4 th BIENNIAL IMTERNATIONAL CONFERENCE ON BUSINESS, BANKING & FINANCE
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Transcript of 4 th BIENNIAL IMTERNATIONAL CONFERENCE ON BUSINESS, BANKING & FINANCE
4th BIENNIAL IMTERNATIONAL CONFERENCE ON BUSINESS, BANKING &
FINANCE
EXECUTIVE COMPENSATION, FIRM PERFORMANCE AND RISK IN THE FINANCIAL
CRISIS PERIOD 2006-2009
Mr. Quinn Trimm
Introduction Introduction US CEO/worker pay gap stood at 301-1 in 2003, as
compared to only 42-1 in 1982 (Matsumura & Shin, 2005).
Executive compensation has become synonymous with the ‘agency problem’ (Quinn, 1999), scholars have concluded that agency costs can be reduced by aligning the risk preferences of CEOs and shareholders, by awarding equity-based incentives i.e. stock options and restricted stock (Core et al. 2003).
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Introduction Introduction The application of performance-linked remuneration
has been viewed as a tool for aligning the interests of directors and shareholders (Dalton et al, 2007).
The uncertainty surrounding the Agency Theory, executive compensation, unsystematic risk, and firm accounting performance motivates this study and attempts to explore the underlying relationship between them, if any.
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Literature ReviewLiterature Review The Agency Theory.
Jensen and Meckling (1976)
Smith (1776)
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Literature ReviewLiterature Review The Managerial Power Theory.
Bebchuk and Fried, (2004); Grabke-Rundell and Gomez-Mejia, (2002).
Finkelstein (1992)
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Research MethodologyResearch Methodology A cross sectional study was employed to examine the
effect of firm performance and total risk on executive compensation.
Multiple regression analysis was used to analyze the relationship between the variables . The data was duly treated using the first difference transformation to achieve normality.
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Research MethodologyResearch Methodology Hypothesis Development
Hypothesis One: Ho = 3(ROA), 4 (ROE), 5(EPS) and 6 (PE) = 0
Hypothesis Two: Ho: 1(MKTR) and 2(UNSYSR) = 0
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Research MethodologyResearch Methodology Regression Models
Compensation= a + 1(MKTR) + 2(UNSYSR) + 3(ROA) + 4 (ROE) + 5(EPS) + 6 (PE) + εi
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Research MethodologyResearch Methodology Base Pay= a + 1(MKTR) + 2(UNSYSR) + 3(ROA) + 4
(ROE) + 5(EPS) + 6 (PE) + εi Annual Bonus= a + 1(MKTR) + 2(UNSYSR) + 3(ROA) +
4 (ROE) + 5(EPS) + 6 (PE) + εi Long term Compensation= a + 1(MKTR) + 2(UNSYSR) +
3(ROA) + 4 (ROE) + 5(EPS) + 6 (PE) + εi Stock Options= a + 1(MKTR) + 2(UNSYSR) + 3(ROA) +
4 (ROE) + 5(EPS) + 6 (PE) + εi
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Research MethodologyResearch Methodology The dependent variable total executive compensation, base
pay, annual bonus, long-term compensation and equity based incentives/stock options) was analyzed (Murphy, 1999).
The first independent variable is firm performance. ROA, ROE, EPS & PE were used (Murphy, 1985).
The second independent variable is firm risk. Considering the Market Model as posed by Harry Markowitz, risk was represented by market risk (MKTR) and unsystematic risk (UNSYSR).
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Empirical ResultsEmpirical Results
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Pre-financial crisis period January 03, 2006 to December 29, 2006
Model
Standardized Coefficients
t Sig.BetaTOTAL COMPENSATION
(Constant) 0.038 0.97
EPS 0.403 4.003 0.000
BASE PAY (Constant) 0.158 0.875
ROE -0.415 -3.139 0.002
EPS 0.536 6.098 0.000
PE -0.242 -2.824 0.006
MKTR 0.275 3.329 0.001
UNSYSR -0.192 -2.41 0.018
BONUS PAY(Constant) 0.003 0.997
EPS 0.254 2.532 0.013
MKTR 0.216 2.288 0.024
LONG TERM COMPENSATION (Constant) 0.065 0.949
STOCK(Constant) 0.006 0.995
EPS 0.454 4.477 0.000
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The financial crisis period January 08, 2007 to December 28, 2007
Model
Standardized Coefficients
t Sig.BetaTOTAL COMPENSATION
(Constant) 0.03 0.976
EPS 0.739 4.926 0.000
BASE PAY(Constant) 0.107 0.915
ROE 0.699 2.02 0.046
EPS 0.546 4.115 0.000
MKTR 0.263 3.307 0.001
BONUS(Constant) -8.98E-04 0.999
ROA 0.975 2.567 0.012
EPS 0.847 5.761 8.12E-08
LONG TERM COMPENSATION(Constant) 0.096 0.923
STOCK(Constant) 0.005 0.996
EPS 0.712 4.634 0.000
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The financial crisis period January 08, 2008 to December 29, 2008
Model
Standardized Coefficients
t Sig.BetaTOTAL COMPENSATION
(Constant) 0.04 0.968
MKTR 0.405 4.648 0.000
BASE PAY(Constant) 0.078 0.938
MKTR 0.243 2.667 0.009
BONUS(Constant) 0.012 0.991
MKTR 0.336 3.708 0.000
LONG TERM COMPENSATION(Constant) 0.008 0.994
STOCK(Constant) 0.026 0.98
MKTR 0.399 4.567 0.000
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The post-financial crisis period January 05, 2009 to December 27, 2009.
Model
Standardized Coefficients
t Sig.BetaTOTAL COMPENSATION
(Constant) -8.74E-01 0.384
ROA 0.787 3.059 0.003
MKTR 0.304 3.262 0.002
BASE PAY(Constant) -1.327 0.188
MKTR 0.418 4.569 0.000
BONUS(Constant) -0.109 0.914
ROA 0.646 2.31 0.023
ROE -0.537 -2.238 0.028
UNSYSR -0.269 -2.148 0.034
LONG TERM COMPENSATION(Constant) -0.222 0.825
MKTR 0.296 2.873 0.005
STOCK(Constant) -0.787 0.433
ROA 1.13 4.489 0.000
ROE -0.968 -4.483 0.000
UNSYSR -0.31 -2.751 0.007
ConclusionsConclusions Managers were contracted based on the perceived value they can add to a
company. This is reflected in their base salary – their worth at the face value. Upon evidence of additional efforts (increased firm accounting performance) they were endowed with bonuses, stock options and other long term benefits.
However, for the years 2006 and 2007 this study did not provide the evidence to fully support the dictum of the Agency Theory.
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ConclusionsConclusions Managers did nothing to overtly jeopardize that which mattered most
– their base salary. With the bullish market of 2007 managers did not appear to be “risk-seeking” and their base salaries increased. In 2008 however, the financial crisis took full effect.
This caused the level of executive compensation to decline, and in 2009 managers tried to rebuild the market by taking more risk.
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ConclusionsConclusions The Agency Theory
The Managerial Power Thoery
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ConclusionsConclusions The Managerial Power Theory points the way for the
apparent deviation from the Agency Theory during the period 2006 – 2009.
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