Determinants Of Ceo Compensation

International Research Journal of Finance and Economics ISSN 1450-2887 Issue 32 (2009) © EuroJournals Publishing, Inc. 2009 http://www.eurojournals.com/finance.htm

Determinants of CEO Compensation Empirical Evidence from Pakistani Listed Companies Syed Zulfiqar Ali Shah PhD Scholar, Mohammad Ali Jinnah University, Islamabad E-mail: [email protected] Tariq Javed Associate Professor, Faculty of Management & Social Sciences Mohammad Ali Jinnah University, Islamabad E-mail: [email protected] Muhammad Abbas PhD Scholar Faculty of Management Sciences International Islamic University Islamabad E-mail: [email protected] Abstract Since 20th century the determinants of CEO compensation remained the main focus of discussion and debate among the academic works. As the academic progress has been growing in this field but the dilemma remains unsolved. There were and still disagreements exist regarding various attributes that determine CEO compensation and most of the studies have been limited to monetary rewards. Our study is motivated by the desirability of exploring the determinants of CEO Compensation in a transitional economy. We have taken panel data including time series from 2002 to 2006 and cross sectional incorporating un balanced panel. To analyze the relationship of different variables we have applied common effect model after correlation and descriptive statistics. We incorporated financial and nonfinancial (i.e. Corporate Governance) variables in finding out determinants. As far as performance variables are concerned we have not found any significant evidence of their effect but size effects positive on CEO compensation. Different proxies of Corporate Governance have also been found statically significant with CEO Compensation. Keywords: Corporate Governance, CEO Compensation

Introduction Chief Executive Officer compensation is the economic reward given to him measured by his basic pay, bonuses and stock options. During the 20th century extensive research has been conducted and the debate on CEO compensation has got much more attention and controversy. According to Tosi & colleague (1989) about 250 studies on executive compensation and performance have been conducted during last century but the outcomes of these studies are disappointing (Cited by Miller; 1995). Since many writers have attempted to find the determinants of CEO compensation using different methods. Still controversy exists among the researchers regarding the most important determinants of CEO

International Research Journal of Finance and Economics - Issue 32 (2009)

149

compensation, their attributes, and how they influence executive compensation. The reliability of the sources used to acquire data on CEO compensation by different studies, is also controversial and debatable. Other disagreements arise due to different methods used by different studies to find relationship among various determinants of executive compensation. The academic works on CEO compensation have been diversified, as different writers see the determinants of CEO compensation from different perspectives. Since the internationalization, workplace diversification, profit maximization and the demise of various large companies strengthens the need for a synthesis on the determinants of CEO compensation globally. Some writers attempt to find the economic determinants, some try to find the social factors of executive compensation, some have used agency theory approaches by focusing governance/power/ownership attributes, while other tries to find the determinants on the basis of profit/sales or performance, but they have their own limitations which gives a misleading picture of the issue. These attempts of exploring the relationship between CEO compensation and its determinants have brought the debate on a crucial stage. Less work has been done on the links between individual motives, motivation and compensation in the context of Chief Executives compensation. In this paper we will discuss various research works done on the determinants of CEO compensation, the controversies in their results, argue on the importance of intrinsic rewards along the monetary rewards and give some future research implications. Throughout history the researchers have found many but complex determinants of CEO compensation. Most of the academic debate on the determinants of CEO compensation moves around the economic factors. Due to the varying market demands, workplace diversity, heterogeneity in organizational levels, and growth opportunities, the operations of firm have got complexity. As a result, the CEOs ability to sustain in this dynamic environment and the level of his compensations has gained extensive attention both in academic and non-academic concerns. In the academic works of determinants of CEO compensation firm size, firm performance, market risk, power, tenure, CEO ownership, and firm growth have been used to determine the compensation of executives. The executive compensation in almost all the researches is measured by cash compensation and bonuses paid to the CEO yearly. On the other hand, the determinants of CEO compensation with different attributes have different measures in the diverse academic works.

