CEO compensation and government ownership

Abstract

Research Question/Issue: Despite the benefits of privatization (i.e., divestiture of government-owned enterprises), governments still own substantial stakes in economically important firms. Given public concern about excessive compensation and frequent government responses, this paper compares the level and structure of CEO compensation in privatized firms, including those still partially owned by governments, to firms never owned by the government.Research Findings/Insights: Using a multinational sample of firms, we find that privatized firms have lower total CEO compensation than private firms never owned by governments. CEO equity-linked wealth in privatized firms is less sensitive to stock performance, and equity compensation is negatively related to government ownership stakes. Privatized companies engage in less risk-taking than nonprivatized companies, suggesting that government risk aversion could explain differences in CEO compensation.Theoretical/Academic Implications: This study finds that the role government ownership plays in the level and structure of executive compensation is broadly consistent with pay regulations governments periodically impose. It provides empirical support for the argument that government owners are risk-averse and associated with lower equity-linked executive pay, which discourages CEO risk-taking.Practitioner/Policy Implications: This study encourages corporate boards to consider the degree of government involvement in their firms when setting CEO compensation packages and policies. Government concerns about excessive compensation may require boards to find other ways to incentivize CEOs, particularly given the weaker governance linked to state-influenced firms. Additionally, governments should analyze their influences on CEO compensation, and how these can affect performance, when considering their ownership stakes in public companies.

Directors’ Compensation. What Really Matters?

“…Regarding ownership structure, recent evidence on CEO compensation(Borisova et al, 2019) indicates that the type of owner (government in particular) also influences the level and structure of executive compensation.…”

The effect of ownership structure on investment decisions under exogenous shocks

“…SOEs can subsidize the production of higher levels of output to maximize employment or achieve other socially desirable goals, such as locating production capacities in specific geographic regions or increasing national security (Boubakri et al, 2008;Jaslowitzer et al, 2018). SOEs privilege stability and survival (Fogel et al, 2008), decreasing the incentives to downsize operations and promoting risk aversion when undertaking capacity investments (Borisova et al, 2019;Boubakri et al, 2013). Thus, SOE managers tend to be evaluated based on the goals of government actors, resulting in weak external disciplinary forces and causing them to be more sympathetic to the demands of politicians, employees, or other stakeholders (Bertrand & Mullainathan, 2003;Fogel et al, 2008;Subramanian & Megginson, 2018).…”

“…The problems arising from imperfect monitoring and agency issues, which tend to be better managed by a more concentrated ownership structure, are more difficult for SOEs to deal with. Institutional rigidities limit the ability of SOEs to correct for information asymmetries through incentive systems because (i) managers are locked into a pay structure with a weak link—if any—between salaries and performance (Borisova et al, 2019) and (ii) stock‐based compensation schemes are absent (Borisova et al, 2012; Chen et al, 2017; Souder & Shaver, 2010). Additionally, in POEs, the market may respond to bad performance by withdrawing capital, taking over the firm, replacing the managers or shutting the company down, whereas SOEs have softer budgets that are not directly subject to the disciplinary forces of capital markets (Megginson & Netter, 2001).…”

Corporate ownership and concentration

“…Furthermore, CEOs in some cases may also be political appointees with direct access to the political level, undermining the authority of the board to oversee company performance. In addition, executive compensation structures in these companies show a lower correlation between firm performance and compensation level compared with private companies, which can harm the interests of shareholders (Borisova, Salas and Zagorchev, 2019 [28]).…”