Examining Shareholder Value Creation over CEO Tenure: A New Approach to Testing Effectiveness of Executive Compensation

2011 ◽  
Vol 23 (1) ◽  
pp. 1-28 ◽  
Author(s):  
James Jianxin Gong
Keyword(s):  
Stock Returns ◽  
Ceo Compensation ◽  
Pay For Performance ◽  
Shareholder Value ◽  
Value Added ◽  
Data Availability ◽  
Time Interval ◽  
Performance Sensitivity ◽  
Ceo Tenure ◽  
Ceo Pay

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.

Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Meriem Ghrab ◽  
Marjène Gana ◽  
Mejda Dakhlaoui
Keyword(s):  
Corporate Governance ◽  
Firm Performance ◽  
Pay For Performance ◽  
Simultaneous Equation ◽  
Executive Pay ◽  
Estimation Model ◽  
Content Type ◽  
Explanatory Variables ◽  
Performance Sensitivity ◽  
Ceo Pay

Purpose The purpose of this study is to analyze the CEO compensation sensitivity to firm performance, termed as the pay-for-performance sensitivity (PPS) in the Tunisian context and to test the robustness of this relationship when corporate governance (CG) mechanisms are considered. Design/methodology/approach The consideration of past executive pay as one of the explanatory variables makes this estimation model a dynamic one. Furthermore, to avoid the problem of endogeneity, this study uses the system-GMM estimator developed by Blundell and Bond (1998). For robustness check, this study aims to use a simultaneous equation approach (three-stage least squares [3SLS]) to estimate the link between performance and CEO pay with a set of CG mechanisms to control for possible simultaneous interdependencies. Findings Using a sample of 336 firm-years from Tunisia over the 2009–2015 periods, this study finds strong evidence that the pay-performance relationship is insignificant and negative, and it becomes more negative or remains insignificant after introducing CG mechanisms consistently with the managerial power approach. The findings are robust to the use of alternative performance measures. This study provides new empirical evidence that CEOs of Tunisian firms abuse extracting rents independently of firm performance. Originality/value This study contributes to the unexamined research on PPS in a frontier market. This study also shows the ineffectiveness of the Tunisian CG structure and thus recommends for the legislator to impose a mandatory CG guide.

scholarly journals Value creation measures: an industry-based study

2018 ◽  
Vol 67 (2) ◽  
pp. 426-444
Author(s):  
John Henry Hall
Keyword(s):  
Stock Returns ◽  
Value Creation ◽  
Stock Exchange ◽  
Shareholder Value ◽  
Value Added ◽  
Value Drivers ◽  
Content Type ◽  
Johannesburg Stock Exchange ◽  
Return On Capital ◽  
Market Value Added

Purpose The purpose of this paper is to identify the shareholder value creation measure best suited to express shareholder value creation for a particular industry. Design/methodology/approach The analysis was performed on 192 companies listed on the Johannesburg Stock Exchange, classified into nine different samples or industries. Five shareholder value creation measures were examined, namely market value added (MVA), a market-adjusted stock return, the market-to-book ratio, Tobin’s Q ratio, and the return on capital employed divided by the cost of equity. Findings An analysis of the nine categories of firms led to the identification of different measures that are suited to express value creation. Stock returns did not provide an appropriate value measure. Instead, depending on the specific industry, Tobin’s Q ratio, MVA, and the market-to-book ratio should be used to measure and express value creation. Practical implications For management, the value drivers identified for each industry present a clear indication of industry-specific variables upon which they can focus in operating activities to most efficiently increase shareholder value. Originality/value Unlike previous studies that use only one or two different shareholder value creation measures as dependent variables, this study uses five different value creation measures. Another contribution of this study is the compilation of a unique set of value drivers that explain shareholder value creation separately for each of the nine different categories of firms.

scholarly journals Evidence on board size and its impact on CEO pay-performance sensitivity

