Tenure, firm's performance, and CEO's compensation

Abstract

Purpose -The purpose of this paper is to assess the association between Chief Executive Officer (CEO) tenure, compensation, and firm's performance. Design/methodology/approach -The paper compares the influence firms' performance on CEOs' cash and total compensation based on the length of tenure. It also examines pay-performance relationship for new CEOs vs those serving their last year in such positions. Findings -The firm size appears to be a significant explanatory variable for CEOs' cash and total compensation regardless of CEOs tenure and measure of performance. Additionally, firms' performance is a significant determinant of cash compensation for CEOs during the first three years of their work as CEOs and not significant for those with 15 years or more as the company's CEO. Both market-based and accounting-based performance measures are negatively correlated with CEOs' total compensation regardless of length of experience.Research limitations/implications -This study did not differentiate routine CEO changes, i.e. normal retirement, from the non-routine ones. Additionally, the results may be limited by the temporal nature of the sample. Future studies dealing with CEO turnover should cover a longer period of CEO' tenure and examine the nature of CEO's dismissal. Such a research design may provide additional insight to the CEO compensation and influence of performance measures in executive contracts. Originality/value -This research offers some evidence in support of CEO incentives relative to the length of service as the firm's CEO. The findings indicate differences in pay-performance sensitivities on the basis of CEO's tenure. Comparing the pay-performance relationship for individuals serving their first year and those serving their last year as the firm's CEOs, the paper detects statistically significant differences in influence of performance on cash compensation.

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“…The coefficient is economically important (0.139) implying that an increase in the CEO's tenure by one year will increase executives' rewards by roughly 14%. This finding stands in line with the previous evidence of Nourayi and Mintz (2008). Moreover, the estimate for the CEO ownership is positive and statistically significant at the 1% level.…”

CEO Compensation: Does Financial Crisis Matter?

“…There is substantial evidence in earlier studies that firm size and CEO compensation are positively related (e.g., Finkelstein & Hambrick, 1989;Lambert et al, 1991;Canarella & Gasparyan, 2008;Nourayi & Mintz, 2008). Based on the previous studies, we formulate the following hypothesis.…”

“…While some studies use firm size as a control variable, others consider it as an explanatory variable. Nourayi and Mintz (2008) and Ghosh (2006) identified a positive effect of firm size on CEO compensation.…”

The Determinants of Chief Financial Officer's Compensation in the Service Industry

“…Nourayi and Mintz [16] indi-cate that the firm size appears to be a significant explanatory variable for executive cash compensation. Early and Cleverley [12] and Langer [13] also describe that the firm size influences the CFO compensation.…”

“…Lambert, Larcker, and Baker [20] found that executives who are awarded fixed salary lack a direct incentive to promote corporate performance because they do not share in the resulting gains in the firm's value. Nourayi and Mintz [16] reported that accountingbased measures of performance are positively correlated with executives' cash compensation.…”