Literature Review Firm Size and CEO Compensation Historically the academic works show a strong relationship between the firm size (usually measured in terms of annual sales or total assets) and CEO compensation. Roberts (1959) and McGuire & colleagues (1962) found that CEO compensation was more closely related to size of the firm when measured by sales, and less related to profits. This relationship may reveal that the when sales increases, CEOs are paid more than they are paid with any increase in profits, then CEOs will put more efforts in sales maximization rather profit maximization. Hijazi and Bhatti (2007) found that the Company size is closely related to job complexity and employer's ability to pay in determining executive pay. Lewellen & Huntsman (1970) found contradictory results showing a positive relationship between compensation and profits rather than sales. The ultimate purpose of business for both shareholders and executives is profit maximization of the firm and CEOs efficiently contributing to profit maximization get more in terms of remuneration. Tosi et al (2000) found strong relationship between organizational size and CEO compensation, which shows that CEOs may put their efforts to increase the size in order to maximize their compensation. Some later studies show that firm size is considered to be the strongest determinant of CEO compensation when measured in terms of total assets (Ciscel, 1974; Finkelstein & Hambrick, 1989; Chalmers et al, 2006). As CEOs having higher quality skills, qualification and diverse characteristics are required for larger firms and they are paid accordingly (Chalmers et al; 2006). Lambert &

150

International Research Journal of Finance and Economics - Issue 32 (2009)

colleagues (1991) found weaker relationship between size (measured by sales) and executive compensation than suggested by the previous researches and argued that changes in organizational size do not primarily affect CEO compensation. Boyd (1994) found weak relation between CEO compensation and firm size measured by log of net sales. Conversely, some studies measured the firm size in terms of sales and find a strong relationship with the CEO compensation (Deckop, 1988: Jones, Kato 1996; Magnan et al, 1995; Kuskiut, 1989). But the overall differing results are disturbing. The methods used to analyze the data have great impacts on the outcomes of the study. Different studies have used different methods to analyze the data. Some have applied correlation, while others have used regression analysis and multiple-regression. Similarly the databases used to find the relationship between various attributes of firm size and CEO compensation differ in most studies. These controversies results in the lack of reliability and confidence on the findings, limiting their practical applicability Firm Performance and CEO Compensation Firm performance is also considered to be the significant determinant of CEO compensation. The literature on CEO compensation emphasizes that executive compensation should be given on the basis of performance. Performance in academic research is measured by different profit related variables. In the academic works of Executive compensation, ROE (return on equity) is used as a measure of firm performance (Finkelstein, Hambrick, 1989), stock market capitalization showing value of the company in stock market is used as stock performance in UK and shareholders’ return showing percentage gain for shareholders (dividends, capital gain) is used as a measure of stock market performance in Japan (Kubo, 2001). Annual stock market return, including capital gain plus dividend (%) and Return on Assets ROA Annual return on assets as measured by EBIT/ total assets at year end are used to measure firm performance by Chalmers &colleagues (2006). ROA (Return on Assets), defined as gross profit divided by total assets; and MARGIN (Profit margin) defined as gross profit divided by sales labor productivity and PRODUCT as an alternative firm performance measure are also used (Jones & Kato, 1996). Some studies find that the profit is a better predictor of CEO compensation than sales. Firm profitability was positively related to executive compensation, ROE was unrelated to salary but positively related to bonuses (Finkelstein, Hambrick 1989; Deckop 1988). Jensen & Murphy (1990) show a weak relationship between CEO compensation and stockholders wealth. Studies by Fleming & Stellios (2002) and some Australian studies (Izan et al, 1998; Defina et al, 1994) show no relation between compensation and firm performance. Tosi & colleagues (2000) also finds a weak relationship between compensation and performance. Kubo (2001) surprisingly finds a strong association between executive pay and company’s stock market performance in U.K firms and a weak relation between executive pay and company stock market performance in Japanese firms. Chalmers & colleagues (2006) shows that Return on assets was positively associated with all compensation components except shares, only bonus component of executive compensation was associated with annual stock market returns, and CEO cash bonus was positively associated with both market and accounting returns. Different studies have used different methods to analyze the data. Some have applied correlation, while others have used regression analysis and multiple-regression. Daniel J. Miller (1995 pp. 1362) quotes: “It is disturbing that, in the last 70 years, studies have yielded either no empirical evidence that increases in CEO pay are tied to performance or have had significant results but explained less than 10 percent of the variance in change in CEO salaries, presumably because of the methods used. At the same time, corporations are adamant in their defense of their CEOs' salaries and the notion that salary increases are based on firm performance.” These controversies results in the lack of reliability and confidence on the findings, limiting their practical applicability

