Determinants of CEO Pay

This post comes to us from Brian Cadman of the School of Accounting at the University of Utah, Sandy Klasa of the Department of Finance at the University of Arizona, and Steve Matsunaga of the Department of Accounting at the University of Oregon.

In the paper, Determinants of CEO Pay: A Comparison of ExecuComp and Non-ExecuComp Firms, we document systematic differences in contracting environment characteristics between ExecuComp and non-ExecuComp firms that are likely to impact firms’ executive compensation contracts. The ExecuComp database provides an easy-to-use data source of a relatively broad range of firms, including the largest and arguably most important firms in the economy. As a result, the database is extensively used to investigate a wide range of governance and compensation issues, though little is known regarding the governance structures and compensation functions of firms not included in the database, or how they differ from those of firms included in ExecuComp.

We hypothesize that the greater firm complexity, analyst following, and stock liquidity associated with ExecuComp firms alters the contracting environment for these firms, which leads to three empirical predictions. First, we predict that ExecuComp firms place a greater weight on earnings and stock returns in CEO cash compensation contracts. Second, we predict that the weight on earnings will be more sensitive to a firm’s growth opportunities for ExecuComp firms. Third, we predict that the positive association between institutional ownership concentration and CEO stock option incentives documented by Hartzell and Starks (2003) will be stronger for ExecuComp firms than for non-ExecuComp firms.

The findings support our hypotheses and suggest that differences in contracting environments between ExecuComp and non-ExecuComp firms lead to differences in the structure of CEO incentive contracts and the role played by external monitors, such as institutional shareholders in setting CEO incentives. Overall, our findings highlight the importance for future researchers to consider how a firm’s contracting environment can affect results of empirical tests of executive compensation. Researchers should use caution when generalizing results to firms that are not included in the ExecuComp dataset.

The full paper is available for download here.

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One Comment

  1. James
    Posted Monday, August 2, 2010 at 6:41 am | Permalink

    I agree with you. There must be some measure for CEO’s pay but the one who deserve more should get more.