Remuneration

Highest executive pay vs CEO: Bebchuk & Fried (2003) provide a theory that the greater the disparity between CEO and top executives, the more entrenched the CEO is. The CEO has more power (by being able to dictate their own pay) and therefore the agency problem deepens.  An entrenched CEO makes the monitoring function of the board difficult with increased CEO succession risk, especially when related to internal candidates (Masulis & Mobbs, 2011).

  • Fulfillment criteria: Higher score awarded the higher the percentage
  • Why this fulfillment criteria: As per literature
  • Scoring: 0=30%+, 1=21%-30%, 2=11%-20%, 3=0%-10%

Increase in CEO pay excessive:  Murphy (1999) finds a poor relationship between CEO pay and company performance.  In addition, Brick, Palmon, & Wald (2006) find board pay has a positive relationship with excessive CEO pay.  These findings raise questions about the monitoring role and independence of the board.  If CEO pay is not tied to performance then the incentive for CEO’s to maximise shareholder value is lost and the agency problem amplified.

  • Fulfillment criteria: Higher score awarded the lower the percentage
  • Why this fulfillment criteria: As per literature
  • Scoring: 0=30%+, 1=21%-30%, 2=11%-20%, 3=0%-10%

Max score for Remuneration category is 6.

References

Bebchuk, A., & Fried, J. (2003). Executive compensation as an agency problem. The Journal of Economic Perspectives, 17(3), 71-92.

Brick, I., Palmon, O., & Wald, J. (2006). CEO compensation, director compensation, and firm performance: Evidence of cronyism? Journal of Corporate Finance, 12(3), 403-423.

Masulis, R., & Mobbs, S. (2011). Are all inside directors the same? Evidence from the external directorship market. The Journal of Finance, 66(3), 823-872.

Murphy, K. (1999). Executive compensation. Handbook of Labor Economics, 3, 2485-2563.