Executive pay and performance: the moderating effect of CEO power and governance structure

Abstract

This paper examines the crucial question of whether chief executive officer (CEO) power and corporate governance (CG) structure can moderate the pay-for-performance sensitivity (PPS) using a large up-to-date South African data-set. Our findings are threefold. First, when direct links between executive pay and performance are examined, we find a positive, but relatively small PPS. Second, our results show that in a context of concentrated ownership and weak board structures; the second-tier agency conflict (director monitoring power and opportunism) is stronger than the first-tier agency problem (CEO power and self-interest). Third, additional analysis suggests that CEO power and CG structure have a moderating effect on the PPS. Specifically, we find that the PPS is higher in firms with more reputable, founding and shareholding CEOs, higher ownership by directors and institutions, and independent nomination and remuneration committees, but lower in firms with larger boards, more powerful and long-tenured CEOs. Overall, our evidence sheds new important theoretical and empirical insights on explaining the PPS with specific focus on the predictions of the optimal contracting and managerial power hypotheses. The findings are generally robust across a raft of econometric models that control for different types of endogeneities, pay, and performance proxies.

Keywords:

• Executive pay
• corporate performance
• corporate governance
• CEO power, endogeneity, South Africa

Acknowledgment

The authors would like to acknowledge insightful and timely suggestions by the Editor-in-Chief, Professor Michael Dickmann, the Managing Editor, Mrs Penny Smith, and two anonymous reviewers. The authors would also like to acknowledge useful comments received at presentations at the Centre for Empirical Finance (CEF), School of Management and Business, Aberystwyth University, Staff Research Seminar in June 2011, Aberystwyth, UK; Accounting and Finance Group, Adam Smith Business School, University of Glasgow, Staff Research Seminar in February 2012, Glasgow, UK; British Accounting and Finance Association Annual Conference in April 2011, Aston Business School, Aston University, Birmingham, UK; African Accounting and Finance Association Annual Conference in September 2011, Accra, Ghana; and International Finance and Banking Society Annual Conference in June 2012, Valencian Institute for Economic Research, Valencia, Spain.

Notes

1. We will like to thank an anonymous reviewer for this suggestion.