CEO Compensation And A Company's Performance Term Paper

Length: 9 pages Sources: 20 Subject: Leadership Type: Term Paper Paper: #98647423 Related Topics: Pay For Performance, Compensation Management, Performance Evaluation, Tyco
Excerpt from Term Paper :

¶ … CEO's salary, bonus, and long-term compensation with respect to various organizational, financial and CEO factors such as corporate reputation, growth in employees, company size, and return on equity, CEO tenure and CEO stock ownership. In relation to the general performance of the organization

This paper utilizes the various measurement of chief executive compensation as exploited by the various detailed pieces of literature and employed as the dependent variable in a model based on multiple regression theory. It explores the extent to which the CEO's compensation package affects the overall performance of the whole firm or corporation for which he or she works for.

The purpose of this research is to determine the extent to which the CEO's remuneration a large corporation such as Coca Cola has on the general performance of the organization.


The CEO's compensation has for a long time been source of attention from various groups in both the general society and the corporate circles. The investors who are involved in the funding of the various organizations and firms usually want to ensure that the hired CEO's remuneration and its related incentives are having a direct and positive influence on the general performance of the firm in question.

The lack of proper performance by a certain CEO whose pay check is fat is often met with excessive opposition from the media, the investors and the general public. The global reactions to misappropriation of funds due to certain leadership or rather governance styles have therefore necessitated various academic debates in respect to the actual determinants of the CEO's pay and what its overall effect on the performance of the corporation should be. Most literature however, point out clearly that the most important parameter that influence the size of the CEO's compensation are the corporation's size. The compensation-performance correlation is therefore a very fundamental issue to be studied and therefore effected in order to ensure the due profitability and continuity of the various global corporations. Previous studies however, do suggest that a very weak relationship do exists between the CEOs pay and the level of performance of any given corporation.

It has been observed in the recent past that high level of corporate governance is necessary in order to ensure that the CEO's compensation truly matches the performance of the corporation. This has mostly been fuelled by the recently observed cases of leadership failures that were unfortunately coupled with very high CEO's compensation levels. The best examples are the various scandals that rocked both the U.S. And the UK corporations. Specific examples of corporate failure that were however marked with very high CEO's pay are the Maxwell Corporation, Enron and Tyco (Girma etal. 2007:65).The failures of these mega corporations were all linked to very elevated CEO's compensation (Matsumura and Shin, 2005).

Data Collection and Methodology

The research technique that is to be adopted is based on the longitudinal panel analysis of sample size of 100 firms from 2000 to 2004.This technique is however, rarely utilized in the context of socially centered research as postulated by (Ryman and Bell, 2003).The technique of data collection for this study is to be mainly through archival research. It is worthwhile to note that there is a big gap that is placed between the researcher and the actual research reality. The researcher shall mainly apply the real CEO's salary statistics against the actual company performance data sets. All these two data sources are far much withdraws from the researcher. We shall stick mainly to the archival technique of data collection due to its permanency attribute. This method also has the merit of allowing the future researchers to apply the same data sets in the analysis of other phenomena or various other improvements in the already existing research projects. The other source of data for this analysis is the financial databases that are readily available through hand collection from various yearly remuneration reports.

The datasets for the two major parameters are then analyzed by utilizing the first-differenced and then subsequently...


CEOs compensation in this case is the initiative company owner's tries so much to compensate their CEOs fairly in order for them to continue with running the companies without any strains and to still look in the best interest of the company. This is owed to the fact that management is "not always constrained to act with the owner's welfare in mind," (Lewellen and Huntsman, 1970) this always because the owner is not involved with running the company directly but through the manager who should be well compensated. CEOs compensation becomes a problem because both owners of the company and the CEO works hard to achieve the best for their company thus the owners should look in ways such as giving the managers a basic salary and compensate them more when the company get more profits. This can be through commissions or even performance-based bonus which are all through incentive-based contracts. The level of managerial effort will depend on an executive's incentive contact, (Murphy 1986)

CEOs compensation has grown gradually over the last 50 years and covers disciplines such as economics, Law, accounting and organizational structure, (Murphy 1999) financial economist such as Jensen and Murphy (1990), have studied the relationship between CEOs compensation and company performance.

Financial economists have also investigated the effects of variables such as the decisions of the directors, capital base of the company, dividend policies mergers, diversification (Murphy, 1999: 2) on CEOs compensation. CEOs compensation is thought to be the most effective way of addressing the company's problem of who owns it and who controls it, (Jensen and Mackling 1979).

Many owners might find this inefficiency troubling. Hall and Liebman (1997) recreated Jensen and Murphy's experiment and found there was a greater relationship between CEO pay and company performance than Jensen and Murphy (1990) thought. This was because Jensen and Murphy (1990) used data from 1969-1983, which predates the "explosion of the use of stock options issuance" that began in the 1980s. Hall and Liebman use expanded data covering the 1980s and some of the 1990s. Between 1980 and 1994, the median value of stock option grants ranges from zero dollars to $325,000. In 1980, 30% of CEOs received options, while in 1994, this figure increased to 70% (Hall and Liebman, 1997). Thus according to this study we assume that stock options are a very important part of the incentive-based contract.

