Is there a firm-size effect in CEO stock option grants?

Abstract

Schaefer (1998) and Baker and Hall (2004) posit a firm size effect for regular executive compensation but not specifically for executive stock option grants. They propose an inverse relation between pay-performance sensitivity and firm size along with a positive relation between the marginal productivity of executive effort and firm size. The product of pay-performance sensitivity and executive productivity is „incentive strength‟. They find a weakly positive association between incentive strength and firm size. We substitute Hall and Murphy‟s (2002) pay-performance sensitivity metric to detect a firm size effect in CEO stock option grants. After adjusting for small-firm risk aversion and private diversification „clienteles‟, we document evidence of a residual small-firm effect impacting on incentive strength principally through grant size. Given lower small-firm deltas, grant size appears to have been increased by compensation committees to ensure small-firm CEOs are not under-compensated relative to their large-firm counterparts. We also find that firm complexity influences pay-performance sensitivity as well, but not labor productivity (proxying for CEO productivity). No evidence is found that firm smallness and complexity impact on labor productivity. However, we empirically confirm a negative relation between pay-performance sensitivity and firm smallness and, by implication, firm complexity.

Directors Remuneration and Companies' Performance the Comparison of Listed Companies in Poland and UK

“…They used book value of total assets as a proxy for firm size. Rosser et al ( [23], pp. 115-126) also used book value of total assets as firm size when they investigated the impact of firm size on CEO compensation.…”

“…There is an ongoing debate at present how corporate governance should be define (Jarzemowska [13], pp. [22][23][24][25][26][27][28][29][30][31][32][33][34]. The concept of corporate governance can be looked at form legal and economic perspective.…”