Less Pay and More Sensitivity? Institutional Investor Heterogeneity and CEO Pay

Abstract

In this article, the authors develop and test a theory on the effect of institutional investor heterogeneity on CEO pay. Their theory predicts that institutional investors’ incentives and capabilities to monitor CEO pay are determined by the fiduciary responsibilities, conflicts of interest, and information asymmetry that institutional investors face. Their theory suggests, in contrast to previous literature, that public pension funds and mutual funds exert different effects on CEO pay at their portfolio firms because they do not have the same monitoring incentives and capabilities. Using a longitudinal sample of S&P 1500 firms for the years 1998 to 2002, the authors find that public pension fund ownership is more negatively—indeed, oppositely—associated with both the level of CEO pay and CEO pay-for-performance sensitivity than mutual fund ownership. Their findings suggest that (a) researchers’ use of institutional investor classifications that do not distinguish public pension fund ownership and mutual fund ownership can be misleading and (b) while CEO pay critics have called for pay plans that are in line with the “less pay and more sensitivity” principle, this may be an ineffective goal to pursue.

Executive pay and performance in Portuguese listed companies

“…This mechanism reduces the CEO's ability to extract extra rents, and a negative relationship between the use of debt financing and the CEO's earnings is expected. This hypothesis has been tested in the literature by Ryan and Wiggens (2001), Florackis and Ozkan (2009), and Shin and Seo (2011) and their results are consistent with the proposal that debt minimises agency costs.…”

“…Research on this issue by Pennathur and Shellor (2002) measured the determinants of CEO earnings as a function of the firm's performance, where performance is measured by the stock returns, investments and funds from operations. Further analyses of the relationship between firm performance and CEO earnings are provided by Gregg et al (2005), Conyon and Murphy (2000), Ozkan (2007Ozkan ( , 2011, Shin and Seo (2011), among others. The overall results show that firm performance does not have a significant impact on CEO compensation and where it does it explains only a small fraction of total CEOs earnings.…”

“…Conyon et al 1995;Conyon et al 1997); and (5) shareholders and ownership characteristics (e.g. Shin and Seo, 2011). The hypotheses proposed in this research are derived from the abovementioned theoretical models, and from the explanatory indicators found in the empirical literature.…”

Relationship between CEO Pay and Firm Performance: Evidences from Malaysia Listed Firms

“…One of the reports in China says that "executive pay in public firms amounted to as much as 10% of corporate earnings in [2001][2002][2003]; only 20% of the increase in executive pay could be explained by the growth in firm size and performance." (Shin and Seo, 2010).…”

Rejoinder to The motivation of business leaders in socialist and marketbased systems by Péter Mihályi

“…In the socialist countries, the "top SOE managers were given a certain percentage of the enterprise's profit as a bonus" Mihalyi 2017, p. 5). In free-market corporations, managers are usually awarded call stock options (Shin and Seo 2011) that motivates them to undertake actions aimed at raising the value of the company. In summary, contrary to the neoclassical economics view, Kornai (1971) and Mihalyi (2017) argued that profit maximization is only one of the factors that drive managers.…”