This study examines the matching of CEOs to firms and the compensation earned by such managers in a competitive labor market. I first develop a simple competitive equilibrium model and derive predictions regarding the change in wages when an inelastic supply of CEO labor cannot match an increase in demand. The model predicts that the CEO pay-size elasticity increases when more firms compete for a fixed supply of managers. I then empirically test this prediction using industry-level IPO waves as a proxy for increased competition among firms for CEOs. Consistent with the model, I find that pay-size elasticity increases with an increase in an industry's IPO activity. I also find that increased IPO activity leads to a greater likelihood of executive transitions between firms. Overall, the findings point to the substantial role market forces play in the determination of pay in the CEO labor market. I then use a structural model to examine the distortionary effects of frictions in the CEO labor market. I estimate the switching cost to be 20% of the median firm's annual earnings. While reduced-form estimates of the switching cost serve as a lower bound on the reduction in firm value, they underestimate the overall effect which also includes the resulting inefficient firm-CEO matches. Using counterfactual analysis, the switching cost is estimated to decrease the median firm's value by 4.8%, four times larger than the reduced-form estimate. / text

Agency theory, proposed by previous studies such as Guidry, Leone, and Rock (1999) and Arya and Huey-Lian (2004), suggests that bonus and other accounting-metric-based compensation can motivate managers to perform well in the short horizon while equity-based compensation, such as restricted shares and stock options, can serve the purpose of aligning the long run interests of shareholders and managers. The empirical evidence, for example Jensen and Murphy (1990), Kaplan (1994), Hall and Liebman (1998), Murphy (1999), Zhou (2000), and Chowdhury and Wang (2009), confirms that incentive compensation is popular in many countries. However, recent studies suggest that the relation between performance and incentive compensation is weak. Shaw and Zhang (2010) find that CEO bonus compensation is less sensitive to poor earnings performance than it is to good earnings performance. Fahlenbrach and Stulz (2011) study the relation between bank performance during the 2008 bank crisis and the bonus and equity-based compensation of bank CEOs. They find that banks with CEOs whose incentives were better aligned with the interests of shareholders performed worse than other banks. This study examines whether ownership structure can explain the differences among compensation structures of chief executive officers (CEOs). In particular, we examine the compensation structure of three distinct groups: family-controlled, institution-controlled, and widely-held firms. We distinguish these three kinds of firms to represent different levels of market imperfection. Compared with family-controlled and institution-controlled firms, widely held firms have dispersed ownership. The most significant weakness of a widely-held ownership structure is the lack of shareholder monitoring due to the unmatched benefit and cost of monitoring for small shareholders. In contrast, a holder of a large block of shares will have the same monitoring costs but the benefits to this shareholder from monitoring management and reducing agency costs would be substantial and larger than the costs of monitoring. Thus the presence of a large shareholder will reduce the agency costs. In addition, large shareholders may be willing to spend time and effort continuously to collect more information on management performance or to estimate the firms investment projects. This behaviour will reduce the problems that arise from information asymmetry and will decrease the waste of free cash flows by managers. Both family-controlled firms and institution-controlled firms have large shareholders. However, whether or not the control shareholders are playing an active monitoring role is still an important issue. From the viewpoint of aligning the interests of managers and shareholders, the family-controlled group is superior to the institution-controlled group. First, institutions are more flexible in moving their ownership from one firm to another depending on performance. If the costs of monitoring are high in comparison to the costs of rebalancing portfolios, institutions will choose to rebalance instead of monitoring. In contrast, a family that controls a firm does not have this flexibility. Second, family-controlled firms generally assign influential positions to family members whose focus is in line with that of the family group. Even though a non family member may be appointed as the manager, the level of monitoring is significant given the high ownership concentration by the family. However, the level of monitoring by a family may not necessarily translate into a reduction of agency costs for minority shareholders. Indeed, previous studies suggest that significant family ownership may lead to agency costs of its own. The family may divert company resources for its own benefit despite the presence of a manager who may or may not be a family member. Essentially, the family and the manager can collude to spend on perks and personal benefits at the expense of minority shareholders. Chourou (2010) suggests that excessive compensation of chief executive officers at some family owned Canadian corporations may be viewed as expropriation of minority rights. Overall, the main objective of this study is to examine whether block-holder monitoring is a substitute to the incentive components of compensation. We propose that as we move from widely-held to institution-controlled the level of monitoring may or may not increase. However, as we move further into higher control, as may be suggested by family ownership, the level of monitoring will increase but this monitoring may not necessarily reduce agency costs. The results show that the institution-controlled firms pay significantly less bonus compensation per dollar of assets than widely-held firms but the differences in equity based compensation are not significant. In addition, the family-controlled corporations offer the lowest performance-based compensation, bonus per dollar of assets, in comparison to the institution-controlled and the widely-held groups. These results indicate that the family-controlled Canadian corporations rely more on monitoring managers than paying them incentive payments in the form of bonus payments. In addition, our results indicate that the institutions which control corporations may be monitoring the managers of these corporations but this monitoring does not significantly reduce the need for the long-term incentive components of compensation. This result suggests that institutions may monitor the short-term performance effectively but they may prefer rebalancing their portfolio rather than monitoring long term performance.