International Research Journal of Finance and Economics - Issue 32 (2009)

151

CEO Tenure Executive tenure has also got some attention among the investigators of CEO compensation. The executive tenure in different studies has been measured by the number of years the executive has remained CEO. Finkelstein & Hambrick (1989) found that there was no significant relationship between CEO tenure and pay and it became weaker as the tenure increased. They explain it as a possibility that after few years with any organization, the CEOs prefer to have other form of remuneration to cash compensation. It was later confirmed by Garen (1994) who found that about 76% of the total incentives of CEO are stock based incentives, which are three times greater than pay based incentives. Finkelstein Hambrick (1989) argued that the total compensation and salaries of CEOs were not affected by their general management experience but bonuses were associated to it. According to Carothers (2004) top executive salary is found to be statistically associated with the number of years CEO remains with the company. Hill & Phan (1991) argued that age and tenure have little or no effect on CEO compensation. Conversely, Bertsch & Mann (2005) found a strong relationship between CEO pay and tenure. Again, there is no consensus on the issue whether CEO tenure can be used to determine the CEO cash compensation or not. Power Determinant Power is defined here as the capacity of individual actors to exert their will (Hickson, Lee, Schneck, & Pennings, 1971; MacMillan, 1978; Pfeffer, 1981; Fong, 2004; Finkelstein, 1992) Power of CEO has received considerable attention among the recent researches. Power balance is considered to be the important factor in defining and explaining the link between owners/shareholders and executives. Agency theory literature shows that power balance between executives and shareholders determine the CEO pay. Kathleen (1989) argues that agency problems may raise when interest of CEO (agent) diverges, then the role of BOD play its role as monitoring team over CEO over his performance. The power of CEO comes from difference sources. It may be the formal authority delegated by the principle himself, to make high level decisions. It may come as a result of ownership of CEOs or their family members in the stock. He may have direct or indirect effect on the compensation committee, external consultants or BOD. CEO duality is another source of power where CEO of any organization is also the chairperson of board of directors (Rechner and Dalton, 1991). The agency theorists also see the CEO compensation in the direction of principal-agent relationships. A core agency problem confronting the shareholders is moral hazard, where CEO may misuse the resource of organization in his own self interest (Fong, 2004). Finkelstein & Hambrick (1989) argued that power between board of directors and CEO is an important determinant of CEO compensation. According to Salancik & Pfeffer (1980) CEO ownership or shareholdings is one of the sources of power that affects CEO compensation: (cited by Finkelstein & Hambrick, 1989). Garen (1994) found that the stock based incentives are about 76% of the total compensation given to CEO and the stock based programs are three times greater than pay based programs. This may shows that CEOs want to acquire more power having ownership in the firm by acquiring more stock options. Finkelstein & Hambrick (1989) found that CEO compensation in management-controlled firms was influenced by size, firm performance, complexity, and the CEO's general management experience, however, in both owner-managed and externally controlled firms, pay was affected only by size (and CEO tenure in the EC group). It is not necessary that the power attained by the executives can only be used to maximize their own profits at the expense of the shareholders. The power can be used in ways to increase performance of the firm, as the executive’s personality attributes also affect the use of power. Adams & Jacobsen (1964) argued when individual feel that they are being overpaid they attempt to increase their effort to produce more quality work. Adams (1965) further argued that when individuals feel inequity it is in their own self-interest to reduce that inequity. It may be argued that when CEOs will be paid more as

152

International Research Journal of Finance and Economics - Issue 32 (2009)

