Pay-performance sensitivity and corporate governance mechanisms: evidence from Tunisia

Abstract

Purpose The purpose of this study is to analyze the CEO compensation sensitivity to firm performance, termed as the pay-for-performance sensitivity (PPS) in the Tunisian context and to test the robustness of this relationship when corporate governance (CG) mechanisms are considered. Design/methodology/approach The consideration of past executive pay as one of the explanatory variables makes this estimation model a dynamic one. Furthermore, to avoid the problem of endogeneity, this study uses the system-GMM estimator developed by Blundell and Bond (1998). For robustness check, this study aims to use a simultaneous equation approach (three-stage least squares [3SLS]) to estimate the link between performance and CEO pay with a set of CG mechanisms to control for possible simultaneous interdependencies. Findings Using a sample of 336 firm-years from Tunisia over the 2009–2015 periods, this study finds strong evidence that the pay-performance relationship is insignificant and negative, and it becomes more negative or remains insignificant after introducing CG mechanisms consistently with the managerial power approach. The findings are robust to the use of alternative performance measures. This study provides new empirical evidence that CEOs of Tunisian firms abuse extracting rents independently of firm performance. Originality/value This study contributes to the unexamined research on PPS in a frontier market. This study also shows the ineffectiveness of the Tunisian CG structure and thus recommends for the legislator to impose a mandatory CG guide.

Board characteristics and CEO turnover–performance relationship: evidence from India

“…This issue cannot be addressed through a fixed-effects model leading to the endogeneity problem. Therefore, in such situations, the 2SYT-GMM technique can be used (Ghrab et al , 2022). Moreover, CTURN in the previous year can affect the chances of CTURN in the current year (Graffin et al , 2013), making it a dynamic process (Lafuente and García-Cestona, 2021).…”

Corporate governance, CEO compensation, and corporate performance: evidence from India

“…Moreover, it has been argued that the past pay of an executive can influence his current level of COMP. Consequently, the inclusion of the lagged dependent variable as an independent variable makes the estimation model dynamic which justifies the application of the dynamic panel data technique SYT-GMM (Ghrab et al , 2022). In addition to it, firm performance can be influenced by the COMP paid to an executive in the firm (Fich and Shivdasani, 2006).…”

“…This might cause a causal and simultaneous relationship between CP and CEO pay, leading to the endogeneity problem. Thus, this problem can be avoided by using the SYT-GMM estimator (Ghrab et al , 2022).…”

“…Furthermore', the coefficient of lagged dependent variable, that is, lag one of total pay and cash pay (L.TC and L.CC), is significant in all the models, indicating that the GMM estimation has a good fit (Al-ahdal and Hashim, 2022). This also implies that the current-year pay of the CEO is based on the COMP paid in the previous year (Sheikh et al , 2017; Patnaik and Suar, 2020; Ghrab et al , 2022). Finally the results pertaining to the impact of CG variables on COMP and PPR are broadly similar to those obtained earlier.…”

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

“…CEO pay has continued to generate a great deal of research, debate, and discussion as a corporate governance tool in finance literature (Agyemang‐Mintah & Schadewitz, 2019; Al‐Najjar, 2017; Amewu & Alagidede, 2021; Amewu & Alagidede, 2021; Ataay, 2018; Chaigneau & Sahuguet, 2018; Lin & Shi, 2020; Mans‐Kemp & Viviers, 2018; Nourayi, 2006; Olaniyi, 2019; Olaniyi & Olayeni, 2020; Rahman & Mustafa, 2018; Saravanan et al, 2016; Wang & Deng, 2021; Wu, 2021). Agency‐theoretical proposition suggests that CEO pay should be closely tied to firm performance as an effective mechanism of corporate governance to match the managers and shareholders' interests (Al‐Shammari, 2021; Choi et al, 2019; Dang et al, 2021; Ghrab et al, 2021; Gloor, 2021; Jensen & Murphy, 1990; Waleed et al, 2021). Following this theoretical proposition, there exist a plethora of studies on the issues surrounding the sensitivity of CEO pay to firm performance with inconclusive and mixed research outputs.…”