EXECUTIVE PAY AND PERFORMANCE IN PORTUGUESE LISTED COMPANIES

Alves, Paulo and Couto, Eduardo and Francisco, Paulo (2014): EXECUTIVE PAY AND PERFORMANCE IN PORTUGUESE LISTED COMPANIES.

Abstract

This essay analyses the relationship between corporate governance practices and Chief Executive Officer (CEO) wages from a sample of Portuguese listed companies over the period from 2002-2011. The relationship between CEO total compensation and shareholders return, firm characteristics, CEO characteristics, board of directors and shareholders characteristics is analysed. It is found that firm specific factors accounts for the majority of the variance in total CEO pay, while firm performance accounts for less than 5%. It is also found that the CEO characteristics, board of directors’ structures, and shareholders features are related with the CEO pay. The policy implications of these results are then derived.

• Item Type: MPRA Paper
• Language: English
• Keywords: Pay, performance, CEO, corporate governance, listed companies, Portugal
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages ; Payment Methods; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure

References

Abdullah, S.N. (2004). Board composition, CEO duality and performance among Malaysian listed companies. Corporate Governance 4(4), pp. 47-6.

AdCapita and Cranfield University (2003). Can Portuguese Managers Compete? Mimeo, available online: http://www.adcapita.com.

Agarwal, A. and Knoeber, C. R. (1996). Performance and mechanisms to control agency problems between managers and shareholders Journal of Financial and Quantitative Analysis 21(3), pp. 377-397.

Aguilera, R. V. and Cuervo-Cazurra, A. (2004). Codes of governance worldwide: what are the triggers? Organization Studies 25(3), pp. 415-443.

Ammann, M., Oesch, D. and Schmid, M. M. (2011). Corporate governance and firm value: International evidence. Journal of Empirical Finance 18(1), pp. 36-55.

Anderson, R. C. and Reeb, D. M. (2003). Founding-Family Ownership and Firm Performance: Evidence from the S&P 500. The Journal of Finance, 58: 1301–1327.

Arellano, M. and Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies 58. pp. 277-297.

Beasley, M. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review 71, pp. 443-465.

Bebchuk, L., Fried, J. and Walker, D. (2002). Managerial power and rent extraction in the design of executive compensation. University of Chicago Law Review 69, pp. 751-846.

Becker, G., (1962). Investment in Human Capital: A Theoretical Analysis. Journal of Political Economy, 70, 5, Part 2: Investment in Human Beings, pp. 9-49.

Benito, A. and Conyon, M. (1999). The governance of directors’ pay from UK companies’, Journal of Management and Governance 3(2), pp. 117-136.

Berglof, E. (1997). Reforming corporate governance: redirecting the European agenda, Economic Policy 12, pp. 91-123.

Bergstresser, D. and Philippon, T. (2006). CEO Incentives and Earnings Management. The Journal of Financial Economics 80(3), pp. 511-509.

Bhagat, S. and Black, B. (1999). The uncertain relationship between board composition and firm performance. Business Lawyer 54, pp. 921-963.

Bhagat, S., Bolton, B.J. and Subramanian, A. (2010). CEO Education, CEO Turnover, and Firm Performance. Available at SSRN: http://ssrn.com/abstract=1670219.

Brick, I.E., Chidambaran, N.K. (2010). Board meetings, committee structure, and firm value. Journal of Corporate Finance 16, pp. 533-553.

Brickley, J., Coles, J. and Jarrell, G. (1997). Leadership structure: separating the MD and chairman of the board. Journal of Corporate Finance 3, pp. 189-220.

Brown, L.D. and M.L. Caylor. (2009). Corporate Governance and Firm Operating Performance. Review of Quantitative Finance and Accounting 32, pp. 129-144.

Bronson, S.N., Carcello, J.V. and Raghunandan, K. (2006). Firm characteristics and voluntary management reports on internal control’, Auditing: A Journal of Practice and Theory 25, pp. 25-39.

Carretta, A., Fiordelisi, F. and Schwizer (2011). The Impact of Corporate Governance Press News on Stock Market Returns. European Financial Management 17(1), pp. 100–119.

Chhaochharia, V. and Grinstein, Y. (2009). CEO Compensation and Board Structure. The Journal of Finance 64, pp. 231-261.

Cho, M-H. (1998). Ownership structure, investment and the corporate value: An empirical analysis. Journal of Financial Economics 47, pp. 103-121.

Conyon, M. (1997). Corporate governance and executive earnings. International Journal of Industrial Organization 15, pp. 493-509.

Conyon, M., Gregg, P. and Machin, S. (1995). Taking care of business executive earnings in the United Kingdom. Economic Journal 105, pp. 704-714.

Conyon, M. and Murphy, K. (2000). The Prince and the Paupper? CEO pay in the United States and United Kingdom. Economic Journal 110, pp. 640-671.

Conyon, M. and Sadler, G. (2010). Shareholder Voting and Directors' Remuneration Report Legislation: Say on Pay in the UK. Corporate Governance: An International Review 18, pp. 296–312.