compared to their peers (CEOs of other organization) they will put more efforts to increase outputs. Mc Eachern (1975) points out that the firm ownership structure (in terms of widely held or closely held) indicates whether firms are controlled by CEOs or shareholders (cited by Magnan et al; 1995). On this basis Magnan et al (1995) found that the compensation level in closely held firms (owner-controlled) is lower than the widely held (management/CEO controlled) firms. Fong (2004) founds that CEOs having power do not respond to pay inequity, while overpaid CEO respond to inequity when they have low power and they are more likely to increase firm performance than their other counterparts. This may show that CEOs strive for power when their compensation needs are being fulfilled and they put more efforts to increase firm performance to win the trust of shareholders. However, previous studies do not explain how CEOs respond to their power insufficiency. It also emphasizes to warrant further investigation on the role of BOD in resolution of conflicts among BOD, shareholders, and CEO while formulating compensation policies for the CEO. Contingency Factors Along with size, performance, ownership and power factors that determine the CEO compensation, the contingency approaches to CEO pay have also great importance. Sander and Carpenter (1998) found that the CEO compensation has significant relation with the internationalization of business, which further suggests that as the business expands its operations from domestic to international levels, the responsibilities of CEO also increase. It can be linked with the size of the organization, like increase in size and operations of organization results in an increase in the compensation of CEO. Also it shows that the strategies adopted by the organizations in consistent with the dynamic market demands can influence CEO compensations. Finkelstein & Hambrick (1989) argue that managerial labor market that can affect the supply and demand for executives in an industry can determine the CEOs compensation, thus the CEOs value in the managerial labor market may increased by the human capital and his personal managerial expertise. The nature of industry determines the R&D level of the organization and its strategic approaches. More dynamic are the industries, more will be the demand and requirement for R&D and more comprehensive strategies needs to be adopted. A study by Balkin, Markman, & Mejia, (2000) finds that the industry and the R&D have key role in determination of executive pay. Another contingency approach to CEO compensations can be understood by the studies made by Napier & Smith, 1987; Kerr, 1985; who argues that diversification can be used to determine CEO compensation. Data and Methodology The sample comprises of 114 listed companies, selected from the KSE listed companies, spanning over different sectors, for the period of 2002-2006, As data contains both time series and cross sectional data so for analysis panel data analysis has been used. We excluded: 1. Financial companies (because their capital structure and profits are different from the other companies) 2. Companies for which the data could not be found.

Methodology Chief executive Officer is the key authority having responsibility for the overall operations of the firm. Obviously, the entire academic works on the CEO compensation aimed to find the determinants of CEO compensation to provide a fit between the interest of the stockholders and CEOs, so each could achieve his own goals. On the business of literature reviewed and data availability in the Pakistani context we have developed the following model for determining the determinants of CEO Compensation.

International Research Journal of Finance and Economics - Issue 32 (2009)

Board size and Board Independence and Institutional ownership

Ownership structure and ownership concentration

153

Firm performance measured by ROE and ROA

Audit Committee Independence and Shareholders activism

Firm size Monetary rewards (salaries, bonuses and options)

Model: Determinants of CEO compensation

The above model provides a comprehensive overview of the determinants of CEO compensation which includes corporate Governance view as well as firm size and performance view. For the analysis purposes after descriptive analysis and correlation matrix we used common effect model of panel data analysis techniques has been used which is depicted in the following equation: CEOC it = α0 + β1 ROE it + β2 ROA it + β3 Sizeit + β4 OS it + β5 OC it + β6 SHAit +β7 BI it + β9 BSit + β8 ACI it + β9 IOit + β8 CEOD it + є it Where; CEOC (CEO compensation), ROE (Return on Equity), ROA (Return on Assets), Size (Log of Total Assets), OS (Ownership Structure, OC (ownership concentration), SHA (Shareholders Activism), BI (Board Independence), BS (Board Size), ACI (Audit Committee Independence, IO (Institutional Ownership), CEOD (CEO duality).

Variable Description Dependent variable CEO Compensation CEOD compensation has been taken as dependant variable which is measured by Log of their salaries+ benefits. Same technique has been used in a majority of literature discussed in literature review section. Determinants of CEO compensation After having the intensive literature review and on the basis of data availability in Pakistani context following variables has been selected for analysis. Performance Measures Being in line with Keryn Chalmersa, Ping-Sheng Kohb,_et. Al (2005 & 2006) & Finkelstein; Donald C. Hambrick (1989) ROA (N.I+Interest/Total assets) & ROE (N.I/ Share Holders Equity) have been taken as performance measures.

