The Relation between CEO Compensation and Past Performance

2012 ◽  
Vol 88 (1) ◽  
pp. 1-30 ◽  
Author(s):  
Rajiv D. Banker ◽  
Masako N. Darrough ◽  
Rong Huang ◽  
Jose M. Plehn-Dujowich
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Ceo Compensation ◽  
Chief Executive ◽  
Data Availability ◽  
Past Performance ◽  
Future Performance ◽  
Theoretical Predictions ◽  
Information Rent ◽  
And Performance

ABSTRACT: This study focuses on the relation between current compensation and past performance measures as signals of a chief executive officer's (CEO's) ability. We develop a simple two-period principal-agent model with moral hazard and adverse selection and test theoretical predictions using CEO compensation data from 1993–2006. Consistent with the predictions, we find that salary (bonus) is positively (negatively) associated with past performance for both continuing and newly hired CEOs. We also find that while current salary is positively associated with future performance, current bonus is not. As the model suggests, salary is adjusted to meet the reservation utility and information rent, and is positively correlated over time to reflect ability. Bonus serves to address moral hazard and adverse selection by separating high-ability agents into riskier contracts. Our results indicate that it is important to disaggregate cash compensation into salary and bonus components to understand the dynamic interaction between incentives and performance. Data Availability: Data are available from public sources indicated in the text.

scholarly journals CEO Monitoring and Board Effectiveness: Resolving the CEO Compensation Issue

2018 ◽  
Vol 21 (2) ◽  
pp. 123-134
Author(s):  
Chiraz Ben Ali ◽  
Frédéric Teulon
Keyword(s):  
Chief Executive Officers ◽  
Ceo Compensation ◽  
Chief Executive ◽  
Board Governance ◽  
Board Effectiveness ◽  
Past Performance ◽  
Compensation Committee ◽  
Ceo Pay ◽  
Executive Officers ◽  
The Impact

This study examines the impact of board governance mechanisms on the pay of Chief Executive Officers (CEOs) using a sample of major French listed companies for the 2009–2011 period. The results show that CEO pay is negatively associated with the presence of a family CEO and positively associated with board size, busy directors, board meetings, and compensation committee independence. We provide further evidence that CEO compensation increases with firm size, and both present and past performance. Our study casts doubt on the effectiveness of formal board attributes in constraining CEO compensation.

Moral Hazard and Internal Discipline: Theory and Evidence

2018 ◽  
Vol 94 (4) ◽  
pp. 365-400 ◽  
Author(s):  
Meng Li
Keyword(s):  
Moral Hazard ◽  
Agency Problem ◽  
Data Availability ◽  
Incentive Pay ◽  
The Public ◽  
External Monitoring ◽  
Confidentiality Agreement ◽  
Theoretical Predictions ◽  
Empirical Tests ◽  
Jel Classifications

ABSTRACT This paper studies, both theoretically and empirically, how subordinates to CEOs can discipline the CEOs' self-serving activities. I predict that because CEOs' self-serving activities hurt the subordinates through the subordinates' stakes in the firms, the subordinates who observe these activities will take actions that negatively affect the CEOs, and that in anticipation of such reactions by subordinates, the CEOs will limit their own misbehaviors. This disciplinary mechanism will become more effective when the CEOs' self-serving activities are more observable to subordinates. Further, the sensitivity of CEOs' self-serving activities to observability will increase (1) as the agency problem between CEOs and their subordinates intensifies, and (2) when external monitoring is less effective. The incentive pay for the subordinates will also decrease with the strength of external monitoring. Using a series of empirical tests, I find results that are largely consistent with my theoretical predictions. JEL Classifications: G34; M41. Data Availability: Data are available from the public sources cited in the text, except for Glassdoor data, which are obtained by the author under a confidentiality agreement with Glassdoor, Inc.

Benchmark on themselves: CEO-directors’ influence on the CEO compensation

2019 ◽  
Vol 45 (7) ◽  
pp. 810-826
Author(s):  
Bill Francis ◽  
Iftekhar Hasan ◽  
Yun Zhu
Keyword(s):  
Chief Executive Officers ◽  
Ceo Compensation ◽  
Design Procedure ◽  
Chief Executive ◽  
Data Availability ◽  
Outside Directors ◽  
Content Type ◽  
Public Firms ◽  
Executive Officers ◽  
Compensation Design

