Made by:

Blom, Roger
Brandjes Robin
Janissen, Robin

Van Kleef, Robin

Van Olst, Roland

Corporate governance, chief

executive officer
compensation, and firm
performance.
Core, John E., Holthausen, Robert W and Larcker, David F.

Research Questions
The purpose of this paper is to examine whether there is
an association between the level of CEO compensation
and the quality of firms corporate governance, and
whether firms with weaker governance structures
have poorer future performance.
Research questions:
Is there a relationship between board structure and
CEO compensation?
Is there a relationship between ownership structure
and CEO compensation?
<<<Research question over de resultaten die Roland
2
presenteert>>> Do firms with weaker governance

Hypotheses

Board and ownership structure explain a significant

amount of CEO compensation
H0: Observed board and ownership structures have no explanatory power on
level of CEO compensation.
H1: Observed board and ownership do have explanatory power on level of
CEO compensation.

<<<Hier kan nog een hypothese over het tweede

stuk>>>
H0: Predicted excess CEO compensation has no explanatory power on firm
performance.
3
H1: Predicted excess CEO compensation has negative explanatory power on
firm performance.

Methodology and sample

The sample consists of 495 observations over a
three-year period (1982-1984) for 205 publicly traded
U.S. firms.

Model (cross-sectional analysis):

CEO compensation = 0+ 2*Economic determinants +
2*Board structure + 3*ownership structure +

Measures of CEO compensation:

- Base salary
- Base salary and bonus
- Base salary, bonus, stock options, performance
plans and restricted stock.
4

Results

Robin, kan hier ook tekst bij ? Iets in de trend

van:
8 BoD-var and 4 OS-var are generally
statistically significant at conventional levels
Increase CEO Pay / positive corr *:
CEO is chair
Board size
Outside dir appointed by CEO
Outside dir gray
Outside dir interlocked (not sign)
Outside dir >69
Outside dir busy
Decrease CEO pay / neg. Corr* :
% inside director
CEO's % stock ownership
Non-CEO Internal director > 5% equity
% stock ownership Outside director (not sign)
Outside blockholder > 5% equity
=> Corp Governane is weak
=> Less effective Corp Gov.->CEO pay
* If not mentioned variable is statistically significant
5

Results

<<<Hier kan een slide komen over de

resultaten van het tweede deel.>>>

The coefficients on excess compensation in Table 4 indicate that a 40%

increase in excess compensation is associated with a decrease in annual stock returns
per year of 4.97%, 2.82%, and 1.78%, for one-year, three-year,
and ve-year stock returns, respectively.
=> Excess CEO pay lead to poorer future performance (Operating & Stock Market)

Conclusion
Both board characteristics and ownership structure have a
substantive cross-sectional association with the level of CEO
compensation {waar maar wollig, onderstaande kernachtiger}.
CEO pay is higher when corporate governance is less
effective (BoD & OS)
Firms with weaker governance structures have poorer future
performance (operating & stock market )
Firms with weak goverance structures -> greater agency
problems; {Valt uit de lucht , toch ??? Maar staat wel in paper -> must}
Firms with greater agency problems -> higher CEO pay
Firms with greater agency problems -> perform worse.
<<<Conclusie over het tweede deel.>>> zie boven
7

Critics and recommandations

Cross sectional analysis is weak. A panel study

may be appriopriate to examine a change in board
and ownership structure on CEO compensation.
This research only includes U.S. firms. As a result,
its not generalizable to other countries (example:
one tier vs two tier boards)
The time period of the data (1982-1984) is
outdated. Composition of compensation changed.

Related studies

Morse et al (2011): Are incentive contracts rigged by powerful

CEOs? (week 5)
Armstrong, C., C. Ittner, and D. Larcker, 2012, Corporate
governance, compensation consultants, and CEO pay levels,
Review of Accounting Studies, 17, 322-351 (week 6).
Jensen, M. and Murphy, K., 1990. Performance Pay and TopManagement Incentives. Journal of Political Economy. Volume
98, No. 2, Pages 225-264, April 1990
Mehran, H., 1995. Executive compensation structure,
ownership, and firm performance. Journal of Financial
Economics., volume 38, Issue 2, pages 163-184, October
1991
9

References

(Murphy, 2012, Executive compensation: where

we are, and how we got there, Working paper,
Harvard Business School)

-> waar komt dit vandaan? Of is dit die grafiek met bonus
ontwikkeling?? Of heb ik iets gemist ?

10