154

International Research Journal of Finance and Economics - Issue 32 (2009)

Size of the Firm This variable has been found in majority of the research papers like Finkelstein; Donald C. Hambrick (1989), Deckop (1988), David H. Ciscel (1974) to find out its relationship with CEO compensation. We also have measured it as log of total assets. Corporate Governance variables A huge research is agreed that corporate governance play a viltal role in CEO compensation. Different researchers have used different variables as proxy of corporate Governance. On the basis of literature we have selected the following variables as a proxy of Corporate Governance. Being in line with Conyon and Peck (1998) CEO Duality has been taken in this study which is measured by taking a dummy putting one if duality is present otherwise 0. Same authors also took Board independence (No. of Independent Non executive Directors/ Total No. of Directors.) as another proxy of corporate Governance. We also followed them. Henderson and Fredrickson (1996) choose another variable as one of proxy for Corporate Governance named Board size (No. of Directors present in Board).

Ownership structure (Shares held by Board of directors/ Total No. of shares) Ownership concentration (Shares held by top 10 shareholders/ Total No. of Shares) Audit Committee independence (No. of NED’s in Audit committee/ Total No. of Directors in Audit Committee)

Results To find out the data characteristics we first performed descriptive statistics, the results of which r shown in following table. Table 1: Mean Median SD Kurtosis Skewness Minimum Maximum

Descriptive Statistics CEOC 14.869 15.032 1.231 0.400 0.167 12.206 19.044

ROA 0.047 0.039 0.138 9.445 -1.360 -0.719 0.481

ROE 0.776 0.105 7.122 101.761 10.057 -3.737 72.143

Size 7.838 7.648 1.770 -0.804 -0.107 3.523 11.090

CEO D 0.320 0.000 0.469 -1.418 0.781 0.000 1.000

BS 2.088 1.946 0.204 1.114 1.458 1.946 2.708

B.I 0.568 0.615 0.247 -0.105 -0.835 0.000 0.909

ACI 0.780 0.800 0.253 1.644 -1.277 0.000 1.000

OC 0.753 0.800 0.190 2.370 -0.754 0.000 1.358

O.S 0.267 0.154 0.276 -0.783 0.743 0.000 0.965

IO 0.413 0.344 0.300 -0.265 0.653 0.000 1.357

SHA 0.656 0.625 0.210 0.226 0.059 0.100 1.286

After performing descriptive statistics correlation analysis has been performed, Results of which are shown in the following table.

International Research Journal of Finance and Economics - Issue 32 (2009) Table 2: CEOC ROA P value ROE P value Size P value CEO D P value BS P value B.I P value ACI P value OC P value O.S P value IO P value SHA P value

155

Correlation Matrix CEOC 1.00 0.29 0.00 0.03 0.76 0.59 0.00 -0.29 0.00 0.33 0.00 0.01 0.92 0.12 0.22 -0.01 0.92 -0.58 0.00 0.57 0.00 -0.17 0.08

ROA

ROE

Size

CEO D

BS

B.I

ACI

OC

O.S

IO

SHA

1.00 -0.22 0.02 0.28 0.00 -0.12 0.22 0.18 0.06 0.10 0.31 -0.09 0.36 0.10 0.31 -0.16 0.10 0.04 0.33 0.25 0.00

1.00 -0.07 0.48 -0.06 0.54 0.06 0.54 -0.06 0.54 -0.04 0.65 0.01 0.92 -0.09 0.36 -0.01 0.92 -0.15 0.18

1.00 -0.16 0.10 0.43 0.00 -0.08 0.50 0.06 0.54 -0.04 0.65 -0.59 0.00 0.55 0.00 -0.10 0.43

1.00 -0.16 0.10 -0.14 0.33 -0.32 0.00 -0.07 0.48 0.14 0.33 -0.19 0.05 -0.12 0.22

1.00 -0.12 0.22 0.25 0.01 -0.08 0.50 -0.38 0.00 0.42 0.00 -0.24 0.00

1.00 0.38 0.00 0.02 0.84 -0.14 0.33 0.03 0.76 0.11 0.26

1.00 0.03 0.76 -0.20 0.04 0.25 0.00 -0.04 0.68

1.00 0.19 0.05 0.08 0.50 0.02 0.84

1.00 -0.68 0.00 0.18 0.06

1.00 -0.22 0.00

1.00

Bold figures are significant at 95% confidence level.