Purpose The purpose of this paper is to examine whether or not the chief executive officers’ (CEO) compensation is affected by the compensation of the outside directors sitting on their board, who are also CEOs of other firms. Design/methodology/approach The authors collect CEOs’ and CEO-directors’ compensation data from Execucomp. The authors then match the CEO-directors’ compensation with appointing firms’ CEO compensation and financial statements, from Execucomp and Compustat, respectively. The sample contains 7,561 firm-year observations from 1996 to 2010, with 1,213 distinct S&P 1500 firms and 1,563 distinct CEO-directors. The authors use ordinary least squared method with firm and year fixed effect in most of the analysis. Findings With both annual and excess compensation, the authors find strong evidence that CEO-directors’ compensation is related to the compensation of the CEO. Causally, when CEO-director overturns his/her excess compensation from negative to positive, the CEO is more likely to have similar upward change in the following year, while more interestingly, the opposite does not hold. These findings are persistent over time and remain robust to various additional tests. Research limitations/implications Due to the data availability, this paper investigates the S&P 1500 public firms. Originality/value It is the first work that investigates the link between board members’ external compensation and the CEO’s compensation. This sheds new light on the process of the CEO’s compensation design, in regard to both the information being utilized in the design procedure and the CEO’s influence on his/her own compensation. Second, this paper adds additional evidence to the choice of peer groups in compensation construction. Third, the authors enhance the understanding of the role of CEO-directors. The authors show that CEO-directors may be the ally of CEO, and help in justifying CEO’s compensation, especially when underpaid.

scholarly journals Employment-Friendly Welfare Policy and Information Asymmetry: Evidence from Sweden and Korea

2016 ◽  
Vol 31 (1) ◽  
pp. 133-152
Author(s):  
Kwon Illoong ◽  
Lee Jin Ho
Keyword(s):  
Moral Hazard ◽  
Information Asymmetry ◽  
Adverse Selection ◽  
Welfare Policy ◽  
Tax Policies ◽  
Unemployment Benefits ◽  
Policy Reforms ◽  
Welfare Policies ◽  
Selection Problems ◽  
Theoretical Predictions

This paper provides a simple theoretical framework for analyzing how welfare polices can affect the incentive to work and compares the recent welfare policy reforms of Sweden and Korea. Sweden has systematically reformed its welfare policies in response to slowing population and economic growth and an aging population. This paper shows that recent Swedish reforms of tax policies and unemployment benefits bear out theoretical predictions that such reforms will help reduce moral hazard and adverse selection problems. In comparison, recent Korean reforms of tax policies and unemployment benefits have focused on moral hazard problems but have largely ignored adverse selection problems.

Lockups Revisited

2005 ◽  
Vol 40 (3) ◽  
pp. 519-530 ◽  
Author(s):  
James C. Brau ◽  
Val E. Lambson ◽  
Grant McQueen
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Initial Public Offerings ◽  
Empirical Support ◽  
Seasoned Equity Offerings ◽  
Comparative Statics ◽  
Equity Offerings ◽  
Public Offerings ◽  
Theoretical Predictions ◽  
Adverse Selection Problem

AbstractLockups are agreements made by insiders of stock-issuing firms to abstain from selling shares for a specified period of time after the issue. Brav and Gompers (2003) suggest that lockups are a bonding solution to a moral hazard problem and not a signaling solution to an adverse selection problem. We challenge this conclusion theoretically and empirically. In our model, insiders of good firms signal by putting and keeping (locking up) their money where their mouths are. Our model yields two comparative statics: lockups should be shorter when a firm is i) more transparent and/or ii) more risky. Using a sample of 4,013 initial public offerings and 3,279 seasoned equity offerings between 1988 and 1999, we find empirical support for our theoretical predictions.

The Determinants and Performance Effects of Managers' Performance Evaluation Biases

2011 ◽  
Vol 86 (5) ◽  
pp. 1549-1575 ◽  
Author(s):  
Jasmijn C Bol
Keyword(s):  
Performance Evaluation ◽  
Employee Motivation ◽  
Data Availability ◽  
Perceived Fairness ◽  
Future Performance ◽  
Confidentiality Agreement ◽  
Leniency Bias ◽  
Performance Effects ◽  
Employee Incentives ◽  
And Performance

ABSTRACT This study examines the determinants and performance effects of centrality bias and leniency bias. The results show that managers respond to their own incentives and preferences when subjectively evaluating performance. Specifically, information-gathering costs and strong employee-manager relationships positively affect centrality bias and leniency bias. The findings also indicate that performance evaluation biases affect not only current performance ratings, but also future employee incentives. Inconsistent with predictions based on the agency perspective, the results show that managers' performance evaluation biases are not necessarily detrimental to compensation contracting. Although centrality bias negatively affects performance improvement, the evidence does not reveal a significant negative relation between leniency bias and performance. Rather, leniency bias is positively associated with future performance, which is consistent with the behavioral argument that bias can improve perceived fairness and, in turn, employee motivation. Data Availability: Data used in this study cannot be made public due to a confidentiality agreement with the participating firm.