Agency theory, proposed by previous studies such as Guidry, Leone, and Rock (1999) and Arya and Huey-Lian (2004), suggests that bonus and other accounting-metric-based compensation can motivate managers to perform well in the short horizon while equity-based compensation, such as restricted shares and stock options, can serve the purpose of aligning the long run interests of shareholders and managers. The empirical evidence, for example Jensen and Murphy (1990), Kaplan (1994), Hall and Liebman (1998), Murphy (1999), Zhou (2000), and Chowdhury and Wang (2009), confirms that incentive compensation is popular in many countries. However, recent studies suggest that the relation between performance and incentive compensation is weak. Shaw and Zhang (2010) find that CEO bonus compensation is less sensitive to poor earnings performance than it is to good earnings performance. Fahlenbrach and Stulz (2011) study the relation between bank performance during the 2008 bank crisis and the bonus and equity-based compensation of bank CEOs. They find that banks with CEOs whose incentives were better aligned with the interests of shareholders performed worse than other banks. This study examines whether ownership structure can explain the differences among compensation structures of chief executive officers (CEOs). In particular, we examine the compensation structure of three distinct groups: family-controlled, institution-controlled, and widely-held firms. We distinguish these three kinds of firms to represent different levels of market imperfection. Compared with family-controlled and institution-controlled firms, widely held firms have dispersed ownership. The most significant weakness of a widely-held ownership structure is the lack of shareholder monitoring due to the unmatched benefit and cost of monitoring for small shareholders. In contrast, a holder of a large block of shares will have the same monitoring costs but the benefits to this shareholder from monitoring management and reducing agency costs would be substantial and larger than the costs of monitoring. Thus the presence of a large shareholder will reduce the agency costs. In addition, large shareholders may be willing to spend time and effort continuously to collect more information on management performance or to estimate the firms investment projects. This behaviour will reduce the problems that arise from information asymmetry and will decrease the waste of free cash flows by managers. Both family-controlled firms and institution-controlled firms have large shareholders. However, whether or not the control shareholders are playing an active monitoring role is still an important issue. From the viewpoint of aligning the interests of managers and shareholders, the family-controlled group is superior to the institution-controlled group. First, institutions are more flexible in moving their ownership from one firm to another depending on performance. If the costs of monitoring are high in comparison to the costs of rebalancing portfolios, institutions will choose to rebalance instead of monitoring. In contrast, a family that controls a firm does not have this flexibility. Second, family-controlled firms generally assign influential positions to family members whose focus is in line with that of the family group. Even though a non family member may be appointed as the manager, the level of monitoring is significant given the high ownership concentration by the family. However, the level of monitoring by a family may not necessarily translate into a reduction of agency costs for minority shareholders. Indeed, previous studies suggest that significant family ownership may lead to agency costs of its own. The family may divert company resources for its own benefit despite the presence of a manager who may or may not be a family member. Essentially, the family and the manager can collude to spend on perks and personal benefits at the expense of minority shareholders. Chourou (2010) suggests that excessive compensation of chief executive officers at some family owned Canadian corporations may be viewed as expropriation of minority rights. Overall, the main objective of this study is to examine whether block-holder monitoring is a substitute to the incentive components of compensation. We propose that as we move from widely-held to institution-controlled the level of monitoring may or may not increase. However, as we move further into higher control, as may be suggested by family ownership, the level of monitoring will increase but this monitoring may not necessarily reduce agency costs. The results show that the institution-controlled firms pay significantly less bonus compensation per dollar of assets than widely-held firms but the differences in equity based compensation are not significant. In addition, the family-controlled corporations offer the lowest performance-based compensation, bonus per dollar of assets, in comparison to the institution-controlled and the widely-held groups. These results indicate that the family-controlled Canadian corporations rely more on monitoring managers than paying them incentive payments in the form of bonus payments. In addition, our results indicate that the institutions which control corporations may be monitoring the managers of these corporations but this monitoring does not significantly reduce the need for the long-term incentive components of compensation. This result suggests that institutions may monitor the short-term performance effectively but they may prefer rebalancing their portfolio rather than monitoring long term performance.

