This study considers the determination of the ex ante pay-performance relationship. A single-period partial equilibrium model is used to show that the executive income can be expressed as a function of the firm's return expressed in dollar terms. The executive income is jointly determined by the opening firm size and current return, which function as a managerial talent proxy and self-selection mechanism respectively. Comparing to Jensen and Murphy (1990) wealth-based Pay-Performance Sensitivity (PPS), this research presents an income-based PPS. The alternative PPS not only overcomes a misleading misspecification in Jensen and Murphy (1990), but also corrects Rosen's (1992) argument for only including return in the pay performance relationship. This research finds empirically that both the opening firm size and stock return play a significant role in determining executive income. This study provides supplementary evidence to Murphy's (1986) Learning Model. However, shareholder income may not be an ideal performance measure in capturing the multi-period pay-performance relationship.

This dissertation contains five research projects within the context of two distinctive issues that concern the effectiveness of executive compensation in aligning executive interests with shareholders and how institutional investors play a role in structuring corporate governance mechanisms. The objective of this dissertation is to first determine how institutions should exert their influence if they are serious about alleviating agency problems and improving firm performance. Second, the thesis seeks to determine whether institutional investors use their influence to shape executive compensation and corporate governance mechanisms in a manner consistent with aligning managerial interests with shareholders and increasing shareholder wealth. The thesis finds that CEOs with option incentives increase the likelihood that a firm will increase risk by undertaking both major real investments and acquisitions. Moreover, CEO option grants are positively related to measures of firm valuation and operating performance suggesting option incentives are an important mechanism to align CEO interests with shareholders. This is robust to alternative measures of firm valuation and operating performance, also various estimation techniques. Using these findings to motivate the direction of institutional influence on executive compensation, it is found that institutional investors, particularly smaller activist traders, significantly increase option grant incentives received by executives. Institutional influence also raises CEO pay which is consistent with preservation of reservation CEO utility levels. Addressing the role of institutional investors in the context of other corporate governance mechanisms, it is found that institutional investor influence is also negatively related to board size and positively related to board independence, which is achieved by removal of inside directors. Such actions are consistent with empirical studies that show smaller boards and increased levels of independent directors improve firm performance and board decision making. The main conclusion from this dissertation is that option incentives are an effective mechanism to align CEO interests with those of shareholders. Institutional investors appear to recognise this importance, and effectively use their influence to increase options received by executives. Combined with institutional investors putting in place corporate boards that provide better oversight of management, institutional investors appear to be effective monitors of the firms in which they invest.

The results obtained from this research indicates that there is no statistical relation between the chosen financial variables and the total compensation to the CEO, except sales. CEO compensation is a highly debated subject in Sweden. The debate concerns whether or not CEOs are paid too much in relation to their results. This research investigates what decides the CEO compensation. Can the CEO compensation be explained by the financial variables ROA, ROE, Sales, Tobin’s q, and the size of the largest shareholder? In this paper companies listed on the Swedish Stock Exchange OMX Stockholm large and mid cap during the years 2003 to 2008 are analyzed by empirically and theoretically adapted models.

Finns det ett samband mellan belöningssystem och finansiell aktieägartillväxt i publika svenska företag? En intressant och högaktuell fråga, som det visade sig, och som kommer att försöka besvaras i denna uppsats. Inledningsvis undersöktes om det fanns någon relevant svensk statistik som kunde belysa de exekutiva ledarnas förtjänstutveckling under senare år. Statistiska Centralbyråns inkomststatistik gav inte svar på frågan. LO-ekonomernas statistik visade sig vara relevant och bekräftade mitt antagande att inkomstutveckling för denna grupp varit osedvanligt god. Med antagandet bekräftad och således stärkt i tron ställdes tre frågor som uppsatsens syfte var att besvara: Fråga 1 Hur ser de belöningsmodeller ut som tillämpas av svenska företag avseende ersättningar till medlemmar i företagens exekutiva ledningsgrupper? Fråga 2 Hur förhåller sig de tillämpade belöningsmodellerna till relevant belöningsoch motivationsteori? Fråga 3 Finns det ett samband mellan aktieägarnas finansiella utveckling i dessa företag och företagens belöningar till den studerade yrkesgruppen? Lämpliga teorier att applicera på de undersökta företagens belöningsmodeller visade sig vara agentteorin och förväntansteorin. Dessa två teorier jämfördes med de fyra undersökta företagens, Ericsson, Handelsbanken, IKEA och Skandia belöningssystem genom studier av dessa bolags årsredovisningar för åren 2000-2004. Det visade sig härvid att de företag (två st.) som hade de högsta belöningsnivåerna redovisade sämst resultatutveckling och negativ avkastning till aktieägarna, medan det företag (en st.) med den lägsta belöningsnivån, hade en god resultatutveckling och en fördelaktig avkastning till aktieägarna. För IKEA var studiematerialet för knapphändigt för att kunna uttala sig om hur belöningsnivån utvecklats även om aktieägarens avkastning var den mest fördelaktiga bland de undersökta företagen. Samtliga företag, IKEA undantagen, har konstaterats ersätta sina exekutiva ledare med grundlön, rörlig lön, anställningsförmåner och pensionslösningar även om Handelsbanken uppger att man inte tillämpar rörlig bonus eller rörligt tantiem. Slutledningsvis konstaterades att det inte i något fall förelåg något samband mellan hur företagen ersätter sina exekutiva ledare och aktieägarnas finansiella tillväxt.

