CEO compensation and firm performance in the insurance industry

Abstract

PurposeWe investigate the relationship between chief executive officer (CEO) compensation and a firm's financial performance in the insurance industry to determine CEO pay policies that are more effective in promoting specific financial corporate goals.Design/methodology/approachConsidering different components of executive pay, we investigate the latter’s relationship with the corporate performance of the insurance industry using the generalized method of moments (GMM) model developed for dynamic panel estimation. Our data encompasses the periods before and after the 2008 financial crisis.FindingsWe observe that after the crisis the insurance industry experienced a major change in executives’ compensation packages. While CEOs’ compensation was primarily based on bonuses pre-crisis, the average size of the bonus was reduced to one-third of the level, stock awards and nonequity incentives were doubled and option awards increased almost 70 percent in the post-crisis period. It is also evident that the work experience of CEOs and the firm's financial performance play a significant role in determining CEO compensation. As the CEO becomes more experienced, stock awards and option awards replace cash bonus.Originality/valueThe paper finds supporting evidence for the agency-related problem in the insurance industry and the convergence of interest hypothesis, suggesting that a firm's market valuation rises as its managers own an increasingly large portion of the firm. To align the interest of owners with that of management, managers should be converted into owners via stock ownership. The paper addresses a topical issue regarding pay and performance and the effect of the financial crisis in the insurance industry.

Do institutional framework and its threshold matter in the sensitivity of CEO pay to firm performance? Fresh insights from an emerging market economy

“…The findings support the theoretical proposition of agency theory that performance should be used as a positive driver of CEO pay to align the managers' and shareholders' interests (Al‐Shammari, 2021; Amewu & Alagidede, 2021; Dang et al, 2021; Hu & Xu, 2021; Jensen & Meckling, 1976; Ko et al, 2020; Yang et al, 2020; Zoghlami, 2021). This finding equally confirms the research outputs of extant studies such as Chen et al (2021), Bouteska and Mefteh‐Wali (2021), Singh et al (2021), Al‐Faryan (2021), Ibrahim et al (2021), and Bhuyan et al (2020) which affirm the theoretical propositions of the classical agency theory. It, however, contradicts the research outcomes of some other studies such as Olaniyi and Obembe (2015, 2017), Duffhues and Kabir (2008), Aduda (2011), and Faria et al (2014) which supports the theoretical stand of managerial power theory that posits CEO pay to be a factor that aggravates agency problem rather than scaling it down (Bebchuk et al, 2011; Bebchuk & Fried, 2003).…”

Does gender diversity on the board reduce agency cost? Evidence from Pakistan

“…The agency issues arising, due to non-alignment of interest between principal and agent, are mitigated by incurring three types of agency costs: monitoring expenses incurred by the principal; bonding expenditures incurred by the agents; and finally, the residual loss, suffered by the principal which is the reduction in welfare experienced by the principal due to aberrant activities of the agent (Jensen and Meckling, 1976). In this scenario, the shareholders, resort to effective boards and stock-based compensation plans to improve the monitoring of management and reduce the agency cost leading to long-term maximization of shareholder wealth (Bhuyan et al , 2020).…”

Truth Vs. Slack Inducing Paradox: How Does Compensation Scheme Mitigate Social Pressure on Budgetary Slack?

“…Although, Fahlenbrach and Stulz (2011) find that bank CEOs whose incentives are aligned with the interests of shareholders do not perform any better than those whose incentives are not aligned, Bhuyan, et al (2020) who examined compensation schemes in the insurance industry found that compensation schemes are closely related to the company's financial performance in the future.…”