Pay for luck: new evidences from the institutional determinants of CEOs' compensation

Abstract

PurposeThe optimal contracting view assumes that compensation arrangements should not reward performance upward that is beyond the management's control. Critics to this view assert, however that unearned compensation boom may be suggestive of pay for luck. Hence, the authors ask if CEOs' incentive pay is sensitive to lucky as to purely corporate performance. If such, one could question: Are CEOs rewarded for luck? Do institutional features matter for CEOs pay‐for‐luck? How does systematic incentive effect sensitive to luck's nature? Accepting the premises of both contacting and skimming agency's approaches, this paper aims to answer these questions.Design/methodology/approachGeneral and separate ordinary least squares (OLS) and instrumental variables (IV) estimations have been run to estimate the general sensitivity of CEOs' pay, respectively, to performance and luck. These estimations are based on a sample of 300 publicly traded firms covering four countries from the Anglo‐American and Euro‐Continental corporate governance models for the period 2004 to 2008.FindingsIn support of the paper's theorizing, it was found that CEOs pay to be positively related to outside contingencies as well as to shareholders' interests. Positive pay sensitivity to exogenous shocks, which we label systematic incentive effect, shows that management take advantage of lucky external events. Further analyses show, moreover, two stylized facts. First, this effect is asymmetric as executives are rewarded more for good luck than penalized for bad luck. Second, it is less generous under stronger corporate governance, higher investor rights protection, and stricter law enforcement rules. The latter institutional factors seem to be overwhelmingly influential variables in explaining the differences in such effect across countries.Research limitations/implicationsThe paper contributes to the CEO compensation research by: showing that a simple contracting view can mislead shareholders about the effective CEOs' skills and efforts; and filling the lack of consensus within the empirical literature as to whether pay for luck depends on institutional features such as the law enforcement level, the degree of investors' right protection, and the corporate governance system's quality.Originality/valueThe paper's findings offer insights to shareholders, pay consultants, and regulators about the effects that unobservable macroeconomic shocks can have towards the design and the efficiency of a CEO pay contract. The findings help, however, academics understanding the international pay gap's causes.

Corporate Governance Disclosure Index–Executive Pay Nexus: The Moderating Effect of Governance Mechanisms

“…Third and despite increasing anecdotal evidence suggesting that other corporate executives below the CEOs, such as CFOs pay packages are getting equally significant in magnitude, existing studies have mainly investigated the antecedents of CEO pay (e.g., Core et al ., ; Dong and Ozkan, ; Adams and Ferreira, ; Fahlenbrach, ; Guest, ; Gregory‐Smith, ; Jouber and Fakhfakh, ), and thereby relatively little is known about the impact of firm‐level corporate governance on the pay packages of other executives, such as CFOs and all other executive directors.…”

Incentivos para a adoção e a utilização da linguagem XBRL pelas companhias em sua comunicação com o mercado

“…O software utilizado para se estimar as DA foi o Eviews. (Flores et al, 2015;Ghosh et al, 2010;Chen et al, 2011;Chi et al, 2011;Jouber & Fakhfakh, 2012). Além disso, as grandes empresas de auditoria acabam por criar práticas homogêneas e padrões a serem seguidos pelos seus clientes.…”

“…0 + 1 2/ 3 + 4 50 6 + 7 50 6_) + 9 6 + : ;2 + < /-= + > ) + 2/ 3 * 50 6 +∈ (Equação 3.11) Na qual: DA = Apropriações Discricionárias que são os resíduos das equações obtidos na fase anterior do estudo. Tais valores serão testados em seus valores normais e em seus valores absolutos (Jouber & Fakhfakh, 2012 Diversos estudos apontam para o fato de que quanto maior a empresa, maior a pressão para aumentar a divulgação de informações financeiras, pois são objeto de maior atenção por parte de investidores e analistas (Firth, 1979;Cooke, 1992;Ahmed & Courtis, 1999;Cruz, 2010 Outro ponto a ser levado em consideração é que, conforme Moore e Benbasat (1991), a adoção da linguagem XBRL, entendida como uma inovação, pode ser percebida como um fator para melhorar a imagem de uma entidade, ou ainda, vincular a empresa a uma imagem de inovação.…”

“…Dessa forma, apesar de a literatura apontar esse fato como inibidor do gerenciamento de resultados (Ghosh et al, 2010;Chen et al, 2011;Chi et al, 2011;Jouber & Fakhfakh, 2012), esse fato não foi verificado neste estudo, não comprovando a hipótese G1 (Há uma relação negativa entre o gerenciamento de resultados e a existência de auditoria efetuada por uma Big Four). O achado neste trabalho corrobora os resultados de Flores et al (2015).…”

“…Esse achado corrobora os resultados de Flores et al (2015), mas não com outras pesquisas estudadas (Ghosh et al, 2010;Chen et al, 2011;Chi et al, 2011;Jouber & Fakhfakh, 2012).…”