CEO Bonuses, Relative Performance Evaluation, and Pay-for-Luck

Jiménez-Angueira, Carlos E.; Stuart, Nathan V.

doi:10.2139/ssrn.1691154

Cited by 3 publications

(5 citation statements)

References 17 publications

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“…Thus, we support our expectations regarding the impacts of the specific Anglo‐American and Euro‐Continental institutional features on CEOs pay sensitivity to luck. Indeed, we rely on previous evidences of pay for luck (Bertrand and Mullainathan, 2001; Garvey and Milbourn, 2003, 2006) and pay‐for‐firm relative performance (Farmer et al , 2010; Gopalan et al , 2009; Jiménez‐Angueira and Stuart, 2010).…”

Section: Empirical Results and Robustness Checksmentioning

confidence: 99%

“…Whereas the authors have failed to find strong evidence of a pay response to performance[2], rival studies conducted post the increase in equity‐based compensation of the 1990s find a much stronger relationship. These studies cover the USA (Hall and Liebman, 1998; Core et al , 1999; Harford and Li, 2007; Zheng and Zhou, 2009; Jiménez‐Angueira and Stuart, 2010), Canada (Zhou, 2000; Park et al , 2001; Craighead et al , 2004; Swan and Zhou, 2006; Chourou et al , 2008; Kalyta and Magnan, 2008; Geremia et al , 2010), France (Alcouffe and Alcouffe, 2000; Llense, 2010), the UK (Ozkan, 2009; Guest, 2009a; Conyon and Sadler, 2010; Voulgaris et al , 2010; Renneboog and Zhao, 2011), Allemande (Elston and Goldberg, 2003), Australia (Evans and Evans, 2001; Merhebi et al , 2006; Heaney et al , 2010), Japan (Abe et al , 2005; Kato and Kubo, 2006), Chine (Conyon and He, 2011; Chen et al , 2011), Hong Kong (Cheung et al , 2005), Sweden (Oxelheim et al , 2010), Italy (Brunello et al , 2001), Denmark (Eriksson, 2000), The Netherlands (Jansen et al , 2009), Slovenia (Gregoric et al , 2010), and Portugal (Fernandes, 2008). A contrario, results from “neighbor” studies by Tosi et al (2000) and Gabaix and Landier (2008) may seem surprising.…”

Section: Theoretical Background and Hypothesis Developmentmentioning

confidence: 99%

“…Consequently, modeling CEO compensation with reference to the principal‐agent backgrounds may weaken or mislead shareholders' overcomes about reward for chance's dramatic impact on their wealth. Among researchers arguing against the assumptions that directors could resist the systematic influences and negotiate at arm's length with managers under the agency theory, we can mention Bertrand and Mullainathan (2001), Garvey and Milbourn (2003, 2006), Gopalan et al (2009), Feriozzi (2011), Oyer (2004), Jiménez‐Angueira and Stuart (2010), Chiu et al (2011), Oxelheim et al (2010), Oxelheim and Wihlborg (2003) and Oxelheim and Randoy (2005).…”

Section: Theoretical Background and Hypothesis Developmentmentioning

confidence: 99%

“…By considering implicit CEOs' incentives to avoid bankruptcy in a simple hidden action model, Feriozzi (2011) documents that luck cannot be filtered out of managerial pay. Jiménez‐Angueira and Stuart's (2010) study testing whether there is asymmetric use of relative performance evaluation (RPE) and pay for luck that indicates CEO power over the compensation process suggests that CEO bonus compensation is more sensitive to industry‐adjusted performance when the firm outperforms its industry benchmark and when the industry benchmark is positive. Oxelheim et al (2010), Oxelheim and Wihlborg (2003) and Oxelheim and Randoy's (2005) results find macroeconomic influences on Swedish CEOs' compensation to be substantial.…”

Section: Theoretical Background and Hypothesis Developmentmentioning

confidence: 99%

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Pay for luck: new evidences from the institutional determinants of CEOs' compensation