From the above table CEO compensation is significant positively correlated with ROA, size of the firm, Board Size and Institutional Ownership which shows when these variables increases CEO compensation also increases or in other words the companies which have more resources, have more performance and shares are also in directors hands, compensation of CEO’s are maximum in those companies, but is negatively significant correlated with ownership structure and CEO duality. It shows that the firms which has separate CEO and Chairman positions, the compensations of CEO’s are not much in those companies as compared to those who have dual positions. With all of the other variables it has insignificant relationship. As far as the relationship of other variables are concerned with one another ROA is significantly correlated with ROE, Size and Shareholders activism. ROE doesn’t show any significant relationship other than ROA in our sample. All of other significant relationships are bolded in the above table. Results of common effect model are presented as follows: Regression Statistics R Square Adjusted R square

0.99282752 0.981178338

R square shows that variation explained by the independent variables is 99.28%. which means the variables which can be incorporated as determinants of CEO compensation and have not been included in the study are only .72% which is very rare. According to these results we can say the independent variables incorporated in the study explains maximum of relationship.

156

International Research Journal of Finance and Economics - Issue 32 (2009)

Description ROA ROE Size CEO D Board Size B.I A.C.Ind. O.C O.S Inst. Ownership SHA

Coefficient -0.497478004 0.014508357 0.413206846 0.052919615 4.154512306 -1.355718147 -0.200678716 1.511657066 0.516793819 0.540066124 1.187137543

T statistics -0.451929872 0.725197374 4.148435663 0.174976197 8.105068974 -2.292411465 -0.309484056 2.054842523 0.6729154 0.77806712 1.839753911

In the above table results of common effect model are interpreted. Which shows that Size of the firm has significant positive effect on CEO compensation. In other words we can say that big companies pay more to their CEOs. Our results are in line with Finkelstein; Donald C. Hambrick (1989) study conducted in Sydney, John R. Deckop (1988) and David H Ciscel (1974). Board size has also been found as having positive impact on CEO compensation. CEO’s of Big boards get more salaries then the short Boards our results are inline with Henderson and Fredrickson (1996), Apparently it is very confusing that Big Boards means diversified Boards. Why CEO’s of these Boards get more compensations. Our this confusion has been resolved by the result of other variable which is Board Independence. Board Independence has statistically significant negative effect on CEO compensation which shows Independent Boards doesn’t allow more compensations. The Boards which are big and have majority of executive Directors they would have maximum compensations for CEO’s but this effect can be rectified by the inclusion of Independent Non executive Directors. In a study conducted by Conyon and Peck (1998) BI was not having any effect on CEO Compensation. But in this study we have found statistically significant effect. Ownership concentration has positive significant effect on CEO compensation. Which shows that the companies in which shares are in limited hands CEO’s can dictate their terms for their compensations because CEO can be taken as their own man. Our results are contradictory to Gold Berg and Idson who find negative relationship and gave the justification that by being shares in limited hands Agency cost reduces that’s why there is a negative relationship. But we found vice versa results as far as Pakistani scenario is concerned. We also found a slightly positive effect of Shareholders activism on CEO compensation. Performance has not been found having statistically significant effect on CEO compensation. Our results are inline with Katsuyuki Kubo February (2001) The other variables also don’t show any significant relationship with CEO Compensation. Following table shows the validity of Model: F Statistics 1157.709575

Significance F 1.15113E-92

Value of very small significance F shows that Model is valid for the study.

Conclusion There is an extensive literature available on the determinants of CEO compensation but the findings among the studies are not compatible with each other. Overall, most of the academic works on the determinants of CEO compensation emphasizes on economic determinants like firm size (measured in terms of total assets or sales), firm performance (measured by sales, profits, ROE, ROA, stockholders wealth) giving controversial and mixed results that lack the value of their practical applicability in firms.

International Research Journal of Finance and Economics - Issue 32 (2009)

157

As far As our study is concerned we have tried to incorporate both economical and non financial variables to find out the determinants of CEO compensation. Our results suggest that: 1. Performance doesn’t play any role in CEO compensations far as Pakistani financial market is concerned but size of firm plays a significant role in the decision of CEO compensation. 2. It was very fruitful to incorporate other variables in finding out CEO compensation’s determinants. We found that more diversified and independent Boards can decide unbiased CEO Compensation other that skewed Boards where CEO’s can dictate their terms. Agency problems among the CEOs, Board of Directors and Shareholders are also very complex and academic works could not explain the resolutions of conflicts and problems among BOD, shareholders, and CEO. Also previous studies do not explain how CEOs respond to their power insufficiency. These controversial results suggest to replicate the determinants of CEO compensation in other areas especially in transitional economies. We argue that work on CEO compensation should be replicated in other areas especially in developing economies to provide a broader picture of the issues on hand. We also argue that not one factor can determine but there are multidimensional determinants of executive compensation contingently.