Chief executive officer compensation, corporate governance and performance: evidence from KSA firms

2019 ◽  
Vol 19 (6) ◽  
pp. 1216-1235 ◽  
Author(s):  
Gaafar Abdalkrim
Keyword(s):  
Corporate Governance ◽  
Firm Performance ◽  
Organizational Performance ◽  
Ceo Compensation ◽  
Chief Executive ◽  
Listed Companies ◽  
Future Research ◽  
Content Type ◽  
Interesting Insight ◽  
And Performance

Purpose This paper aims to examine the relation between chief executive officers (CEOs) compensation and organizational performance in KSA listed companies. It also aims at investigating the effect of corporate governance mechanisms according to this relation. Design/methodology/approach The researcher uses unbalanced panel data regression analysis on a sample of 181 KSA listed companies from 2005 to 2014. Findings The estimation result suggests that CEO Compensation is positively associated with firm performance. The results also show that corporate governance positively and significantly affect the relation between CEO Compensation and performance. Research limitations/implications This research, like any other, has some limitations that can be addressed by future research. The important limitation of this research is that the generalizability of the results is limited by the fact that the majority of the firms in the sample are from material sector which is represented by 42 (32 per cent) firms versus pharmaceutical sector which is represented by only one (1 per cent) firm. Therefore, a future research can tackle the effect of CEO compensation, corporate governance on future firm performance independently. Practical implications The findings have some important implications for stakeholders such as policymakers, listed firms managers, business owners and academic researchers in the emerging KSA market. Besides, understanding the relation between CEO compensation, corporate governance and firm performance can aid the success of corporate modernization and economic reform in KSA. Originality/value The research attempts to fill a substantial gap in the literature by providing the first rigorous econometrics evidence on CEO compensation, corporate governance and firm performance. In addition, it provides interesting insight for researches, decision-makers and board members in KSA.

scholarly journals Why it Pays to Conceal: On the Optimal Timing of Acquiring Verifiable Information

2011 ◽  
Vol 12 (1) ◽  
pp. 100-123 ◽  
Author(s):  
Eberhard Feess ◽  
Markus Walzl ◽  
Michael Schieble
Keyword(s):  
Information Technology ◽  
Moral Hazard ◽  
Adverse Selection ◽  
Limited Liability ◽  
Optimal Timing ◽  
Optimal Contracts ◽  
Additional Information ◽  
Information Rent ◽  
Adverse Selection Problem

Abstract We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs (ITP), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability (ITA). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e., a disclosure contract offered to the agent after the principal announced the result of ITP, and a concealment contract where the agent exerts effort before ITP is checked. We find that concealment is superior whenever the quality of ITP is sufficiently low. Then, ITP is almost worthless under a disclosure contract, while it can still be exploited to reduce the agent’s information rent under concealment. If the quality of ITPimproves, disclosure can be superior as it allows to adjust the agent’s effort to the updated expected quality of the project. However, even for a highly informative ITP, concealment can be superior as it mitigates the adverse selection problem.

Internal versus external CEO choice and the structure of compensation contracts

2013 ◽  
Vol 48 (4) ◽  
pp. 1301-1331 ◽  
Author(s):  
Frédéric Palomino ◽  
Eloïc Peyrache
Keyword(s):  
Moral Hazard ◽  
Empirical Evidence ◽  
Adverse Selection ◽  
Chief Executive Officer ◽  
Sufficient Conditions ◽  
Chief Executive ◽  
Candidate Selection ◽  
Compensation Scheme ◽  
Compensation Contracts ◽  
Ceo Pay

AbstractAny firm choosing a chief executive officer (CEO) faces a double problem: candidate selection and choice of a compensation scheme. We derive sufficient conditions where the unique optimal compensation scheme is a capped-bonus contract in a pure moral-hazard environment, while equity is used when the firm also faces adverse selection. Then, we provide a rationale for the simultaneous increases in CEO pay, use of equity in compensation, and external hiring of CEOs. Our results are consistent with empirical evidence that shows externally hired CEOs earn more than those internally hired and that externally hired CEOs get a higher fraction of their compensation equity based.

Transparency and Executive Compensation

2014 ◽  
pp. 412-433
Author(s):  
Raghavendra Rau
Keyword(s):  
Moral Hazard ◽  
Information Asymmetry ◽  
Executive Compensation ◽  
Adverse Selection ◽  
Agency Problems ◽  
And Performance

There are two major types of agency problems: adverse selection and moral hazard. Changing the transparency of executive compensation is one solution to reducing the two agency problems. I define transparency as any mechanism that reduces the information asymmetry between executives and investors. In this chapter, I discuss how executive compensation is structured, and discuss major regulations that have affected compensation. Finally, I examine how increasing the transparency of these schemes affects the pay level and performance relationship to the executives and how executives modify their behavior to affect transparency as a result of their pay structure.

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