ceo compensation and company performance

8/13/2019 Ceo Compensation and company performance

1/4

Title of Article : CEO Compensation and Company Performance

Author and Brief background :KJ Sigler, University of North Carolina Wilmington,

Cameron School of Business, Wilmington, NC 28403, USA.

Journal Title and Vol. Number :Business and Economics Journal, Volume 2011: BEJ-31

Date of submission :Jan 19, 2014

An overview of the article:

This article examines the relationship of CEO compensation and company performance for 280

firms listed on the New York Stock Exchange for a period from 2006 through 2009. The Author

of this article claims that he found there to be a positive and significant relationship between total

CEO compensation and company performance measured by return on equity. He also claims that

the size of the firm appears to be the most significant factor in determining the level of total CEO

compensation, according to the results, and the tenure of the chief executive officer is another

significant variable.

Development:

The article focuses on the state of CEO pay, the various pay components, problems with the pay

components, pay sensitivity, CEO pay and corporate governance and the model used to measure

the variability of CEO pay and the CEO performance. The sample statistics has been used and

the regression results as well as t-statistics along with the variables have been presented in the

article. The table of dependent variable equals log of total CEO compensation results that the

size of the firm has the most impact on the compensation of the firms chief executive officer.

The link between size and compensation plays into the idea that corporate America pays its top

executive leaders like bureaucrats using size as the determining factor. On the other hand, the

larger the firm the more complex it will be to operate which takes a skill set that may not be

available to most managers. Tenure appears to be the next most important variable implying that

either the CEO acquires more knowledge or expertise over time in the position or him or her

attains more power over the compensation committee that decides the level of CEO pay. It is

possibly a combination of both. Beta is not significant and has a negative sign which is at odds

with the hypothesis that the more risk taken by the CEO than the larger his compensation. The


2/4


3/4

On the basis of CEO pay and corporate governance, it was found that when corporate

governance of a company is weak it appears that managers have a greater influence on the

amount and composition of their own compensation. Because of this, executives can be overpaid

and be protected from poor performance and, thereby, diminish the relationship between

executive pay and the performance of the firm. On the basis of survey, executive compensation

levels are mostly consistent with good corporate governance and any distortions result from the

perceived impact of accounting and tax rules, and any problem with pay is peculiar to an

individual company and is not a general problem.

Finally it was found that with time, the abilities of the top executive should improve as well as

his or her influence over the board of directors which will work to increase CEO pay that reveals

a positive relationship between total CEO compensation and tenure. The riskier a firms business

the greater the probability that negative outcomes will result in the CEO being terminated.

Because of this, CEOs may be more risk averse in their investment decision making for the firm

than well-diversified stockholders of the firm may desire. Pay incentives can encourage CEOs to

increase their risk taking with company funds. Therefore, there should be a positive relationship

between CEO pay and the companys beta in the sample (more risky investments will increase

the firms equity beta). The most consistent result from many studies of CEO pay is that firm

size is positively and significantly related with compensation levels. And found that size will be

a major determinant of the CEO compensation, and used the log of each firms number of

employees as the size variable.

Conclusion and Insights:

After studying the article of KJ Sigler, we can learn that how company performance is related

with compensation plan of CEO in US. Also we knew the state of CEO pay in US, CEO pay

components, problem with the pay components, pay sensitivity with the company & CEO

performance and CEO & corporate governance. Furthermore, we knew different factors affecting

the total compensation of CEO in US.

Every professionals or investors should understand that there should be suitable compensation

for the capable CEO of their organization so they can stay with their organization for longer

period of time and work for maximizing the wealth and worthiness of their organizational value.


4/4

The compensation plan is one of the important motivational factor for the higher executives, but

all the firms must be aware regarding this because it may increase the operational costs and

revenue and expenses might be manipulated which ultimately hampers in the shareholders

wealth maximization. If such crucial mater is considered by investors, also there is probability of

occurring the agency problems and may lead up to severe issues of corporate governance within

the organization. Thus, it is the responsibility of all the compensation committee of every

company to maintain best combination of compensation plan consisting short-term and long-

term with shareholders wealth maximization.

Laxman Aryal

Manikkya

ceo compensation and company performance

Documents