References [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12]

[13] [14]

[15]

Adams, J. S. 1965. Inequity in social exchange. In L. Berkowitz (Ed.), Advances in experimental social psychology, Vol. 2: 267-299. New York, NY: Academic Press. Adams, J. S. & Jacobsen, P. R. 1964. Effects of wage inequities on work quality. Journal of Abnormal and Social Psychology, 69(1): 19-25 Balkin D.B, Markman, G.D, & Gomez-Mejia, L. R. (2000). Is CEO pay in high technology firms related to innovation? Academy of Management Journal, 43(6): 1118-1129. Bertsch K, Mann C. (2005). ‘CEO Compensation and Credit Risk. Special Comment.’ New York, July. Boyd B.K, (1994).‘Board Control and CEO Compensation.’ Strategic Management Journal, Vol. 15, No. 5. pp. 335-344. Brookman J.T. Jandik. T. Rennie Craig G, (2006). ‘A Comparison of CEO Compensation Data Sources.’ January 17, JEL Classification: G34; J33 Carothers. B, 2004. ‘Factors Affecting Chief Executive Officer Salaries: Is Executive Compensation Mostly Determined by Firm Profits?’ Shippensburg University; April. Castanias, R. P., & Helfat, C. E. (1991). ‘Managerial resources and rents.’ Journal of Management, 17(1), 155–171. Chalmers. Keryn; Koh. P.S; Stapledon. G, (2006). ‘The determinants of CEO compensation. Rent extraction or labor demand?’ The British Accounting Review 38, 259–275 Ciscel. D. H, (1974). 'Determinants of executive compensation'. Southern Economic Journal.’ 40, 613-617. Cadbury, Core, J. W., Holthausen, R. W., & Larcker, D. F. (1997), “Corporate governance, CEO compensation, and firm performance.”, Journal of General Management, 22(1): 24- 37. Conyon, M J. and Peck, S. I. 1998,” Board Control, Remuneration Committees, and Top Management Compensation”The Academy of Management Journal, Vol. 41, No. 2, pp. 146157 Deckop. John R, (1988) ‘Determinants of Chief Executive Officer Compensation.’ Industrial and Labor Relations Review, Vol. 41, pp. 215-226. Defina, A. Harris, T, Ramsay, I, (1994). ‘what is reasonable remuneration for corporate officers? An empirical investigation into the relationship between pay and performance in the largest Australian companies.’ Company and Securities Law Journal, 12, 341–356. Finkelstein, S. 1992. Power in top management teams: Dimensions, measurement, and validation. Academy of Management Journal, 35(3): 505-538.

158

International Research Journal of Finance and Economics - Issue 32 (2009)

[16]

