This dissertation presents the results of three experimental research studies investigating factors within the executive compensation process and the effects these factors have on the pay-for-performance paradigm. The first study examines the influence of individual anchoring and the effects of private versus public decisions upon compensation awards by subjects role-playing as either an outside CEO or a non-CEO director. Research results show that subjects anchor to personal pay levels, CEO subjects shield the focal CEO from declining compensation when performance is below average, and that this phenomenon is mitigated when the individual director-subject decision is deemed to be made public. The shielding of compensation is consistent with Social Comparison Theory in that the CEO-subjects identify to and protect the CEO by limiting negative compensation awards of the CEO, and thus, representing an agency cost. The second study examines affect as an influencing factor on individual decision makers in the compensation setting process. Results are consistent with Prospect Theory in that, in the absence of a tangible payoff, personal affect is the outcome monitored and used by individuals in the decision process in the determination of a gain or loss. Using personal pay and personal performance as anchors for subjects role-playing as directors on the compensation committee, results indicate that subjects make decisions to maximize (minimize) positive (negative) affect in compensation awards to the focal CEO. The findings suggest that although individual anchors may interact and add to the complexity of the decision process, the outcomes are consistent with Prospect Theory. The third study examines group decision making as compared to individual decisions when making compensation awards. Results show that in a committee of individuals where a majority of beliefs is present, group polarization occurs and the compensation results are exaggerated as compared to the individual beliefs. The findings also suggest, though, that the appointment of a leader as chair of the committee, either in the majority or minority view, has a moderating effect on the group outcome. These results highlight the potential for agency costs in the group decision process that may be found in the executive compensation-setting environment. Overall, these results add to the knowledge of factors affecting executive compensation. These studies provide evidence that individual anchors, individual performance, individual affect, and the group decision process may add to agency costs and be contributing factors in the imperfection of the pay-for-performance paradigm. / Ph. D.

This study investigates the association between CEO severance agreements and corporate tax avoidance. Severance agreements, by providing executives with additional compensation when there is a change in employment status, should serve to encourage additional risk-taking, as reflected by increased tax avoidance activities. Using a large sample of aggregate compensation data, I find some evidence of a relation between the presence of a CEO severance agreement and tax avoidance. Using a smaller sample of hand-collected data, I find a significant negative relation between the magnitude of cash severance pay and tax avoidance and a significant positive relation between the magnitude of equity severance pay and tax avoidance. Overall, this study provides evidence that the structure and magnitude of severance agreements are related to tax avoidance. / Ph. D.

yes / This study examines the effects of firm performance and corporate governance on chief executive officer (CEO) compensation in an emerging market, Pakistan. Using a more robust Generalized Method of Moments (GMM) estimation approach for a sample of non-financial firms listed at Karachi Stock Exchange (KSE) over the period 2005 to 2012, we find that both current and previous year accounting performance has positive influence on CEO compensation. However, stock market performance does not appear to have a positive impact on executive compensation. We further find that ownership concentration is positively related with CEO compensation, indicating some kind of collusion between management and largest shareholder to get personal benefits. Inconsistent with agency theory, CEO duality appears to have a negative influence, while board size and board independence have no convincing relationship with CEO compensation, indicating board ineffectiveness in reducing CEO entrenchment. The results of dynamic GMM model suggest that CEO pay is highly persistent and takes time to adjust to long-run equilibrium.

Executive Compensation has received a lot of media and academic attention in the last decade. Much of that attention is focused on the gross levels of compensation and not the component structure of salary, stock, options, etc. that make up a compensation package. This paper examines the executive compensation structures of internet technology firms, which are becoming an increasingly important part of the economy. I use samples of newly public and more established companies from early and recent periods to determine if and how the composition of executive pay has changed from 1997 to 2013. My findings suggest a decrease in the use of both options and salary as a percent of total compensation, with an accompanying increase in stock and overall equity percentages, has occurred between early and recent periods. Additionally, I find there to be less reliance on options and a lower mix of equity-to-salary between firms that have just gone public and more established firms, again with an increased use of stock in the component structure.