Jouber

Fakhfakh

2012

International Journal of Law and Management

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PurposeThe optimal contracting view assumes that compensation arrangements should not reward performance upward that is beyond the management's control. Critics to this view assert, however that unearned compensation boom may be suggestive of pay for luck. Hence, the authors ask if CEOs' incentive pay is sensitive to lucky as to purely corporate performance. If such, one could question: Are CEOs rewarded for luck? Do institutional features matter for CEOs pay‐for‐luck? How does systematic incentive effect sensitive to luck's nature? Accepting the premises of both contacting and skimming agency's approaches, this paper aims to answer these questions.Design/methodology/approachGeneral and separate ordinary least squares (OLS) and instrumental variables (IV) estimations have been run to estimate the general sensitivity of CEOs' pay, respectively, to performance and luck. These estimations are based on a sample of 300 publicly traded firms covering four countries from the Anglo‐American and Euro‐Continental corporate governance models for the period 2004 to 2008.FindingsIn support of the paper's theorizing, it was found that CEOs pay to be positively related to outside contingencies as well as to shareholders' interests. Positive pay sensitivity to exogenous shocks, which we label systematic incentive effect, shows that management take advantage of lucky external events. Further analyses show, moreover, two stylized facts. First, this effect is asymmetric as executives are rewarded more for good luck than penalized for bad luck. Second, it is less generous under stronger corporate governance, higher investor rights protection, and stricter law enforcement rules. The latter institutional factors seem to be overwhelmingly influential variables in explaining the differences in such effect across countries.Research limitations/implicationsThe paper contributes to the CEO compensation research by: showing that a simple contracting view can mislead shareholders about the effective CEOs' skills and efforts; and filling the lack of consensus within the empirical literature as to whether pay for luck depends on institutional features such as the law enforcement level, the degree of investors' right protection, and the corporate governance system's quality.Originality/valueThe paper's findings offer insights to shareholders, pay consultants, and regulators about the effects that unobservable macroeconomic shocks can have towards the design and the efficiency of a CEO pay contract. The findings help, however, academics understanding the international pay gap's causes.

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Section: Empirical Results and Robustness Checksmentioning

confidence: 99%

Section: Theoretical Background and Hypothesis Developmentmentioning

confidence: 99%

Section: Theoretical Background and Hypothesis Developmentmentioning

confidence: 99%

Section: Theoretical Background and Hypothesis Developmentmentioning

confidence: 99%

See 2 more Smart Citations

Pay for luck: new evidences from the institutional determinants of CEOs' compensation

Jouber

Fakhfakh

2012

International Journal of Law and Management

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“…Thus, we support our expectations regarding the impacts of the specific Anglo-American and Euro-Continental institutional features on CEO pay sensitivity to luck. Indeed, we rely on previous evidences of pay-for-luck (Bertrand and Mullainathan, 2001;Garvey and Milbourn, 2003;2006) and pay-for-firm relative performance (Farmer et al, 2010;Gopalan et al, 2010;Jiménez-Angueira and Stuart, 2010).…”

Section: Regression Resultsmentioning

confidence: 99%

An Efficient Ic On chip Test Framework To Embed Tsv Testing In Memory Bist Using Dynamic Technique

Ms¹,

Mr²

2017

IJBI

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Corporate governance literature suggests that the relationship between CEO effort and outcomes such as firm performance is highly uncertain due to the influence of numerous organizational and environmental contingencies that are outside CEOs' control. The major focus of this study is to determine whether institutional factors explain cross-sectional differences in CEO pay structure and sensitivity to performance and luck. Thus, we address three ultimate questions; Are CEOs rewarded for luck? Does institutional features matter for CEO pay for luck? How do systematic incentive effect is sensitive to luck's nature? Ordinary Least Squares (OLS) and Instrumental Variables (I.V.) estimations based on a sample of 300 publicly traded firms covering four countries from the Anglo-American and Euro-Continental corporate governance models between 2004 and 2008 show that the answers to the two first questions are a surrounding yes. Robustness check tests relying to the third question provide evidence that pay for luck is asymmetric. That is, executives are rewarded for good luck but they are safe of bad luck.

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Récompense ou incitation ? Un essai de détermination de la nature de l’effet incitatif de la rémunération des dirigeants d’entreprise

Jouber

Fakhfakh²

2016

La Revue Gestion et Organisation

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CEO Bonuses, Relative Performance Evaluation, and Pay-for-Luck

Cited by 3 publications

References 17 publications

Pay for luck: new evidences from the institutional determinants of CEOs' compensation

Pay for luck: new evidences from the institutional determinants of CEOs' compensation

An Efficient Ic On chip Test Framework To Embed Tsv Testing In Memory Bist Using Dynamic Technique

Récompense ou incitation ? Un essai de détermination de la nature de l’effet incitatif de la rémunération des dirigeants d’entreprise

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