The empirical results indicate a strong positive link between three important elements: the duration as CEO, the market capitalization of the company and the non-executive ownership. Our findings also indicate an important but negative impact of two variables on the CEO compensation: the institutional and block holder shareholders. We also observed that there is no CEO pay-performance elasticity for the Total and base salary: the control variables do not have a significant impact on changes in CEO compensation.   These results are in line with the ones of Ozkan (2011, p. 260-285). Those elements would demonstrate the active monitoring of these investors on the top management and especially on their remuneration. Those are also consistent with the paper of Khan et al. (2002, p. 1078-1088), which demonstrates the negative impact on CEO compensation of institutional ownerships when they are concentrated.   Our study didn’t find a strong correlation between the other variables as the board size or sales for example and the level of remuneration of the CEO. That would mean that the number of member of the board doesn’t significantly impact the discussion about the CEO remuneration.

none

CEO pay-performance relationship is a topic that has been largely discussed and researched. Questions still remain on precisely how CEO remuneration is related to company performance. Recently, attention has shifted from how much executives are paid to how they are paid. The purpose of this paper is to find how CEO compensation structure relates to company performance in the auto industry. In order to achieve this aim, the CEO compensation is broken down into four components, namely: base salary, bonus, stocks and stock options, and pension. The company performance is measured by change in market value, since market information is forward looking, meaning future performance might be anticipated in advance by the markets. As such, decisions made whose positive or negative effects may occur later in the future are, if known by investors, priced into the market value. Each compensation component relative the total was tested for correlation with respective market capitalization change. However, the insignificant statistical results conclude that the compensation structure follows a relatively random pattern. Hence, no statistically significant relationship between CEO compensation structure and firm performance in the auto industry was found. The findings that there are no significant performance improvements for firms having a relatively bigger proportion of performance-based pay means that underlying theories, such as agency theory, may not be applicable in the industry.

This thesis investigates the monitoring effect from institutional ownership on bidder Chief Executive Officer (hereafter CEO) compensation in mergers and acquisitions (hereafter M&A) as well as the shift in compensation structure. While it is well-established in the literature that bidder CEO compensation soars significantly after conducting such transactions, the sources of the growth are left unclear. One major argument, the traditional theory, proposes that the growth derives from additional wealth created to shareholders in M&A, because according to the nature of compensation contract, CEOs’ interests are effectively aligned with shareholders’ benefits. On the other hand, scholars of managerial power theory argue that managerial power is stronger than shareholders’ oversight, so managers use M&A as a cover to expropriate wealth from shareholders. Whether the traditional theory or the managerial power theory dominates depends on the presence of optimal contract and the effectiveness of corporate governance. Institutional owners have more motivation and resources to restrict managerial behaviour than diffused owners. Thus, the change in CEO compensation following M&A and the driving factors behind the change could be different in firms with different types of ownership. After examining the 268 merger events from 266 US public non-family bidding firms from 2001 to 2005, this study finds that the magnitude of increase in CEO cash-based compensation is significantly alleviated in the presence of large institutional shareholders, and that the increase seems to be positively related to good short-term performance rather than managerial power. However, the concentrated institutional ownership does not seem to affect CEO equity-based compensation or the change in compensation structure. Besides, we do not find any significant relation between firm long-term post-acquisition performance and the market reaction to the announcement of M&A. Thus, we propose that without a reliable indication from short-term performance, large institutional shareholders could have problems in understanding the potential impact of M&A and they might adjust CEO equity-based compensation in a serial process after M&A.

