CEO Pay-Performance Sensitivity: A Multi-Equation Model

DOI: 10.4236/ti.2014.53013   PDF   HTML   XML   3,488 Downloads   4,402 Views   Citations


This study examines the variables influencing CEO compensation in the technology sector using both exclusively exogenous and interchangeably exogenous and endogenous variables. The study was confined to a single industry to isolate industry compensation practices which may be smoothed out in multi-industry studies. Multiple equations in a vector autoregressive model were used to explain compensation in recognition of the endogeneity of variables such as sales growth, stock returns and net income. Using US firms listed on the NASDAQ, we find that CEO compensation (measured separately as salary only, stock option grants only and total compensation from all sources) to be significantly explained by firm size, the ability to reduce debt, the ability to fund growth, net income and personal characteristics. CEOs are rewarded for achieving profitability. While there is an expectation of innovation in the technology sector with research and development expenditure increasing both sales and stock returns, such innovation only contributes to CEO compensation if it is translated into rising net income in an environment of debt-reduction. Further, CEOs are rewarded for implementing disruptive technology as a competitive strategy. The ability to fund growth is pertinent for the technology sector which may be restricted in its access to debt. Increases in age, tenure and the existence of celebrity status of the CEO led to increased compensation underscoring the importance of personal characteristics.

Share and Cite:

Abraham, R. , Harris, J. and Auerbach, J. (2014) CEO Pay-Performance Sensitivity: A Multi-Equation Model. Technology and Investment, 5, 125-136. doi: 10.4236/ti.2014.53013.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] Dong, M. and Ozkhan, A. (2008) Institutional Investors and Director Pay: An Empirical Study of UK Companies. Journal of Multinational Financial Management, 18,16-29.
[2] Frydman, C. and Jenter, D. (2010) CEO Compensation, Annual Review of Financial Economics. Annual Reviews, 2, 75-102.
[3] Core, I., Holthausen, R.W. and Larker, D.R. (1999) Corporate Governance, Chief Executive Officer Compensation and Firm Performance. Journal of Financial Economics, 51, 371-406.
[4] Jensen, M.C. and Meckling, W. (1976) Theory of the Firm, Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3, 305-360.
[5] O’Reilly, R.A. and Main, B.G.M. (2010) Economic and Psychological Perspectives on CEO Compensation: A Review and Synthesis. Industrial and Corporate Change, 19, 675-712.
[6] Abowd, J.M. and Kaplan, D.S. (1999) Executive Compensation: Six Questions That Need Answering. Journal of Economic Perspectives, 13, 145-168.
[7] Devers, C.E., Cannell, A.A., Reilly, G.P. and Yoder, M.A. (2007) Executive Compensation: A Multidisciplinary Review of Recent Developments. Journal of Management, 33, 1016-1072.
[8] Jensen, M.C. and Murphy, K.J. (1990) Performance Pay and Top Management Incentives. Journal of Political Economy, 98, 225-263.
[9] Main, B.G.M., O’Reilly, C.A. and Wade, J.B. (1995) The CEO, the Board of Directors and Executive Compensation: Economic and Psychological Perspectives. Industrial and Corporate Change, 4, 293-332.
[10] Ozkhan, N. (2007) Do Corporate Governance Mechanisms Influence CEO Compensation? An Empirical Investigation of UK Companies. Journal of Multinational Financial Management, 17, 349-364.
[11] Vafeas, N. (1999) Board Meeting Frequency and Firm Performance. Journal of Financial Economics, 53, 113-142.
[12] He, L. and Conyon, M.J. (2003) Compensation Committees and CEO Compensation in US High-Technology Firms. Working Paper, Wharton School of Business, University of Pennsylvania, Philadelphia.
[13] Werner, S., Tosi, S. and Gomez-Mejia, L. (2005) Organizational Governance and Employee Pay: How Ownership Structure Affects the Firm’s Compensation Strategy. Strategic Management Journal, 26, 377-384.
[14] Cyert, R., Kang, S.H. and Kumar, P. (2002) Corporate Governance, Takeovers, and Top Management Compensation: Theory and Evidence. Management Science, 48, 453-469.
[15] Goyal V.K. and Park, C.W. (2002) Board Leadership Structure and CEO Turnover. Journal of Corporate Finance, 8, 49-66.
[16] Borokovich, K.A., Brunarski, K.R. and Perrino, R. (1997) CEO Contracting and Anti-Takeover Amendments. Journal of Finance, 52, 1495-1517.
[17] Fligstein, N. and Choo, J. (2005) Law and Corporate Governance. Annual Review of Law and Social Science, 1, 61-84.
[18] Kerr, J. and Bettis, R.A. (1987) Boards of Directors, Top Management Compensation and Shareholder Returns. Academy of Management Journal, 30, 645-664.
[19] Cole, R.A. and Mehran, H. (2013) What Do We Know about Executive Compensation at%%%Privately Held Firms? Federal Reserve Bank Staff Report No. 314, The Federal Reserve Bank of New York, New York.
[20] Callan, S.A. and Thomas, J.M. (2011) Executive Compensation, Corporate Social Responsibility, and Corporate Financial Performance: A Multi-Equation Framework. Corporate Social Responsibility and Environmental Management, 18, 332-351.
[21] Fama, E.F. and French, K.R. (1993) Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics, 33, 3-56.
[22] Schumpeter, J.A. (1939) Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. McGraw-Hill, New York.
[23] Barnett, H.G. (1953) Innovation: The Basis of Cultural Change. McGraw-Hill, New York.
[24] Rosenberg, N. (1976) The Direction of Technological Change: Inducement Mechanisms and Focusing Devices. In: Rosenberg, N., Ed., Perspectives on Technology, Cambridge University Press, Cambridge, 108-125.
[25] Storper, M. (1995) Regional Economies as Relational Assets. Unpublished Manuscript.
[26] Lundvall, B.A. (1995) The Social Dimension of the Learning Economy. Working Paper No 96-1, Aalborg University, Aalborg.
[27] Johnson, M., Christensen, C. and Hagermann, K. (2008) Reinventing Your Business Model. Harvard Business Review, 2-11.
[28] Murphy, K.J. (1999) Executive Compensation. In: Ashenfelter, O. and Card, D., Eds., Handbook of Labor Economics, Vol. 3, North Holland, Amsterdam, 2485-2563.
[29] Tosi, H., Werner, S., Katz, J. and Gomez-Mejia, L. (2000) How Much Does Performance Matter? A Meta-Analysis of CEO Pay Studies. Journal of Management, 26, 301-339.
[30] Rosen, S. (1982) Authority, Control and the Distribution of Earnings. Bell Journal of Economics, 13, 311-323.
[31] Kostiuk, P. (1990) Firm Size and Executive Compensation. Journal of Human Resources, 25, 90-105.
[32] Brookman, J.T. and Thistle, P.D. (2013) Managerial Compensation: Luck, Skill or Labor Markets? Journal of Corporate Finance, 21, 252-268.
[33] Lin, D. and Kuo, H. (2013) Chief Executive Compensation: An Empirical Study of Fat Cat CEOs. The International Journal of Business and Finance Research, 7, 27-42.
[34] Anderson, M.C., Banker, R.D. and Ravindran, S. (2000) Executive Compensation in the Information Technology Industry. Management Science, 46, 530-547.
[35] Shin, E., Lee, J. and Kajoo, I. (2009) CEO Compensation and US High and Low-Tech Firms’ Corporate Performance. Contemporary Management Research, 5, 93-106.
[36] Balkin, D.B., Markman, G.D. and Gomez-Mejia, L.R. (2000) Is CEO Pay in High-Technology Firms Related to Innovation? Academy of Management Journal, 43, 1118-1129.
[37] Tushman, M.L. and Anderson, P. (1986) Technological Discontinuities and Organizational Environments. Administrative Science Quarterly, 31, 439-465.
[38] Finkelstein, S. and Hambrick, D.C. (1996) Top Executives and Their Efforts on Organizations. West Publishing, Minneapolis.
[39] Garen, J.E. (1994) Executive Compensation and Principal-Agent Theory. Journal of Political Economy, 102, 1175- 1199.
[40] Brunello, G., Graziano, C. and Perigi, B. (2001) Executive Compensation and Firm Performance in Italy. International Journal of Industrial Organization, 19, 133-161.
[41] Belliveau, M.A., O’Reilly, C.A. and Wade, J.B. (1996) Social Capital at the Top: Effects of Social Similarity and Status on CEO Compensation. Academy of Management Journal, 39, 1568-1593.
[42] Finkelstein, S. and Boyd, B.K. (1998) How Much Does the CEO Matter? The Role of Managerial Discretion in the Setting of CEO Compensation. Academy of Management Journal, 37, 1079-1108.
[43] Johnson, B. (1982) Executive Compensation: Size, Profit and Cost in the Electric Utility Industry. Unpublished Doctoral Dissertation, Florida State University, Tallahassee.
[44] Amihud, Y. and Lev, B. (1981) Risk Reduction as a Managerial Motive by Conglomerate Managers. Bell Journal of Economics, 12, 605-617.
[45] John, T. and John, K. (1993) Top Management Compensation and Capital Structure. Journal of Financial Economics, 48, 949-974.
[46] Barro, J.R. and Barro, R.J. (1990) Pay, Performance and Turnover of Bank CEOs. Journal of Labor Economics, 8, 448-481.
[47] Mayers, D. and Smith, C.W. (1992) Executive Compensation in the Life Insurance Industry. Journal of Business, 65, 51-74.
[48] Bliss, R.T. and Rosen, R.J. (2001) CEO Compensation and Bank Mergers. Journal of Financial Economics, 61, 107- 138.
[49] Culpan, R., Murti, V.N. and Culpan, O. (1992) Determinants of CEO Pay in Service Industry Firms. Group and Organization Management, 17, 210-217.
[50] Ungson, G.R. and Steers, R.M. (1984) Motivation and Politics in Executive Compensation. Academy of Management Review, 9, 313-323.
[51] Becker, G. (1974) Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. University of Chicago Press, Chicago.
[52] Chung, K.H. and Pruitt, S.W. (1996) Executive Ownership, Corporate Value and Executive Compensation: A Unifying Framework. Journal of Banking and Finance, 20, 1135-1159.

comments powered by Disqus

Copyright © 2020 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.