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

Issues as to the suitability of executive compensation packages have obtained an ever increasing profile in recent years. Whilst there has been quite extensive empirical investigation of pay-performance sensitivity, the framework of performance-pay has received less attention in the literature and examination to date. Besides this - whilst there has been a quantum of investigation of relationships between compensation and performance, there has been less focus on case study based analysis. In this context, the current study makes a twofold contribution to the examination of executive directors’ remuneration in FTSE 350 companies. First, this research aims to empirically investigate linkages between the nature and amount of compensation packages and company performance with a particular focus on examining the extent of interrelationships between pay and performance over a ten year period from 1999 to 2008. Within the scope of a variety of theoretical perspectives, this deductive study puts a focus on addressing the question of whether managerial compensation is the greater influence on firm performance or whether it is the latter which has the greater influence on the former. Second, this study seeks to qualitatively add to the relevant literature by means of a longitudinal case study of remuneration at UK based major multi-national company, BP, over a ten year period from 2001 till 2010. Within the context of a variety of theoretical and institutional perspectives, this inductive study explores, by means of investigation of BP’s Directors Remuneration Reports, the role of the BP remuneration committee in setting the mechanisms and structures which determine the nature and extent of executive remuneration packages at BP and considers the wider generalisability of the findings therefrom. Overall the current study utilises a mixed methods approach via a combination both quantitative and qualitative modes of analysis – an approach which is relatively rare in the discipline of research into corporate governance and related issues. The outcomes from the empirical work show evidence of the presence of dual positive associations between executive compensation and company performance. However, the results do indicate that executive compensation is more influential in its effect on firm performance than the framework of performance-related pay. This finding is interpreted as lending support to the stewardship and/or tournament theories as to underlying drivers of executive remuneration in comparison with agency theory, represented by agent-principal or managerial hegemony perspectives, as an explanatory of the construction of executive remuneration and the link with firm performance. Similar to prior literature, the empirical findings indicate that equity-based compensation is more robust in the linkage with firm performance than cash pay dominated packages. However, the results showed that the existence of remuneration committees in general reveals insignificant and negatively related to total CEO/executive remuneration. This finding highlights therefore the need to put a focus on the actual role of compensation committee in setting the type and extent of executive pay packages in a large UK company. The outcomes from the archival case study also suggest that it is difficult to find significant support for a pure agency theory approach whereby shareholders seek to align their interests directly with those of their managers as a driver of executive compensation packages. There is more evidence suggestive of a managerial power/hegemony perspective which is heavily mediated by the presence of powerful non-executive directors and the institutional presence of the remuneration committee. Perhaps the most significant aspects to emerge from the case study are the importance of personal relationships and power at boardroom level. Beyond this the inferences of the supplementary content analysis conducted specifically on the Directors Remuneration Reports are suggestive of a focus on overall BP performance rather than on the specific activities and achievements of individual executive directors. In conclusion, the findings of the present study provide a wealth of detail both quantitative and qualitative as to the manner in which executive remuneration has been set in the UK in recent years and as to linkages both with corporate performance and underlying theories of the determinants of executive remuneration. As such it sheds light on an area of importance and one of continued private and public concern and may be of interest to those responsible for governance within firms and to wider public and regulatory interest as well as future researchers in the field.

After the Great Recession of 2007 there was a spotlight on executive compensation. The magnitude and structure of executive pay became an area of concern to the public. As a result, company management across all sectors had to find a way to offer competitive compensation plans that aligned the interest of shareholders with that of executives. The outcome was an increased focus on tying executive pay to company performance. The level of fixed-pay incorporated into target compensation began to decreases rapidly and was replaced by “at-risk” compensation. For some, this was a major achievement in the world of executive compensation, however, others view this change as potentially dangerous. I chose to analyze the pay-mix structure and annual incentive plans of a group of bellwether companies to see if this transition is increasing company’s exposure to fraud. In this essay I attempt to tie increases in at-risk pay to increases in fraud risk, while identifying incentive goals affected by common fraud practices.

