CEO compensation structure and firm performance
- Publication Type:
- Thesis
- Issue Date:
- 2005
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Many academic studies investigate CEO compensation practices [Murphy (1999)], and
the subject is also widely discussed in the popular press. However, the academic
literature to date has concentrated on settings where CEOs are typically offered equity-based
compensation, and these equity awards are relatively similar in terms of
characteristics. To date, CEO compensation practices have not been investigated in a
setting where firms in similar industries concurrently use either cash only or cash and
equity to compensate their CEOs, and where the characteristics of the equity grants also
differ across firms. This thesis researches CEO compensation in such a setting.
The objective of this thesis is to provide evidence on the use and performance
consequences of different CEO compensation structures. Specifically, the thesis first
determines whether the use of the different compensation structures is linked to different
firm characteristics. Second, the thesis examines the relation between firm performance
and the use of the different compensation structures, and third, the thesis investigates the
performance consequences of deviations from an estimated "efficient" compensation
structure.
Using large Australian firms reporting in the 1999 to 2001 financial years, Chapter Two
provides descriptive evidence on the variation observed in Australian CEO
compensation structures, and finds that around one-third of large Australian firms offer
their CEO only cash based compensation, while the remaining two-thirds use some level
of equity-based compensation. Chapter Three provides some explanation for the
observed variation by demonstrating that firms using the different compensation
structures have significantly different economic characteristics. Chapter Four examines
the performance consequences of compensation structure choice. This Chapter first
. finds little evidence of systematic differences in firm performance across the two
compensation structures. Then this Chapter models an "efficient" compensation
structure based on firm characteristics, and tests the performance consequences of
deviations from this efficient structure. Chapter Four finds some (although weak)
evidence that firms using an inefficient structure have lower firm performance compared
to firms using an efficient structure.
This thesis makes contributions to the literature in number of areas. First, the thesis
shows that it could be efficient for firms with different economic characteristics to use
different compensation structures. Second, the thesis finds that firm performance is not
necessarily related to the use of one or other of the different compensation structures,
but rather that lower firm performance is a consequence of incorrect compensation
structure choice. Overall, this thesis provides important new insights into the use of
different CEO compensation structures.
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