The Importance Of CEO Remuneration

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A growing list of empirical literature has attempted to investigate whether CEOs remunerations are related to the size of the firm and their performance and if corporate governance mechanisms have any significant influence on CEO remuneration. Undoubtedly the most documented association in the Executive remuneration literature is the rapport between CEO pay and firm size. CEOs of big companies are paid more. This is normally justified by the complexity of jobs performed by executive officers of large firm (Murphy, 1999). Specifically, more recent studies such as Smith and Watts (1992) and Rosen (1982) argue that CEOs of big companies need talented and competent managers with capacity and experience to perform very complex tasks because they …show more content…

They showed that the composition of the board is an important factor in determining CEO pay. Specifically, their research proved that CEO remuneration decreases with ownership of the largest stockholder, increase in risk of bankruptcy and the board of director’s ownership, while it increases with the tenure of the CEO, the percentage of independent directors on the board and CEO ownership. But, their findings provide no statistical evidence that a large board leads to an overcompensation of the CEO, while the CEO pay is higher if the CEO is also the chairman of the board in the same firm. Their findings also remain unchanged after holding constant other determining factor of CEO remuneration, such as company size, accounting and market based performance metrics. Moreover, empirical evidence from Cyert, Kang and Kumar (2002) research established a negative link between CEO remuneration and the ownership of members’ remuneration committee i.e. expanding their ownership decreases CEO’ s equity and option remuneration by 4 to 5 …show more content…

On Contrary to expectations, using data collected from 193 manufacturing, transportation, minerals and financial services listed companies in the USA, Boyd (1994) found that the ratio of insiders was negatively associated with compensation of the CEO . Lambert et al. (1993) documents also a positive association between CEO remuneration and the proportion of independent directors on the board and the percentage of the board composed. However, Finkelstein and Hambrick (1989) - using a panel of data collected on the chief executives of companies listed under 'Leisure ' in the Forbes Annual Reports on American Industry, in the years 1971, 1976, 1982, and 1983 – found that CEO remuneration is not associated with the proportion of independent directors. Randoy and Nielsen (2002) investigated the association between CEO pay, corporate governance structures and firm performance within Sweden and Norway in 1998 using data collected from 120 Norwegian and 104 Swedish firms that are traded publicly. The statistical evidence established from cross-sectional data, indicates that there is a positive association between CEO remuneration and the size of the board, non-independent directors ownership and CEO remuneration, Company outstanding shares market value and CEO pay. However, they failed to establish CEO pay-performance association. Core et al (1999) have also carried out an

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