Executive Compensation - University of Tilburg

Transcription

Executive Compensation
Performance and impact of the financial crisis
Max J.H.J. Schubert1
December 2011
Tilburg University
Department of Finance
Supervisor: Prof. Dr. V. Ioannidou
1
Author information: M.J.H.J.Schubert; Student Master International Management 2010/11; Administration nr.
423886; E-mail address: [email protected].
Abstract
The relation between executive compensation and performance is a topic often
studied by several researchers. In most studies only the relation between compensation and
performance before the crisis is investigated. These papers illustrate that there are positive
relations between these variables. This paper summarizes the empirical and theoretical
research and provides up-to-date description and trends of executive compensations. It is
unique in the fact that it investigates the effects of a crisis and the differences in the
relations between economically different periods, thus before and during a financial crisis.
The results suggest that the result-oriented pay, stock options and restricted stock holdings
is always positive related to performance before the crisis. Except in the internal reference
wage there are found a lot of negative relations. During the crisis there are still many
positive relations. However there are more negative relations than before the crisis. Thus
relations in one period are not nescessary the same in the other period. The most relations
are found in the external reference wage model followed by the relative performance
evaluation model, general relation model and internal reference wage model. The effect of
the crisis depends on the performance measure, industry (division) and period. The results
also illustrate that the relations of base salary and number of compensations differs
between performance measures, divisions and periods. The difference in the variable
number of compensations means that the incentive theory does not hold in all cases. The
variable total assets group yields very consistent results. It has almost allways a negative
relation.
Keywords: Executive compensation, performance, corporate governance
Data Availability: All data are available from the public databases, Compustat Global
Database and Compustat’s ExecuComp Database and will be tested using SPSS. The
Compustat Global Database is covering all financial data like balance sheets, income
statements and cash flows. This database is used for the performance data nescessary in this
study. The Compustat’s ExecuComp Database is covering all CEOs compensation data. In this
study the S&P Small-Cap 600 (Code SC), S&P Mid-Cap 400 (Code MD) and S&P 500 (Code SP)
are used for the indications of compensation. Most of the times the data is from 1992 to
2010. For investigating the relations only the S&P 500 is used from 1992 to 2010. All
compensation dollar values are represented in thousands of dollars and the performance
dollar values are represented in millions of dollars, if not noted otherwise.
This paper is made for the master program International Management of the Tilburg
University as MSc Thesis International Management for the Department of Finance2. My
thanks go to Mrs. Prof. dr. V. Ioannidou, Professor of Finance at Tilburg University, for the
helpful comments and suggestions during my research as my supervisor.
2
Department of Finance contact information: Tilburg University, Department of Finance, P.O. Box 90153, 5000
LE Tilburg, the Netherlands.
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Table Of Contents
Abstract
1. Introduction
2. Information about Executive Compensation
2.1
Components of compensation
Base Salary (Fixed Base Pay)
Result-Oriented Pay (Annual Bonus Pay)
Long-Term Incentive Plans (LTIPs)
Stock Options
Restricted Stock (Performance Shares)
Other Compensations
2.2
Compensation strategy
Stock Options
2.3
Incentive Implications
Stock Options
2.4
Industry and country differences
Industrial differences
Country differences
2.5
Policies, laws and legislation
2.6
Compensation effects towards performance
2.7
Theories related to compensation
3. Research and Data information
3.1
Methodology
Test 1 (Relationship and influence of the crisis)
Test 2 (Relationship in different periods)
3.2
Data and Variables
3.3
Limitations
4. Empirical analysis
4.1
Test 1 (relationship and influence of the crisis)
4.2
5. Conclusion
References
Appendix
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1. Introduction
The financial world has seen two big crises, the 1929-1930 U.S. financial crisis (Shiller,
2008) and the recent financial Mortgage crisis of 2007 (Fontana and Setterfield, 2009 &
Landskroner and Raviv, 2009). This financial crisis is a result of mortgaging policies from
banks and it has resulted in the bankruptcy of many companies or take-overs by the
government. For example in Denmark the 11th bank was seized by the government (Molin,
2011). In the Netherlands, the Dutch government had to buy ABN Amro bank to prevent
complete bankruptcy (Dirks, 2008). Even with this failure of the Bankers they received a high
bonus, in total 11.1 million euro’s for 10 bankers, paid by the new owner (Hummels, 2010).
The U.S. congressional oversight panel has in a recent special report identified that the
increase in executive pay together with incentives for excessive risk taking is one of the
crucial problems for the 2007 financial crisis (Landskroner and Raviv, 2009).
Figure 1, the median total compensation from 1992 to 2010, is confirming that the
executives’ compensation is increasing (for the sample taken from Compustat’s ExecuComp
Database for the S&P 500, the S&P Mid-Cap 400 and the S&P Small-Cap 600). In 2006 the
executive pay has more than doubled in the S&P Small-Cap 600 and even more than
quadrupled in the S&P Mid-Cap 400 and quintupled in the S&P 500 in 2007. In 2007 (S&P
Small-Cap 600), 2008 (S&P 500 and S&P Mid-Cap 400), it decreased which holds until 2009.
