CEO pay and family firm heterogeneity: A behavioral agency model perspective

We study the effects of family control on CEO pay from the perspective of behavioral agency model (BAM), with particular focus on family firm’s generational stage and CEO family ties. Using a panel of Australian listed firms, we find that family firms present lower total and variable CEO pay, showing also less pay disparity between the CEO and other top executives. We also find that multi-generational family firms and those run by non-family CEOs offer higher total and variable CEO pay and present high pay disparity. The BAM and family’s aversion to socioemotional wealth loss can explain the effects of family control based on the pursuing of non-financial family goals. The decline of these goals derived from the aging of the firm and the hiring of external CEOs shape family control and should be considered in the design of executive compensation policies and by external parties when assessing their suitability. JEL CLASSIFICATION: G30; G32; G34; G38

Whose pay should be cut in economic crises? Consumers prefer firms that prioritize paying employees over CEOs

Four experiments examine the impact of a firm deciding to no longer pay salaries for executives versus employees on consumer behavior, particularly in the context of the COVID-19 pandemic. Study 1 explores the effect of announcing either pay cessations or continued pay for either CEO or employees, and shows that firms’ commitment to maintaining employee pay leads to the most positive consumer reactions. Study 2 examines the effects of simultaneously announcing employee and CEO pay cessations: consumers respond most positively to firms prioritizing employee pay, regardless of their strategy for CEO pay. Moreover, these positive perceptions are mediated by perceptions of financial pain to employees, more than perceptions of CEO-to-worker pay ratio fairness. Study 3, using an incentive-compatible design, shows that firms’ commitment to paying employees their full wages matters more to consumers than cuts to executive pay, even when those executive pay cuts lead to a lower CEO-to-worker pay ratio. Study 4 tests our account in a non-COVID-19 context, and shows that consumers continue to react favorably to firms that maintain employee pay, but when loss is less salient, consumers prioritize cutting CEO pay and lowering the CEO-to-worker pay ratio. We discuss the implications of our results for firms and policymakers during economic crises.

Non-financial performance measures and pay-performance sensitivity

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.

Changing the blame game: Does the presence of a pay ratio disclosure impact nonprofessional investors’ reactions to CEOs’ internal attributions for poor firm performance?

We conduct two experiments to investigate how the presence of the CEO pay ratio, a recently mandated disclosure, influences nonprofessional investors’ reactions to a CEO’s internal attributions for poor firm performance. Results of our first experiment suggest that relative to blaming oneself, blaming other firm employees for poor firm performance more effectively absolves a CEO from responsibility for poor firm performance and damages perceptions of the CEO’s trustworthiness less when a pay ratio disclosure is present versus absent. These perceptions, in turn, affect investors’ support for the CEO’s compensation and the company’s attractiveness as an investment. Our second experiment provides evidence of the underlying process, showing the pay ratio disclosure and the CEO’s attribution to other employees affects the perceived status of a CEO. Together, our findings inform managers about the impact of their attributions for poor firm performance and regulators about potential unintended consequences of pay ratio disclosures.

CEO pay slice and acquisitions in Australia: the role of tournament incentives

PurposeThis paper investigates the influence of tournament incentives, measured by Chief Executive Officer (CEO) pay slice (CPS), on the acquisition decisions of Australian firms.Design/methodology/approachThis study applies ordinary least squares regression analyses to a sample of 1,429 acquisition observations announced by 986 unique Australian firms spanning the 2001–2015 period. Event study methodology was employed to capture the market reaction to acquisition announcements. Multinomial logit models, a two-stage least squares instrumental variable (IV) approach and propensity score matching (PSM) technique were performed for robustness and endogeneity correction purposes.FindingsThe results suggest that CPS has a positive and significant relationship with the announcement period abnormal return realised by acquirers, implying that executives are motivated to exert best efforts and support the CEO in making value-creating acquisitions. Further analyses reveal that management teams of high CPS firms demonstrate efficiencies in executing acquisitions. The positive relationship between the CPS and abnormal return is more pronounced in acquisitions of private targets, domestic targets and bidders with high-quality CEOs. These acquisitions make a significant contribution to the long-run performance of the firm, which provides support for the effort inducement hypothesis.Practical implicationsThe study's empirical evidence implies that the strong governance environment in Australia and a highly monitored acquisition market and compensation contracts motivates executives to exert their efforts to make value-enhancing acquisitions.Originality/valueThis paper appears to be the first investigation that makes a link between CPS in different components (i.e. short-term, long-term and total pay) as proxy for tournament incentives and the outcomes of both public and non-public acquisitions in the Australian setting.

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

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.