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EXECUTIVE COMPENSATION

Contents

1.0 Introduction——————————————————————————-3

2.0 Relationships between pay and performance—————————————-3

2.1 The influence of performance on pay————————————————-3

2.2 The influence of pay on performance————————————————-4

3.0 Relationships among pay and behaviors———————————————5

4.0 Methodological issues and future directions————————————-6

5.0 References——————————————————————————-7

1.0 Introduction

Executive compensation can be categorized into two main groups: relationships between performance and pay and relationships among behaviors and pay. Scholars of executive compensation focused extremely on the relationships between performance and pay CITATION Bal12 l 1033 (Balsam 2012). However, behavioral consequences of executive compensation have recently grown and executive compensation researches consider both groups. This paper examines determinants of executive compensation and its consequences according reviews from different scholars. It also gives suggestions of future undertakings in executive compensation.

2.0 Relationship between pay and performance

The impact that performance has on executive pay depict compensation as a reward for earlier action, or as a way of setting up performance CITATION Sir96 l 1033 (Sirkin and Cagney 1996). Scholars refer to this link as the touch of compensation to performance. This relationship of pay and performance is viewed as a dollar transformation in executive wealth related with every dollar change in shareholder wealth. Research suggests that there is mean increase in CEO compensation of 3.25 dollars for every 1000 dollar rise in the wealth of shareholders. This implies that performance-pay sensitivity indicate that a link between the interests of executive and shareholders. The sensitivity of firm performance to CEO pay is quite low. Scholars still examine the relationships with vigor. Although some current developments continue to focus on the effect o pay on performance, other researches put emphasis on the effect of moderators and some factors.

2.1 The influence of pay on performance

Scholars of executive compensation take pay as a tool of motivation CITATION Dav04 l 1033 (Davis and Edge 2004). Therefore, pay is a predictor rather than a predictable variable of the models. Past researches on consequences of pay have commonly explored the impacts of aggregate pay measures or total pay on outcomes of firms. However, significant literatures show that performance of firms is not only a function of factors beyond manager’s control, but also a function of decisions from managers. In fact, results that show influence of pay on performance have evoked sound results and elicited many questions that pertain to the effectiveness of executive pay to align the interests of shareholders and managers CITATION Sun10 l 1033 (Sun, Zhao and Yang 2010). The good proportion of noise in the level of performance measures of firms, and the equivocal nature of performance-to-pay relationship, has shifted research focus to examining the performance effects of structures and pay plans, pay difference and pay for top management, and individual elements such as stock options.

2.2 Relationships among pay and behaviors

Some scholars suggest that executive compensation shapes the interests of shareholders and executives by hindering executive opportunism and curbing risk aversion CITATION Ste03 l 1033 (Stern 2003). However, a prolonged approach to the analysis of the interest link argument seems appropriate given the uncertain nature of performance-pay research. Although several scholars gauge the effectiveness of aligning interest by exploring the link between performance and pay, alignment of interest arguments show that pay influences behavior that affects performance. Many past researches have focused on direct, but coarse and distal, performance to pay relationships. However, because the performance of a firm is a function of both exogenous forces and executive’s actions, it is not difficult to come across researches that equivocally display pay-to-performance relationships. Eventually, scholars began exploring more direct and proximal behavioral results of compensation that evaluate interest positioning predictions. Within the alignment of interest logic lie a separate goal link and risk preference alignment arguments, which are said to affect varying behaviors. Therefore, the two are concurrently, but separately, taken into account in compensation theory and research CITATION Chi04 l 1033 (Chingos 2004).

3.0 Effects of executive actions and other factors on pay

Scholars have examined the influences of behavior on executive compensation, although investigations of the effects of pay on behavior transcend work in all other areas. However, this act is highly disparate CITATION Gra08 l 1033 (Graham, Roth and Dugan 2008). For instance, some scholars developed a model to understand whether the behaviors of executives required for certain jobs determined the structure of pay or whether the structure of pay determined the behaviors of executives. The conclusion was that managers receive high performance-based pay due to the fact that they control higher quality programs rather than the performance-based pay bringing quality projects.

Some scholars explored pay linked to acquisitions. They discovered that chief executive officers in high-merger banks were paid for progress, whereas those in low-merger banks were awarded for growth. They also concluded that even though decreases in stock price due to bank acquisition reduced the performance –linked pay of acquiring bank’s chief executive officer, the losses were cancelled by the rise in pay that followed growth. Moreover, they listed down a positive relationship between cash and ROA and that of total compensation and growth through acquisitions. The relationships depicted a significant increase in CEO pay more than organic growth. The pay-for-growth relationship demonstrates that although executive officers received bonuses from acquisition in their simple lives, the bonuses were an increasing function of the officer’s deal size, power, and effort. The effect of power on pay has also been demonstrated using a sample of Dutch executives. The research resulted in a situation that makes covert power to enlarge overt power on pay. The impacts were highly pronounced for bonus size of chief executive officers CITATION Red08 l 1033 (Reda, Reifler and Thatcher 2008).

4.0 Methodological issues and future directions

The review suggests that although study is concurrently on-going within the two broad categories explored, the groups remain separated from each other CITATION Lip08 l 1033 (Lipman and Hall 2008). This resulted in a strong preference towards independence within and across the relationships studied. Apart from few researches explored above, there is a shift in focus to integrating research findings from both categories. Less work has tried to integrate results within groups. Some scholars argued that their findings noted executive compensation research had advanced from a myopic focus that did not integrate other perspectives and methodologies. On the contrary, recent work is so expansive in its endeavors that the ability to get significant conclusions is extremely limited. Current research exposes that many executive pay researches come from the finance and management areas. Although scholars in this researches study similar relationships and constructs, they do it from varying perspectives. For instance, extending, developing, and testing logic is important to managing research. Rigor, sensitivity, and empirical regularity are paramount to research in finance. With such extremes, it does not surprise to find cross-discipline integration uncommon. Although common ground exists in these disciplines, it is clear that there is still much that is required from scholars about executive pay CITATION Abo10 l 1033 (Aboody and Kasznik 2010). Cross-discipline incorporation has the power to propel compensation practice and research. Scholars should acknowledge and incorporate the insights and contributions from other disciplines.

References

BIBLIOGRAPHY Aboody, David, and Ron Kasznik. Executive compensation and financial accounting. Hanover, MA : now, 2010.

Balsam, Steven. An introduction to executive compensation. San Diego: Academic Press, 2012.

Chingos, Peter. Responsible Executive Compensation for a New Era of Accountability. Hoboken: John Wiley & Sons, 2004.

Davis, Michael, and Jerry Edge. Executive compensation : / the professional’s guide to current issues & practices. San Diego: Windsor Professional Information, 2004.

Graham, Michael, Thomas Roth, and Dawn Dugan. Effective executive compensation : creating a total rewards strategy for executives. New York: AMACOM/American Management Association, 2008.

Lipman, Frederick, and Steven Hall. Executive compensation best practices. Hoboken, N.J: John Wiley & Sons, 2008.

Reda, James, Stewart Reifler, and Laura Thatcher. Compensation committee handbook. Hoboken: John Wiley & Sons, 2008.

Sirkin, Michael, and Lawrence Cagney. Executive compensation. New York: Law Journal Seminars-Press, 1996.

Stern, Hermann. Executive compensation Switzerland : Trends in Vergütungsstrukturen für Führungskräfte. Zurich: Obermatt Partners, 2003.

Sun, Sunny Li, Xia Zhao, and Haibin Yang. Executive compensation in Asia: A critical review. Kansas: Springer Science+Business Media, 2010.