2010 ◽  
Vol 7 (4) ◽  
pp. 223-251
Author(s):  
Ning Gao ◽  
Kenneth Small
Keyword(s):  
Decision Making ◽  
Recent Literature ◽  
Value Added ◽  
Shareholder Wealth ◽  
Board Size ◽  
Performance Sensitivity ◽  
Top Managers ◽  
Value Added Models ◽  
Ceo Pay ◽  
Board Monitoring

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.

scholarly journals Relationship between CEO pay and total shareholder return: An empirical analysis in the Italian context

2016 ◽  
Vol 13 (4) ◽  
pp. 182-187
Author(s):  
Nicola Cucari ◽  
Mazza Giuseppe ◽  
Martina Costantini ◽  
Giuseppe Sancetta
Keyword(s):  
Regression Analysis ◽  
Ceo Compensation ◽  
Pay For Performance ◽  
Listed Firms ◽  
Panel Data Regression ◽  
Data Regression ◽  
Ceo Pay ◽  
Using Data ◽  
Italian Context ◽  
The Relationship

This study examines the relationship between CEO Pay and total shareholder return, using data between 2008-2014 from Italian listed firms (FTSE MIB). We perform panel data regression analysis of CEO compensation on financial performance, and in this way we refer to research made by Gigliotti (2013), but we extend it considering the Total Shareholder Return instead of accounting based performance. TSR has become a crucial measure in a pay-for-performance approach for different reasons. Our results indicate that there is not a significant relationship between CEO compensation and corporate performance during 2008-2014. These results contribute to our understanding of the pay for performance mechanism in times of financial disturbance, highly relevant to the existing debate considering CEO compensation

CEO Pay, Managerial Power, and SFAS 123(R)

2012 ◽  
Vol 87 (6) ◽  
pp. 2151-2179 ◽  
Author(s):  
Terrance R. Skantz
Keyword(s):  
Ceo Compensation ◽  
Data Availability ◽  
Best Interest ◽  
Managerial Power ◽  
Ceo Pay

ABSTRACT This study presents evidence that option expensing, whether voluntary under SFAS 123 or mandatory under SFAS 123(R), is associated with changes in CEO compensation that are beneficial to shareholders. I find that the reporting benefits of aggregate-employee option grants under SFAS 123 are associated with the change in the mix of CEO option grants and stock grants that occurs after SFAS 123(R), suggesting that reporting benefits of option grants may have influenced some CEO compensation decisions. Additionally, I find that the reduction in CEO pay after SFAS 123(R) is greater when shareholders have more power to act in their own best interest and when there is evidence of pre-expensing CEO compensation rents. The findings suggest that SFAS 123 may have encouraged inefficient, CEO-preferential pay practices and that SFAS 123(R) may have contributed to a reduction in CEO compensation inefficiencies. Data Availability: All data are publicly available.

scholarly journals CEO Compensation in Korea: Is It Different Than in the US? A Comparison between Korean Non-Life Insurance Firms and US Property-Liability Insurance Firms

2021 ◽  
Vol 9 (4) ◽  
pp. 61
Author(s):  
Sangyong Han ◽  
Hyejeong Mun
Keyword(s):  
Life Insurance ◽  
Ceo Compensation ◽  
Pay For Performance ◽  
Level Structure ◽  
Shareholder Value ◽  
Insurance Companies ◽  
Executive Pay ◽  
Life Insurers ◽  
Insurance Firms ◽  
Performance Based Pay

This study investigates the level, structure, and pay-for-performance relationship of CEO compensation in Korean non-life insurance companies. We find that seniority plays an important role in setting CEO compensation practices and that performance-based pay, such as bonus, is more effective than base salary in enhancing shareholder value for Korean non-life insurers. Unlike previous studies that show that international differences in executive pay have been diminished considerably since the 2000s, our evidence shows that there is a remarkable difference in CEO compensation between Korean non-life insurers and U.S. property-liability insurers. Furthermore, we provide evidence that the pay-performance relationship is weaker in Korean non-life insurance companies relative to US counterparts, suggesting that it is necessary for Korean non-life insurers to tie performance-based compensation more closely to shareholder value in the design of CEO compensation.

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