Finkelstein, S. & Hambrick, D. C. (1989). ‘Chief executive-compensation: A study of the intersection of markets and political processes.’ Strategic Management Journal, 10(2): 121-134. Finkelstein S; Boyd B.K, (1998). ‘How Much Does the CEO Matter? The Role of Managerial Discretion in the Setting of CEO Compensation.’ The Academy of Management Journal, Vol. 41, Special Research Forum on Managerial Compensation and Firm Performance. pp. 179-199. Finkelstein. S & Hambrick, D. C. (1988). ‘Chief executive compensation: a synthesis and reconciliation.’ Strategic Management Journal, 9, 543–558. Fleming, G., Stellios, G., (2002). ‘CEO compensation, managerial agency and boards of directors in Australia.’ Accounting Research Journal 15 (2), 126–145. Fong E.A, (2004). ‘Chief Executive Officer (CEO) Responses To CEO Compensation Equity.’ University of Florida. Garen J.E, (1994). ‘Executive Compensation and Principal-Agent Theory.’ The Journal of Political Economy, Vol. 102, pp. 1175-1199. Hickson, D. J., Hinings, C. R., Lee, C. A., Schneck, R. E., & Pennings, J. M. 1971. Strategic contingencies theory of intraorganizational power. Administrative Science Quarterly, 16(2): 216-229. Hijazi S.T & Bhatti K.K, (2007). ‘Determinants of Executive Compensation and Its Impact on Organizational Performance.’ Compensation & Benefits Review, Vol. 39, No. 2, 58-68, DOI: 10.1177/0886368707299176 © 2007 SAGE Publications. Hill. C W. L; Phan. P, (1991). ‘CEO Tenure as a Determinant of CEO Pay.’ The Academy of Management Journal, Vol. 34, pp. 707-717. Izan, Y., Sidhu, B., Taylor, S., (1998). ‘Does CEO pay re.ect performance? Some Australian evidence.’ Corporate Governance 6 (1), 39–47. Jones D C; Kato T(I 996). ‘The determinants of chief executive compensation in transitional economies.’ Evidence from Bulgaria.’ Labor Economics. 3, 319-336 Kathleen M. Eisenhardt, (1989). ‘Agency Theory: An Assessment and Review.’The Academy of Management Review, Vol. 14, No. 1, pp. 57-74 Kubo. K, (2001-2). ‘The Determinants of Executive Compensation in Japan and the UK: Agency Hypothesis or Joint Determination Hypothesis?’ CEI Working Paper Series, No. 20012 Institute of Economic Research Hitotsubashi University. Kuskuit P.F. (1989). ‘Firm Size and Executive Compensation.’ The Journal of Human Resource. Vol 25. 90-105. Jensen. M.C; Murphy. K.J, (1990). ‘Performance Pay and Top-Management Incentives.’ The Journal of Political Economy, Vol. 98, pp. 225-264. Kerr, J. L. (1985). Diversification strategies and managerial rewards: An empirical-study. Academy of Management Journal, 28(1): 155-179. Lambert. R.A., Larcker D.F., and Weigelt, K. (1991). ‘How Sensitive is Executive Compensation to Organizational Size?’ Strategic Management Journal, Vol. 12, pp. 395-402. Lewellen. Wilbur. G; Huntsman. Blaine. (1970).. ‘Managerial Pay and Corporate Performance.’ The American Economic Review, Vol. 60, pp. 710-720. MacMillan, I. C. 1978. ‘Strategy formulation: Political concepts,’ St. Paul: West Publishing Company. Magnan M.L, St-Onge, Thorne L. (1995). ‘A comparative analysis of determinants of CEO compensation between Canadian and U.S firms.’ Industrial Relations, Vol 50,297-319. McGuire Joseph W; Chiu John S. Y; Elbing Alvar O. (1962),. ‘Executive Incomes, Sales and Profits.’ The American Economic Review, Vol. 52, pp. 753-761. Miller. D J. (1995), ‘CEO Salary Increases May Be Rational after All: Referents and Contracts in CEO Pay.’ The Academy of Management Journal, 38, pp. 1361-1385 Napier N. K. & Smith, M. (1987). ‘Product diversification, performance criteria and compensation at the corporate manager level.’ Strategic Management Journal, 8(2),195-201.

[17]

[18] [19] [20] [21] [22]

[23]

[24] [25] [26] [27] [28]

[29] [30] [31] [32] [33] [34] [35] [36] [37] [38]

International Research Journal of Finance and Economics - Issue 32 (2009) [39] [40] [41] [42] [43]

[44]

159

O’Reilly, C. A, Main, B., & Crystal, G. (1988). ‘CEO compensation as tournament and social comparison: a tale of two theories.’ Administrative Science Quarterly, 33, 257–274. Pfeffer, J. 1981. Power in organizations. Marshfield, MA: Pitman. Rechner, P. L. & Dalton, D. R. 1991. CEO duality and organizational performance: A longitudinal analysis. Strategic Management Journal, 12(2): 155-160 Roberts, David. (1956). "A General Theory of Executive Compensation Based on Statistically Tested Propositions." Quarterly Journal of Economics 70(2): 270-94. Tosi, H. L., Werner, S., Katz, J. P., & Gomez-Mejia, L. R. (2000). ‘How much does performance matter? A meta-analysis of CEO pays studies.’ Journal of Management, 26(2): 301-339. Westphal, J., & Zajac, E. J. 1995. Who shall govern? CEO/board power, demographic similarity, and new director selection, Administrative Science Quarterly, 40: 60-83.