This study examines the effects of research and development (R&D) reporting method and managerial knowledge of supervisor compensation on R&D project continuation decisions. The current study employs an experiment with a 2x3 between-participants design, manipulating both R&D reporting method (expense vs. capitalize) and knowledge of supervisor compensation (control group with no knowledge vs. knowledge of non-restricted stock compensation vs. knowledge of restricted stock compensation). Using salient short-term incentives to motivate real earnings management, this study demonstrates that capitalization may result in managers foregoing economically efficient R&D investment opportunities. The results indicate that managerial knowledge of supervisor compensation structure has little influence on managers’ R&D project continuation choices. However, when managers capitalizing R&D expenditures had knowledge that their supervisors received non-restricted (short-term) stock compensation their perceived personal responsibility for the decision significantly decreased. Participants who capitalized R&D expenditures and had knowledge that their supervisor received restricted (long-term) stock compensation rated the importance of making a decision to please their supervisor significantly higher than all other participants. Additionally, participants with knowledge that their supervisors restricted stock compensation were significantly more concerned about the likelihood of negative personal repercussions regardless of R&D reporting method. These findings contribute to the management accounting literature by providing new insights on the influence of knowledge of supervisor compensation on managerial decision making as well as additional insights into the factors that contribute to and limit real earnings management. This study also extends the literature on R&D by providing evidence of the potential for real earnings management when R&D expenditures are capitalized in the absence of personal responsibility.

In essay one, my primary objective is to see the sensitivity of foreign exchange rate risk on firm performance in US manufacturing industry and examine if the hedging help reduce the foreign exchange rate risk. I am particularly interested in manufacturing industry because of the nature of business operation of manufacturing firms. Manufacturing firms in US are not only exposed to foreign exchange fluctuation from sales and revenue but also are exposed to foreign exchange rate risk for procurement, placement and investment. I find that the firms with extreme foreign exchange rate risk exposure exhibit lower daily return and firms with very low foreign exchange rate risk exhibit higher daily return using the portfolio approach. I also find that the firms that hedge has lower foreign exchange rate exposure compared to firms that don’t hedge. The coefficient for hedge is negative and statistically significant. In essay two, I investigate the effect of executive compensation on exchange rate risk in US manufacturing industry. There is a large theoretical and empirical interest on executive compensation using agency framework that investigates the conflict of interest between shareholders and corporate executives. That interest has been largely aligned with the use of managerial performance dependent on observable measures of firm performance. Since US manufacturing firm is largely exposed to foreign exchange transactions by design, I investigate if the value of in-the-money unexercised vested executive stock option has any impact on foreign exchange rate exposure. I investigate if the value of in-the-money unexercised unvested executive stock option has any impact on executive stock option. Using pooled OLS, fixed effect panel data and random effect panel data, I find that in all 3 model value of in-the-money unexercised vested executive stock option has negative coefficient and is statistically significant. At the same time in all 3 models the value of in-the-money unexercised unvested executive stock option is positive and is statistically significant.

I analyze the effect of various risks faced by commercial banks on the executive compensation in banking industry. Commercial bank executives are risk averse due to the regulatory pressure in addition to board governance mechanism. Commercial banks face various risks because of the regulatory mechanism and unique asset structure of the firm. So, it is expected that they should associate their own pay and pay-performance sensitivities (PPS) with the risks their banks face. I find that bank executives associate their performance based pay with both idiosyncratic risk and systematic risk. But they associate their fixed pay only with systematic risk. The risk based PPS is also affected by the idiosyncratic risk but not by the systematic risk. Both asset return risk and insolvency risk have significant positive effect on PPS. Bank executives put significantly higher emphasis on the fixed compensation in terms of salary and bonus, and significantly lower emphasis on the performance based compensation. They also put minimum emphasis on the risk based PPS although they put significant emphasis on return based PPS. These indicate the risk-averse nature of the bank executives due to the regulatory pressure in addition to board governance mechanism.