Determinates of Executive Compensation: A Hierarchical Linear Modeling Approach

Determinates of Executive Compensation: A Hierarchical Linear Modeling Approach

Owen P. Hall Jr. (Graziadio School of Business and Management, Pepperdine University, Malibu, CA, USA) and Kenneth Ko (Graziadio School of Business and Management, Pepperdine University, Malibu, CA, USA)
Copyright: © 2014 |Pages: 11
DOI: 10.4018/ijkbo.2014040104
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Abstract

Executive compensation continues to grow at a time when the rest of America is hurting. Why is this so? Many business pundits believe that there is a total disconnect between executive compensation and company performance. The purpose of this paper is to illustrate how hierarchical modeling can be used to better understand the relationship between executive compensation and organizational efficacy. An analysis of S&P1500 firms for 2004 was performed using a two level hierarchical design. The results show that a number of manager and firm characteristics affect total compensation including executive age, revenues and Tobin's Q. These results can be used by compensation committees to better align executive pay with firm performance and prevailing social norms.
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Literature Review And Background

The relationship between executive pay and firm performance has been extensively studied (Hallock, 2008; Petra, 2008; Devers, 2007; Conyon, 2006; Erturk, 2005; Core, 2003). The general consensus is that the determinants of executive compensation are numerous and complex. For example, Hallock discovered that there is a stronger relationship between pay and performance with conditionally higher paid CEOs compared with conditionally lower paid CEOs. Furthermore, Peta found that the size and makeup for the board seems to have an impact on executive compensation. Specifically, this study revealed that CEOs are more likely to receive lower levels of performance-based incentives when the majority of the compensation committee members serve on less than three other boards, and when the size of the board is less than or equal to nine members. Recent evidence also indicates that management demographics like age and education influence decision making and thus firm performance (Goll, 2005). Additionally, the level of education has been found to have a positive effect on organizational innovation and performance (Carmen, 2005). The combination of both demographic and environmental factors provides new insights into the relationship between executive compensation and firm performance.

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