This proposal then tires to evaluate the correlation between CEOs compensation and it effects on a company's performance which were guided by two hypotheses. The first one holds that the CEOs compensations is determined by his past performance, while the second holds that incentives are not important and executive productivity depends on "managerial ability which is initially unknown, but revealed over time, (Murphy 1989).

CEOs compensation affects the company's performance and should be an initiative that is to be taken by both the owners' and those who manage the company. This is because when there is a good compensation package for the manager the he would strive to unleash his potentials to the fullest enabling the company perform better on the other hand the owner should strive to have a good capital base and dividend policies among other that would enable smooth running of the company.

The researcher earlier have tried to evaluate this phenomenon using various theoretical framework to evaluate above such as neoclassical theory, managerial theory, relative performance evaluation theory, principal agent theory, human capital theory, social comparison theory, managerial power theory, information processing theory and tournament theory.

A vast number of researchers who tries to evaluate CEOs pay and performance use the principal agent theory as the basis of their research. On the other hand agency framework is used as an effective way of aligning CEOs interests more closely to those of the owners by enabling a clear reward system that acknowledges the reward system.

The objective of this study is to examine the relationship by controlling for persistency and simultaneity. When doing empirical work with panel data, there are two factors one must take into consideration. First, it is likely that CEO compensation and firm performance are correlated with the current realization of the unobserved firm-specific effects (Marschak and Andrews, 1944). There are additional factors, such as effectiveness of…

Sources Used in Documents:


Anderson, R.C & Bizjak, J.M. 2003) An Empirical Examination of the Role of the CEO and the Compensation Committee in Structuring Executive Pay.Journal of Banking and Finance, 27.

Baiman, S. And Verrecchia R. (1995).Earnings and price-based compensation contracts in the presence of discretionary trading and incomplete contracting. Journal of Accounting and Economics, Vol. 20:1, pp. 94-120.

Barro, J.R.; Barro, R.J. (1990) Pay, Performance and Turnover of Bank CEOs, Journal of Labor Economics, 8.

Bebchuk, L.A & Fried, J.M.( 2003) Executive Compensation as an Agency Problem. National Bureau of Economic Research Working Paper Series, No. 9813.

Cite this Document:

"CEO Compensation And A Company's Performance" (2010, February 05) Retrieved June 24, 2022, from

"CEO Compensation And A Company's Performance" 05 February 2010. Web.24 June. 2022. <>

"CEO Compensation And A Company's Performance", 05 February 2010, Accessed.24 June. 2022,

Related Documents
CEO Compensation
Words: 839 Length: 3 Pages Topic: Business - Management Paper #: 15677110

CEO Compensation Despite Crystal's criticisms of executives earning outrageous sums of money that are not linked to their performance, the reality is that most executives have a compensation package that is based on performance in some way or another (Codon and Lynch, 2004). However, the use of stock options and other equity-based incentives create enormous incentives to manage the performance of companies for short-term stock price gain. This often comes at

CEO Compensation
Words: 846 Length: 2 Pages Topic: Business Paper #: 12935087

seemingly outrageous salaries of many CEOs have sparked a great deal of debate. As CEO salaries reach 532 times that of the average worker, many people note that these exorbitant salaries seem to have little impact on CEO performance. In addition, high CEO salaries are morally suspect, as they are often decided by powerful figures, and reflect a clear economic and social division in a country that is founded

Social Factors Relating to CEO Compensation
Words: 2046 Length: 6 Pages Topic: Business Paper #: 40615261

CEO Compensation The author of this report is asked to answer a few questions and create a tool relating to chief executive officer (CEO) compensation. Of course, there are some traditional trends and factors that usually inform and help calculate what the pay for a CEO shall be. However, there are some people that are clearly outliers to this and some of these anomalous amounts and/or their overall disproportionality to the

Companies As Civil Servants
Words: 932 Length: 3 Pages Topic: Business Paper #: 3819120

Companies Do Enough for Society by Simply Adding to the Economy or Should Businesses Also Attempt to be Socially Responsible This work in writing will consider the pros and cons of businesses being socially responsible in society. Towards this end, this study will examine the literature in this area of inquiry. Defining Socially Responsible Behavior Socially responsible behavior on the part of a business is defined as the business's "obligation to maximize

Compensation Practice
Words: 1640 Length: 6 Pages Topic: Careers Paper #: 7416079

Verizon Compensation Strategy Compensation Practice Verizon Communications is a publicly traded company registered in the United States as a telecommunications and broadband company. It trades under the name Verizon. It is a market leader in the telecommunications industry and strives to provide excellent services that satisfy consumers. Worker compensation has always been an important aspect of Verizon's overall strategy to keep employees motivated and provide excellent service to consumers. In 2010, the

Compensation Strategies Companies. For Company Selected, Discuss
Words: 711 Length: 2 Pages Topic: Business Paper #: 12414604

compensation strategies companies. For company selected, discuss a 350-word synopsis: • Evaluate compensation strategies executives company. • Evaluate compensation strategies sales forces contingent workers company.ID Compensation strategies for two companies Whole Foods Whole Foods, the organic grocery retailer, is one of the few companies that has actually reported garnering positive press as a result of its executive compensation policy. Whole Foods ' "caps the chief executive's salary and bonus at 14 times