This study examines the effectiveness of Say on Pay (SoP) regulation as a corporate governance mechanism in the context of M&A deals. Using a large sample of U.S. firms over the 2005-2017 period, this study finds that, in the post-SoP period, overall CEO pay growth rate declines and CEO pay to acquisition performance sensitivity improves following M&A activities. This supports ‘SoP governance’ hypothesis, which proposes that SoP regulation will restrict CEOs self-fulfilling behaviour. In a macro-economic set-up, the introduction of SoP regulation was intended to discipline top managers by giving shareholders an opportunity to express their opinion on CEO compensation. It was therefore expected that, in the post SoP-era, CEOs will experience a lower growth in their pay package following M&A deals. On the other hand, the relation between SOP voting approval rates and CEO compensation following M&A activities is unidirectional. Irrespective of the performance of M&A deals, it is observed that CEOs with higher shareholder voting approval experience a significant positive change in their compensation level after an M&A deal. We term this as a ‘reliable CEO’ hypothesis. According to the ‘reliable CEO hypothesis, a very high voting percentage may legitimize CEOs action and embolden CEOs to carry out more risky ventures such as M&As. Since there is an established relation between risk and return, shareholders would like CEOs to take appropriate risks to increase firm value. A reliable CEO, who enjoys a high degree of shareholders’ support, should not be penalized for taking more risky ventures that are intended to increase shareholders’ wealth. Our results confirm this viewpoint.

The market consensus during the financial crisis was that financial sector CEOs were engaged in excessive risk taking induced by compensation practices. Thus, the primary focus of this paper is to determine whether empirical evidence supports this assertion. As such, I examine bank CEO compensation, bank risks, and the relation between bank CEO risk taking incentives and bank risks and the effect of the 2007/9 financial crisis on this relation. I find that banks on average reduced their exposure to credit, capital, total, and unsystematic risks, and increased their exposure to liquidity, portfolio, off-balance sheet and (accounting) foreign exchange risks, from 2003 to 2006. These trends largely reversed during 2007 to 2009. During the 2007/9 financial crisis, banks experienced significant structural shifts in all risk indicators (except for capital and foreign exchange risks) which increased significantly consequent on the economic downturn. I also find that banks remained highly sensitive to changes in short- and long-term interest rates and foreign exchanges rates throughout the period. My findings also support a bank size effect. I observe consistent real growth in CEO base salary annually, from 2003 to 2009, which suggests that there is resilience in this form of compensation to the financial crisis. However, only small banks paid significantly higher base salary during the financial crisis to offset the similar decline in annual bonus payments caused by deteriorating financial and market performances during that time. I find that CEO portfolio option values were more responsive to changes in total risk during the pre-financial crisis period (2003 to 2006) than during the financial crisis (2007 to 2009). Also, I find evidence of banks size effects in compensation components, compensation structure and compensation sensitivity. My results are robust to other sample formations and statistical indicators. After adjusting for the simultaneity bias between bank CEOs' risk taking incentives (measured by the sensitivity of CEO option portfolio and pay for performance sensitivity) and bank risks (using accounting and market based measures), my findings reveal significant shifts in the relation between compensation and bank risks during the financial crisis. Specifically, during the financial crisis, CEOs with more sensitive pay for performance were related to banks with greater capital risk, and banks with higher portfolio risk had CEOs with more sensitive pay for performance. Also, banks with greater total and unsystematic risks during the financial crisis had CEOs with less risk taking incentives. Other indicators during the financial crisis show that less stable banks had CEOs with less risk taking incentives, while banks with greater asset return risk had CEOs with less sensitive option portfolios. Overall, these results do not support the risk inducing incentives of bank CEO compensation especially during the financial crisis.

<p>The purpose of this paper is to determine the extent to which culture, in six European and two North-American countries, affects CEO compensation. If differences in culture between countries can provide an explanation for cross-national differences in CEO compensation, it may increase multinational corporations understanding of how to design CEO compensations in the countries where they operate. Acquiring such knowledge would maximize the effect of their compensation plans. The study relates cultural dimensions to total CEO compensation and the ratio between variable compensation and total CEO compensation.</p><p>Cultural data, which comprises the study’s theoretical foundation, is based on the GLOBE study (House et al., 2004). Of the GLOBE study’s nine cultural dimensions, the study examines the five dimensions found most relevant to CEO compensation practices; performance orientation, uncertainty avoidance, institutional collectivism, future orientation and power distance. The research has been conducted through a regression analysis of 240, both private and publically listed companies. Companies with a turnover above €49 million or at least 250 employees were randomly chosen in Sweden, Germany, Netherlands, United States, Canada, France, Ireland and United Kingdom.</p><p>The study’s results shows that the cultural dimensions examined, to different extent do affect CEO compensation. The results show total CEO compensation to be negatively related to institutional collectivism, power distance and performance orientation. Further, total CEO compensation is positively related to future orientation. The proportion of variable compensation to total CEO compensation is negatively related to institutional collectivism and uncertainty avoidance. The proportion of variable compensation to total CEO compensation is positively related with future orientation. Thus we conclude that culture can contribute to understand cross-national differences in CEO compensation.</p>