Executive Compensation and Financial Performance Measures: Evidence from Significant Financial Institutions

Abstract

We survey the use of financial performance measures in determining executive pay among significant Australian financial institutions. We document evidence of the pervasiveness with which externally disclosed non‐GAAP (non‐Generally Accepted Accounting Principles) financial measures are also used internally to determine variable remuneration, with the apparent popularity of cash profit after tax in short‐term incentives plans. Our evidence also highlights the increasing use of peer group‐adjusted measures (e.g., relative cash earnings per share and return on equity ranking against a peer group) in determining longer‐run incentives, despite the fact that members of the peer group do not measure financial performance in a directly comparable manner. Detailed analysis of the four major trading banks (Australia and New Zealand Banking Group, Commonwealth Bank, National Australia Bank and Westpac) reveals differences in the way non‐GAAP earnings measures are calculated across the major banks, as well as some variation over time in the way individual banks measure performance. We also document evidence of non‐GAAP earnings restatements, with around 25% of non‐GAAP results subsequently being restated. These restatements are more likely to result in a downward revision of the initially reported non‐GAAP result than an upward revision. We therefore conclude that existing measures of financial performance used to determine senior executive compensation are not as ‘objective’, as might be assumed.

Executive compensation and the financial performance of Polish listed companies from the corporate governance perspective

“…Our findings are generally consistent with previous studies in the countries, for which the Anglo-American is more suitable, e.g. in the US, Japan, Australia, and New Zealand, such as those of: (1) Lin and Shi (2020), who show that there is a positive relationship between firm market performance and CEO pay; Kato and Kubo (2006), who find that Japanese CEO's cash compensation is sensitive to firm performance; Le et al (2020), who document evidence of the pervasiveness of financial measures used in the assessment of variable remuneration among financial institutions; Ding and Chea (2021), who report that the employee stock option is positively related to firm performance. In emerging economies, the relationships between CEO pay and firm performance are heterogeneous.…”

“…The level of compensation offered to chief executive officers (CEOs) and the relationship between executive pay and companies' financial performance are among the issues that the corporate governance literature deals with the most often. This topic was discussed in the last several decades (Jensen & Murphy, 1990;Mäkinen, 2005;Kato & Kubo, 2006;Brick et al, 2006;Iwu-Egwuonwu, 2010;Ozkan, 2011;Raithatha & Komera, 2016;Amarou & Bensaid, 2017;Yamina & Mohamed, 2017) as well as in recent years (Le et al, 2020;Lin & Shi, 2020;Dias et al, 2020;Amewu & Alagidede, 2021;Cui et al, 2021;Ding & Chea, 2021;Wang et al, 2021;Chen & Hassan, 2022;Kayani & Gan, 2022). Nonetheless, some authors have demonstrated empirically that the relationship between executive compensation and financial performance is significant and positive, while others have not found such a relationship at all.…”

“…Firstly, it concentrates on emerging markets and concerns the relationship between executive pay and firm performance from the perspective of corporate governance principles adopted in Poland, where The Continental model is more suitable (Jerzemowska et al, 2013). The current literature on these relationships has been largely focused on The Anglo-American model (Ascherl et al, 2019;Le et al, 2020;Lin & Shi, 2020;Wang et al, 2021) or the Asia-Pacific countries (Farooque et al, 2019;Cui et al, 2021;Ding & Chea, 2021;Chen & Hassan, 2022;Kayani & Gan, 2022). Our decision is motivated by the lack of global consensus in the literature about these relationships and the non-existing current research across the Central Eastern European (CEE) region.…”

Empirical examination of the direct and moderating role of corporate social responsibility in top executive compensation

“…Kabir and Thai (2017) document the moderating effect of different aspects of corporate governance on the relationship between CSR and financial performance. Le et al (2020) document that externally disclosed non-Generally Accepted Accounting Principles (non-GAAP) financial measures are also used internally to determine remuneration. Matolcsy and Wright (2011) find that firms whose CEOs receive compensation inconsistent with their firm characteristics have lower performance than firms whose CEOs’ compensation is consistent with their firms’ performance.…”

Financial Risks and Its Effect on Financial Performance of Investment Firms Listed at the Nairobi Securities Exchange in Kenya

“…Financial performance can be measured using various operational indicators. According to Le, Shan, and Taylor (2020), the main financial performance measures are; the return on equity (ROE), return on assets (ROA), leverage, liquidity, firm size, and Tobin's Q among others.…”