Core, J., Holthansen, R. and Larcker, D. (1999). Corporate governance, chief executive earnings and firm performance. Journal of Financial Economics 51, pp. 371-406.

Coughlan, A. T. and Schmidt, R. M. (1985). Executive earnings, management turnover, and firm performance: An empirical investigation. Journal of Accounting and Economics 7(1-3), pp. 43-66.

Cronqvist, H. and Nilsson, M. (2003). Agency Costs of Controlling Minority Shareholders. The Journal of Financial and Quantitative Analysis 38(4), pp. 695-719.

De Anca, C. (2008). Women on corporate boards of directors in Spanish listed companies’, In: Vinnicombe, S., Singh, V., Burke, R., Bilimoria, D. and Huse, M. (eds.). Women on Corporate Boards of Directors: International Research and Practice, pp. 96–107. Edward Elgar, Cheltenham.

Demsetz, H. and Lehn, K. (1985). The Structure of Corporate Ownership: Causes and Consequences. Journal of Political Economy 93(6), pp. 1155-1177.

Dyer, W. G. (2006). Examining the “family effect” on firm performance. Family Business Review 19, pp. 253-273.

Durnev, A. and Han Kim, E. (2005). To steal or not to steal: firm attribute, legal environment and valuation. The Journal of Finance 60(3), pp. 1461-1493.

Easterbrook, F. (1984). Two Agency Cost Explanations of Dividends. American Economic Review 74, pp. 650-659.

Easterbrook, F. and Fischel, D. (1996). The Economic Structure of Corporate Law, Harvard University Press, Cambridge.

Edmans, A. and Xavier, G. (2009). Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories. European Financial Management 15(3), pp. 486-496.

Fama, E. and Jensen, M. (1983). Separation of ownership and control. Journal of Law and Economics 26, pp. 301-325.

Farinha, J. (2003), Corporate Governance: A Survey of the Literature. Universidade do Porto. Discussion Paper No. 2003-06.

Fernandes, N. (2008). EC: Board earnings and firm performance: The role of independent board members. Journal of Multinational Financial Management 18, pp. 30-44.

Florackis, C. and Ozkan, A. (2009). The impact of managerial entrenchment on agency costs: An empirical investigation using UK panel data. European Financial Management 15(3), pp. 497-528.

Freeman, R.E (1984). “Strategic Management: A stakeholder Approach”. Boston, MA: Pitman.

Gosh, C. and Sirmans, C. F. (2005). On REIT MD earnings: does board structure matter? The Journal of Real Estate Finance and Economics 30(4), pp. 397-428.

Gregg, P., Jewell, S. and Tonks, I. (2005). Executive pay and performance in the UK 1994-2002. CMPO Working Paper Series No. 05/122.

Gregorič, A., Polanec, S. and Slapničar, S. (2010). Pay me Right: Reference Values and Executive Compensation. European Financial Management 16, pp. 778–804.

Guthrie, K., Sokolowsky, J., and Wan, K. (2012). CEO Compensation and Board Structure Revisited. Journal of Finance 67(3), pp. 1149-1168.

Heidrick & Struggles consulting company (2009). Corporate Governance Report 2009: Boards in turbulent times, Mimeo.

Hermalin, B. and Weisbach, M. S. (1998). Endogenously chosen board of directors and their monitoring of the CEO. American Economic Review 88, pp. 98-118.

Herrero, I. (2011). Agency Costs, Family Ties and Firm Efficiency. Journal of Management 37(3), pp. 887-904.

Hill, C. W. L. and Phan, P. (1991). CEO Tenure as a Determinant of CEO Pay. The Academy of Management Journal 34(3), pp. 707-717.

Hoel, M. (2008). The quota story: Five years of change in Norway’ In: Vinnicombe, S., Singh, V., Burke, R., Bilimoria, D. and Huse, M. (eds.). Women on Corporate Boards of Directors: International Research and Practice, pp. 79–87. Edward Elgar, Cheltenham.

Ikaheimo, S., Puttonen, V. and Ratilainen, T. (2011). External corporate governance and performance: evidence from the Nordic countries. European Journal of Finance 17(5-6), pp. 427-450.

Jensen, M. C. (1986). Agency Cost Of Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review 76(2), pp. 323-329.

Jensen, M. C. (1993). The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. The Journal of Finance 48(3), pp. 831-880.

Jensen, M. C. and Meckling, W. (1976). Theory of the firm: managerial behaviour, agency costs and capital structure. Journal of Financial Economics 3, pp. 305-360.

Jensen, M.C. and Murphy, K. J. (1990). Performance Pay and Top Management Incentives. Journal of Political Economy 98(2), pp. 225-264.

Jensen, M.C. and R.S. Ruback (1983). The market for corporate control: The scientific evidence. Journal of Financial Economics 11, pp. 5-50.

Khurshed, A., Lin, S. and Wang, M. (2011). Institutional block-holding of UK firms: do corporate governance mechanism matter? European Journal of Finance 17(2), pp. 133-152.

