elasticity for UK CEOs seems to be lower; pay‐performance elasticity for UK CEOs is 0.075 (0.095) for cash compensation (total direct compensation), indicating that a ten percentage increase in shareholder return corresponds to an increase of 0.75% (0.95%) in cash (total direct) compensation. We also find that both the median share holdings and stock‐based pay‐performance sensitivity are lower for UK CEOs when we compare our findings with the previous findings for US CEOs. Thus, our results suggest that corporate governance reports in the UK, such as the Greenbury Report (1995) that proposed CEO compensation be more closely linked to performance, have not been totally effective. Our findings also indicate that institutional ownership has a positive and significant influence on CEO pay‐performance sensitivity of option grants. Finally, we find that longer CEO tenure is associated with lower pay‐performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure.     

Corporate governance when founders are directors

We examine chief executive officer (CEO) compensation, CEO retention policies, and mergers and acquisition (M&A) decisions in firms in which founders serve as a director with a nonfounder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay-for-performance sensitivity for nonfounder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared with nonfounder firms. Overall, the evidence suggests that boards with founder-directors provide more high-powered incentives in the form of pay and retention policies than the average US board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared with nonfounder firms.     

Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform

Beginning in 2018, U.S. public firms were required to report the ratio of the chief executive officer's (CEO) compensation to their median employee's compensation in the annual proxy statement. Exploiting the staggered reporting of pay ratios, we find little evidence that total CEO compensation changes in response to pay ratio disclosure reform. However, we do find that boards significantly adjust the mix of compensation awarded by reducing the sensitivity of CEO pay to equity price changes, particularly when the CEO is likely to garner media scrutiny, and by reducing reliance on stock-based and other compensation components that are most susceptible to media coverage surrounding the pay ratio disclosure. Firms ultimately disclosing higher pay ratios garner more media coverage around the filing of their proxy statement, and more negative-toned coverage in the subsequent month. Finally, we find evidence that greater pay disparity is associated with greater selling activity by retail investors and more negative say-on-pay votes following pay ratio reform, consistent with a broad set of investors responding to public scrutiny resulting from pay ratio disclosures.     

A path analysis investigation of the relationships between CEO pay ratios and firm performance mediated by employee satisfaction

We posit that information about CEO pay ratios is important to investors because employees' perceived fairness of their firm’s CEO pay ratio has consequences for firm performance. We use path analysis to examine the association between firm performance and (1) the predicted CEO pay ratio as determined by economic factors (the fair component of CEO pay ratio) and (2) the predicted CEO pay ratio as determined by non-economic factors (the unfair component of CEO pay ratio). We test for the existence and relative importance of direct and indirect paths using two measures of employee satisfaction and two measures of firm performance. We find that pay equity, a larger CEO pay ratio driven by economic factors, is associated with employee contributions to better firm performance. Conversely, we show that pay inequity, a larger CEO pay ratio driven by non-economic factors, is associated with employees' contributions to poorer firm performance. Consistent with the view that managerial entrenchment may amplify the negative effects of the CEO pay ratio, we find that the negative indirect path between pay inequity and firm performance, mediated by employee satisfaction, is more pronounced in firms with entrenched CEOs. Our findings contribute to the accounting compensation literature because they are consistent with CEO pay ratio information having economic consequences.     

Non-compensation-related consultant service and CEO compensation

This study examines how consultants’ non-compensation-related consulting service (NCS) affects the contractual usefulness of accounting and stock information in executive compensation, as reflected in pay-performance sensitivity. The hypothesis is based on anecdotal evidence suggesting that consultants’ provision of NCS is likely to adversely affect the quality of CEO compensation plans. We investigate whether the consultants providing NCS are involved in potential conflicts of interest. The results show that CEO pay is higher in companies where consultants provide NCS and have a higher NCS fee ratio. The pay-performance sensitivity in CEO compensation decreases when consultants engage in NCS. The overall results are consistent with NCS representing a conflict of interest and compromising the quality of compensation committees.     

The determinants of CEO compensation: Rent extraction or labour demand?

CEO compensation is topical and controversial and accordingly receiving considerable attention by various stakeholders. We investigate whether rent extraction or labour demand explains CEO compensation level in Australia. We do so by examining the determinants (economic, governance and ownership) of CEO compensation level and explore the relationship between predicted excess compensation and subsequent firm performance. Our results suggest that governance and ownership attributes, in addition to economic attributes, are significant determinants of CEO compensation. However, these attributes differentially determine the various components of CEO compensation. Our evidence is consistent with: (1) the determination of fixed salary and share-based compensation reflecting a firm's demand for a high-quality CEO; and (2) the CEO's ability to extract rent through bonus and options compensation, particularly for smaller firms or firms with above average performance. However, the rent extraction is not economically significant and does not persist beyond one year. This is in sharp contrast to the US evidence where rent extraction through CEO compensation is pervasive, economically significant and persistent [Core, J., Holthausen, R., Larcker, D., 1999. Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51, 371–406].     

Tournament incentives, firm risk, and corporate policies

This paper tests the proposition that higher tournament incentives will result in greater risk-taking by senior managers in order to increase their chance of promotion to the rank of CEO. Measuring tournament incentives as the pay gap between the CEO and the next layer of senior managers, we find a significantly positive relation between firm risk and tournament incentives. Further, we find that greater tournament incentives lead to higher R&D intensity, firm focus, and leverage, but lower capital expenditures intensity. Our results support the hypothesis that option-like features of intra-organizational CEO promotion tournaments provide incentives to senior executives to increase firm risk by following riskier policies. Finally, the compensation levels and structures of executives of financial institutions have received a great deal of scrutiny after the financial crisis. In a separate examination of financial firms, we again find a significantly positive relation between firm risk and tournament incentives.     

Us knows us in the UK: On director networks and CEO compensation

We analyze the relation between CEO compensation and networks of executive and non-executive directors for all listed UK companies over the period 1996-2007. We examine whether networks are built for reasons of information gathering or for the accumulation of managerial influence. Both indirect networks (enabling directors to collect information) and direct networks (leading to more managerial influence) enable the CEO to obtain higher compensation. Direct networks can harm the efficiency of the remuneration contracting in the sense that the performance sensitivity of compensation is then lower. We find that in companies with strong networks and hence busy boards the directors' monitoring effectiveness is reduced which leads to higher and less performance-sensitive CEO compensation. Our results suggest that it is important to have the ‘right’ type of network: some networks enable a firm to access valuable information whereas others can lead to strong managerial influence that may come at the detriment of the firm and its shareholders. We confirm that there are marked conflicts of interest when a CEO increases his influence by being a member of board committees (such as the remuneration committee) as we observe that his or her compensation is then significantly higher. We also find that hiring remuneration consultants with sizeable client networks also leads to higher CEO compensation especially for larger firms.