Executive pay

A CEO is paid hundreds of times more than the ‘everyday workers’ in their own company. The market seems to allow it, but is it morally right?
This report proposes a biblical framework for exploring remuneration, which has three major components – justice, dignity and reward. Justice is concerned with the fair amount of pay, to ensure families are protected from destitution. Dignity is concerned with the right kind of work and protects the agency of workers. Finally, reward is about working for the right reasons, and leads to the common good. Together, they provide new insight into the ethics of remuneration.

The principal-agent paradigm predicts directors will pay themselves excessive remuneration. To curb self-dealing behaviour, the interests of shareholders and directors are traditionally aligned through awarding the directors with shares or share-based instruments, but such economic incentives commonly fail to achieve their purpose. Shareholder interests are thus also protected through legislative intervention. This includes the requirement for enhanced disclosure of remuneration packages, the requirement for special resolutions to approve the issue of securities to directors and to approve their remuneration for services as directors. The provisions suffer from many interpretational difficulties that result in significant portions of a remuneration package escaping shareholder purview. These difficulties can be overcome by ascertaining the intention of the legislator, chiefly through research of parliamentary records
and reading the statute as a whole. The arguably more legally-correct interpretation provided in this paper will protect shareholder interests much more comprehensively. Given the passivity of many shareholders, it will remain to be seen whether they will avail themselves of it.

In an attempt to address the growing gap between chief executive officer (CEO) remuneration and that of the general worker, reign in rising CEO remuneration, and justify the portion of long-term incentive pay that makes up the bulk of CEO remuneration, shareholders and other stakeholders are trying to find definitive factors that will link CEO remuneration to company performance. Finding this link has become central to all executive remuneration issues. The results of the studies linking CEO remuneration to company performance are varied and inconclusive, particularly in South Africa. The reason for this is that previous studies have not looked at whether the company performance measures chosen have definite relationships with CEO remuneration in each industry. This study investigated eleven financial indicators of company performance to determine which of them have significant and positive relationships to CEO remuneration in different industries in South Africa. 254 South African listed companies, spread over 5 industries, were analysed for the period 2008 to 2012 using panel data analysis and statistical tests. The results were conclusive, finding performance metrics that had a positive and significant relationship to CEO remuneration in 4 of the 5 industries investigated, as well as over the aggregate of all the industries.

Contextual factors are typically neglected in both theorizing and empirical tests on executive pay. The fast majority of empirical investigations use data from U.S. based firms. Theoretical implications are typically developed, understood and tested on the basis of the U.S. context. However, the U.S. case is not the world wide standard. Pay in other countries is on average considerably lower and have a different pay mix. The puzzle that from the typical use of agency theory can’t be explained is the variance of pay practices that exist not only within countries but also across countries. This paper extends scholars renewed attention to managerial power theory on executive pay. It sets out how and why institutional theory must be included in explanations of executive pay. On the basis of a sample of executive pay packages from 17 different countries we test the theoretical extensions. Results indicate that institutions interact with firm level determinants of executive pay. Explanati...

While there exist extensive literatures on both distributive justice and senior executive pay, and a number of authors (notably the French economist Thomas Piketty) have addressed the implications of high pay for distributive justice, the existing literature fails to address what senior executives themselves think about distributive justice and whether they consider high income inequalities to be morally acceptable. We address this gap by analysing a unique dataset comprising the views of over 1000 senior executives from across the world, which was constructed using a survey instrument designed by the authors based on a thought experiment resembling John Rawls’s original position. We report four main findings. First, executives conceptualise distributive justice in a pluralistic manner, endorsing different and sometimes apparently conflicting philosophical principles: to explain how this plurality can be accounted for we propose a novel field-theory framework for conceptualising beliefs about distributive justice. Second, executives support similar philosophical approaches at both society and company levels of analysis, thus countering the idea that companies should leave matters of distributive justice exclusively for governments to deal with via the tax system. Third, executives believe that they live in societies and work for companies that fall short of desirable distributive justice outcomes. Fourth, the distributive justice views of the executives in our sample fall into four distinct clusters that are correlated with certain socio-demographic markers. Finally, we note the distinction between distributive justice beliefs and behaviour, from which we derive a number of managerial and public policy implications.

Em português:

A relação entre gestores e acionistas vem sendo analisada há mais de dois séculos, ainda que a produção científica se tenha intensificado apenas desde o estudo de Jensen e Meckling (1976) sobre a Teoria da Agência. Esta sugere a associação dos incentivos monetários dos gestores ao desempenho das empresas, de forma a garantir um maior alinhamento de interesses entre gestores e acionistas (Aggarwal e Samwick 1999; Chen et al. 2015). No entanto, os estudos sobre esta matéria estão longe de serem consensuais. Ademais, entre vários fatores, as recentes crises e escândalos financeiros, assim como os níveis de desigualdade socioeconómica, têm despertado as preocupações do público em geral para as matérias de corporate governance e, particularmente, para a remuneração executiva. Especificamente, no que diz respeito à realidade portuguesa, esta encontra-se deficientemente estudada.
Neste sentido, optou-se pela realização de um estudo que incidiu na análise econométrica da interdependência entre as remunerações dos administradores executivos e o desempenho das sociedades não financeiras cotadas na Euronext Lisbon durante o período de 2002 a 2015. Para esse efeito, realizaram-se quatro fases de estimações e duas análises de robustez com base em modelos de dados em painel, inserindo-se, também, diversas variáveis de controlo identificadas na literatura.
Este estudo identificou relações positivas bidirecionais entre a remuneração executiva (acrescida do valor das ações detidas) e o desempenho. A evidência vinca também a importância das ações com o objetivo de alinhar os interesses entre gestores e acionistas no contexto nacional. Os resultados parecem, igualmente, suportar os estudos dos defensores da existência de um efeito motivacional da remuneração. Esta dissertação apresenta, ainda, uma série de conclusões relativamente à relação entre a remuneração e o desempenho com outros determinantes da remuneração executiva e do desempenho das empresas. Destes resultados, destacam-se as relações da remuneração executiva com a dimensão da empresa, a política de dividendos e a concentração acionista, alinhando-se com a generalidade da literatura estudada.

---
In english:

Interdependence between the executive compensation and companies’ performance: an analysis of the companies listed on the Euronext Lisbon

The relationship between managers and shareholders has been discussed for more than two centuries, although scientific production has been intensified since the study of Jensen and Meckling (1976) about the Agency Theory. This theory suggests the association between executive monetary incentives and companies’ performance in order to ensure greater alignment of interests between managers and shareholders (Aggarwal and Samwick 1999; Chen et al. 2015). However, studies on this subject are far from being consensual. Moreover, among several factors, recent crisis and financial scandals, as well socio-economic inequality levels, have raised general public's concerns for corporate governance related issues, and particularly, for executive compensation. Specifically, concerning the Portuguese reality, this is poorly studied.
In this context, it was decided to conduct a study that focused on an econometric analysis of the interdependence between the executive compensation and the performance of non-financial firms listed on Euronext Lisbon from 2002 to 2015. For this purpose, it was performed four estimations phases and two robustness tests, all based on panel data models, and inserting, also, several control variables identified in the literature.
This study identified bidirectional positive relationships between executive compensation (plus the amount of shares held) and performance. The evidence also emphasizes the importance of shares in order to align the interests of executives and shareholders in the national context. The results seem to support the studies of the defenders of the motivational effect of remuneration. This dissertation also presents a number of conclusions regarding the relationship between compensation and performance with other determinants of executive compensation and company’s performance. Based on these results, it is important to highlight the relations between executive compensation and company size, dividend policy and shareholder concentration as well. This is aligned with the majority of the studied literature.

Explores the future of governance and the future role and practice of directors and boards in the light of trends and changing requirements and questions the sustainability of current approaches to governance based upon particular responses to issues in certain jurisdictions in what now seems an increasingly remote age in relation to new forms of organisations and changing ways of obtaining  finance. Also raises questions about the contribution of boards to sustainability and innovation. Written to encourage debate ahead of the 16th London Global Convention on Governance and Sustainability and published as: Coulson-Thomas, Colin (2016), Governance for Sustainability and the Sustainability of Governance,  Director Today, Vol. II Issue VIlI, August, pp 41-45  Also published and available as the Theme Paper for this convention.

The paper examines political and charitable donations among FTSE350 companies over a period spanning 1996 through 2010. A wide range of measures is drawn on to explain the observed variation in behaviour. In addition to measures of company size, industry, FTSE sector and performance, detail of each company’s governance and of the age and gender of the boardroom executives is included. The unique contribution of the paper is to make use of the observed level of executive remuneration. If this is taken as an indicator of managerial power, it is demonstrated that there is statistical support for the argument that political and charitable donations are utilised, to some extent, as camouflage for high executive pay. The results underline the importance of institutional considerations in the standard agency theory and managerial power perspectives, and point to a social theory of agency. The originality of the paper lies in bringing together the two literatures of corporate giving and exe...

Introduction Key focus of the study The primary challenge in the executive pay-performance relationship is finding a mutually beneficial balance between executive remuneration and organisational performance. This Orientation: The relationship between Chief Executive Officer (CEO) remuneration and organisation performance has been a topic of close scrutiny, especially since the global financial crisis. Optimal contracting relies on the premise that effective incentives will link organisation financial performance and CEO remuneration in ways that will be in the best interests of both shareholders and CEOs. Research purpose: The purpose of this research study was to investigate the relationship between CEO remuneration and organisation performance in South Africa between 2006 and 2012 and to determine whether the two constructs were positively correlated. Motivation for the study: The study provides an evidenced-based understanding of the nature of the CEO pay-performance relationship in South Africa. Understanding this relationship is critical to finding a suitable model to structure executive remuneration that will protect shareholders from over-remunerating executives in times of economic appreciation, whilst protecting executives from being underpaid in times of economic depreciation.