La Porta, R., Silanes, F. L., Shleifer, A. and Vishny, R. W. (1997). Legal determinants of external finance. The Journal of Finance 52, pp. 1131-1150.

La Porta, R., Silanes, F. L., Shleifer, A. and Vishny, R. W. (1998). Law and finance. Journal of Political Economy 106, pp. 1113-1155.

La Porta, R., Silanes, F. L., Shleifer, A. and Vishny, R. W. (2000). Agency problems and dividend policies around the world. The Journal of Finance 55, pp. 1-33.

Lee, S. C., Rhee, M., and Yoon, J. (2012). The Effects of Foreign Monitoring on Audit Quality: Evidence from Korea. Available at SSRN: http://ssrn.com/abstract=2001782.

Manne, H. G. (1965). Mergers and the Market for Corporate Control. The Journal of Political Economy 73(2), pp. 110-120.

Mishra, C. S. and Nielsen, J. F. (2000). Board independence and earnings policies in large bank holding companies. Financial Management 29(3), pp. 51-70.

Ozkan, N. (2007). Do corporate governance mechanisms influence CEO earnings? An empirical investigation of UK companies. Journal of Multinational Financial management 17, pp. 349-364.

Ozkan, N. (2011). CEO earnings and firm performance: An empirical investigation of UK panel data. European Financial Management 17(2), pp. 260-285.

Pennathur, A. K. and Shellor, R. (2002). The determinants of REIT CEO earnings. Journal of Real Estate Finance and Economics 26, pp. 175-191.

Piot, C. and Janin. R. (2007). External auditors, audit committees and earnings management in France. European Accounting Review 16, pp. 429-454.

Renders, A., Gaeremynck ,A. and Sercu , P. (2010). Corporate governance ratings and company performance: A cross-european study. Corporate governance: An international review 18(2), pp. 87-106.

Ryan, H. E. and Wiggins, R. A. (2001). The influence of firm- and manager-specific characteristics on the structure of executive compensation. Journal of Corporate Finance 7, pp. 101–23.

Richard, P., Devinney, T., Yip, G., and Johnson, G. (2009). Measuring organizational performance: Towards methodological best practice. Journal of Management 35, pp. 718-804.

Rose, C. (2006). Board composition and corporate governance: a multivariate analysis of listed Danish firms. European Journal of Law Economics 21, pp. 113-127.

Rosenstein, S. and Wyatt, J. G. (1990). Outside directors, board independence, and shareholder wealth’, Journal of Financial Economics 26, pp. 175-191.

Sawicki, J. (2009). Corporate governance and dividend policy in southeast Asia pre- and post-crisis’, European Journal of Finance 15(2), pp. 211-230.

Shin, J. Y. and Seo, J. (2011). Less Pay and More Sensitivity? Institutional Investor Heterogeneity and CEO Pay. Journal of Management 37(6), pp. 1719-1746.

Singh, V. (2008). Contrasting positions of women directors in Jordan and Tunisia. In: Vinnicombe, S., Singh, V., Burke, R., Bilimoria, D. and Huse, M. (eds.) Women on Corporate Boards of Directors: International Research and Practice, pp. 165–85. Edward Elgar, Cheltenham.

Schulze, W. S., Lubatkin, M. H., Dino, R. N. and Buchholtz, A. K. (2001). Agency relationships in family firms: Theory and evidence. Organization Science 12, pp. 99-116.

Smith, C. W. and Watts, R. L. (1992). The investment opportunity set and corporate financing, dividend, and compensation policies. Journal of Financial Economics 32(3), pp. 263-292.

Staples, (2007). Board Globalisation in the World's Largest TNCs 1993-2005. Corporate Governance: An International Review 15(2), pp. 311-321.

Terjesen, S., Sealy, R. and Singh, V. (2009). Women Directors on Corporate Boards: A Review and Research Agenda. Corporate Governance: An International Review, 17(3), pp. 320–337.

Tosi, H. L., Werner, S., Katz, J. P., and Gomez-Mejia, L. R. (2000). How much does performance matter? A meta-analysis of CEO pays studies. Journal of Management, 26(2), pp. 301-339.

Vafeas N. (1999). Board meeting frequency and firm performance. Journal of Financial Economics 53, pp.113-142.

Williamson, O. E. (2002). The theory of the firm as governance structure: from choice to contract. Journal of Economic Perspectives 16(3), pp. 171-195.

Wade, J., O’Reilly, C., and Pollock, T. (2006). Fairness and Executive Compensation. Organization Science 17(5), pp. 527–544.

Wooldridge, J.M. (2002). Econometric Analysis of Cross Section and Panel Data’, Cambridge, MA, MIT Press.

William, J. (2010). Corporate governance mechanisms throughout the world. Corporate governance: An International Review 18(3), pp. 159-160.

White, L. F. (1996). Executive compensation and dividend policy. Journal of Corporate Finance 2(4), pp. 335-358.

Yermack, D. (1996). Higher market valuation for firms with a small board of directors’, Journal of Financial Economics 40, pp. 185-211.