This paper examines shareholder disapproval of CEO compensation as expressed through their advisory vote on executive compensation (say-on-pay) as required by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Using a sample of 884 votes by S&P 500 firms in 2011 and 2012, I find that higher CEO salary, a weak link between pay and performance, and higher dilution from stock option grants are associated with lower say-on-pay approval. In addition, I find evidence that shareholders are sophisticated in their examination of CEO compensation by voting against excess compensation over what is deserved due to performance and other determining factors.

<p>The results obtained from this research indicates that there is no statistical relation between the chosen financial variables and the total compensation to the CEO, except sales.</p><p>CEO compensation is a highly debated subject in Sweden. The debate concerns whether or not CEOs are paid too much in relation to their results. This research investigates what decides the CEO compensation. Can the CEO compensation be explained by the financial variables ROA, ROE, Sales, Tobin’s q, and the size of the largest shareholder?</p><p>In this paper companies listed on the Swedish Stock Exchange OMX Stockholm large and mid cap during the years 2003 to 2008 are analyzed by empirically and theoretically adapted models.</p>

ABSTRACT MANAGERIAL INCENTIVES AND TAKEOVER WEALTH GAINS By EBRU REIS DECEMBER 5, 2006 Committee Chair: Dr. Jayant R. Kale Major Department: Finance This study examines the relationship between managerial equity incentives and takeover wealth gains both for target and acquirer firms. Although there is some research about the effect of acquirer managers’ incentives on acquirer wealth gains, this paper is one of the first to investigate the effect of target managers’ incentives on the wealth effects of target firms in corporate takeovers. In addition, prior research has focused on the alignment effect of equity incentives in takeovers. However, takeovers provide an opportunity to liquidate personal equity portfolio for managers who hold an undiversified portfolio of their firms’ stock. In this study, I identify two hypotheses that potentially explain the effect of target managers’ incentives on wealth gains. While incentive alignment hypothesis predicts a positive relationship, diversification driven-liquidity hypothesis predicts a negative relationship between target managerial incentives and target wealth gains. I use a sample of 656 successful and 104 failed acquisitions over the period 1994-2003 to test these competing hypotheses. I find that for targets that are less (more) diversified, equity incentives are negatively (positively) related to wealth effects. I also find that the target managerial incentives increase the success probability of a takeover bid and this positive effect is less pronounced for diversified target managers. Based on these results, I conclude that incentive alignment argument is dominated by liquidity argument in less diversified target firms, however, holds in diversified firms. For acquirer managers, I do not find any evidence that supports incentive alignment or diversification arguments.

I investigate the relation between firm risk and firm transparency over the period 1992-2006 and find that the level of firm transparency and the level of firm risk are negatively related. I also find that higher CEO pay-performance sensitivity (delta) works to mitigate this inverse relationship. This result is consistent with Hermalin and Weisbach (2007) who suggest that managers reduce risk to protect their pay and performance evaluations under higher levels of firm transparency. I further find that firms in high technology industries are more likely to increase risk relative to firms in other industries when transparency is high. Finally, I develop an additional proxy for transparency based on the Standard and Poor’s Transparency and Disclosure Score. Results using this proxy are generally consistent with my findings that there is an inverse relationship between risk and transparency and that CEO pay-performance sensitivity lessens this relationship.

This paper presents an empirical analysis of top executive compensation from intellectual capital perspective using data from US listed companies and aims to examine whether executives get appropriate compensation. I propose a pay-contribution compensation scheme and extend previous research on agency theory, by exploring how executive compensation contract design may be based on the firm’s intellectual capital (IC). Such features would serve the core purpose of compensation design, which is to create long-term firm value. But inappropriate compensation scheme cannot motivate individual ICs to contribute fully and deteriorate firm value eventually. I view CEO, CFO, COO, CMO, CSO, CTO, CHOs as individual intellectual capital of firms, and through examining key indicators from financial contribution, organizational contribution, relational contribution and growth contribution, I find that their total compensations, total incentive compensations and total cash compensations are not significant on their functions for all executives, implying that free rider problem may exist. I conduct two steps regression models: the first step is to reveal free-rider problem based on the significant relationship between executive compensation and his/her role contribution, and the second step is to examine whether executive compensations rewarded by his/her role contribution have significant influence on firm valuation. The outcome of model 1 shows that CEO and CSO have no free-rider problem, while CTO and CHO may have potential free-rider problem, CFO and CMO may have the risk of free-rider problem, and COO may have moderate free-rider problem. The outcome of model 2 shows that CEO and CFO compensation rewarded by role contribution have significant influence on firm valuation; COO, CMO and CHO compensation rewarded by role contribution have moderate influence on firm valuation; while CTO compensation rewarded by role contribution have little influence on firm valuation and CTO compensation rewarded by role contribution have no influence on firm valuation. My result is consistent with agency theory since free rider may cause executive inertia, reduce individual IC productivity, and impair firm value. The findings suggest that pay-contribution compensation contracts and remuneration schemes focus on different executive positions and strategic roles of individual intellectual capital to avoid free rider problem.

In the past decade, public scrutiny surrounding rising levels of executive compensation has led to more stringent independence requirements for compensation committees. However, there is little research studying the effects of compensation committees on executive pay from the time these new requirements were implemented. My paper studies the effects of compensation committee chair personal ties to the CEO, economic interests, and group committee characteristics on both the level and structure of CEO compensation. My findings suggest that certain committee chair personal ties to the CEO are associated with both a higher level of CEO compensation and a higher percentage of CEO salary compensation. I also find that the more compensation committee chairs are paid, the less likely they are to create CEO pay plans with strong incentive provisions, but the more likely they are to increase the level of total CEO compensation. The higher the committee chair’s ownership percentage is in the company, the less likely they are to create low-risk CEO pay plans, and the more likely they are to increase the level of total CEO compensation.