The trend of the median total current compensation (cash & bonuses) is represented in
Figure 2. These increased in the period until 2005 and even more than doubled in the S&P
500 and S&P Mid-Cap 400. In 2006-2007 they decreased thereafter they started to increase
again slightly, but they were still below the U.S. inflation rate, using 1992 as base level.
Performance compensations (for example; result-oriented pay, stock options and
restricted stocks) where originally introduced or implemented with the idea to improve
organizational performance for shareholders. They should motivate executives to increase
their efforts to work harder or more efficient for the organization and increase in that way
the performance. There are a couple of studies confirming a positive relation between
compensation and performance (e.g., Brown, Robinson and Cayler, 2004; Fich and
Shivdasani, 2004; Thierry, 2001) These studies are mostly focused on non-financial
organizations because financial organizations are normally not giving any information about
executive compensations.
The objective is to provide a rich and up-to-date description and updating empirical
and theoretical research on executive compensation. In this paper the effects of
compensations, the influence of a financial crisis and the difference of before and during a
financial crisis are represented. Illustrated by the published articles there is again a lot of
attention in the topic of executive pay from investors, financial economists, regulators and
the media. This research can give insights about the effects of compensations in relation to
performance in different economic circumstances. Nowadays there is data available of
organizations from 1992 until 2010 which is data from before and a couple of years during
the financial crisis. This provides the opportunity to test if the studies about compensation
also hold in different circumstances.
The paper is structured as follows. Section 2 provides information about executive
information and shows the current state of related literature. Section 3 describes the
methodology and information regarding the (sample) data, variables and limitations of this
research. Section 4 outlines the analysis or test and presents the results. Section 5 concludes
this paper.
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2. Information about Executive Compensation
The literature about CEO pay research is growing. Most financial studies involve in
the relationship of payments/compensations and company’s size, profits, risk, corporate
performance, investment decisions, capital structure or dividend policies, using U.S. data
(Suntheim, 2010; Murphy, 1998). But before explaining or researching one of these
relationships it is convenient to know what executive compensation exactly is, how it works,
how it has developed over the last years and what aspects are related to compensation.
This section gives an introduction and overview of the current state of theoretical
and empirical literature related to this topic. Starting with some general information about
compensation like the components of compensation, the setup of compensation,
differences between industries, the amount of compensation and policies, laws and
legislations towards compensations. Then there will be a brief review of the research which
is related to compensation in relation to performance and finally some economical and
psychological theories related to the effects of compensations will be explained.
2.1
Components of compensation
Compensation can be divided in many different ways where each of these
components separately or together may affect the attitudes and work behavior. Murphy
(1998) for example divides executive pay packages in four basic components. These are base
salary, annual bonus (combined with performance or results), stock options and long-term
incentive plans (such as restricted stock plans and performance plans). As additional group
he names special benefits like life insurance, retirement plans and severance arrangements.
Thierry (2001) has another way of dividing the compensation. He says that compensation
mostly consist of three or four components. The first component is the fixed base pay, also
known as wage or salary. The second part is a results-oriented pay or performance bonus,
such as (cash) bonuses, stock options or shares on the stock market. These are paid if certain
results or performance levels have been achieved. The third component is secondary labor
conditions, for example health insurance, disability coverage or retirement benefits. The
final group are perquisites. These include (mobile) phone cost coverage, car leasing or lower
mortgage interest. The Financial Times Lexicon has a complete other way of dividing
compensation. According them compensation packages consist of a mix of short (within a
year) and long (more than a year) term incentives. Short term incentives could be for
example salary and annual bonuses and long term incentives could be stock options and
restricted shares.
Although there are many different ways to divide compensation, in this study almost
all components will be separately investigated and described. These are the components;
base salary, result-oriented pay, long-term incentive plans (LTIPs), stock options, restricted
stocks and others. Were the first two groups are short term incentive plans because they are
normally given yearly and the next three are long term incentive plans. The group others
consist of all other components, which are mostly long term incentives, thus are paid over a
period longer than one year. All these components except base salary and others are
normally performance based award systems which have a target payment. These groups are
of interest for the relation between compensation and performance.
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The base salary also known as wage, salary or fixed base pay is the first component,
that normally is present in each contract (Table 1 illustrates that in the S&P 500, 99.58%
receives a base salary). The base salary is a fixed pay towards executives which is a short
term incentive, normally paid within a year.
That it is fixed means that it does not matter what happens, the executive has the
right to receive this compensation. Probably for this reason it is for a risk-averse executives
on of the morst important component. It is a key component and the most standard way of
compensation. Probably even the first form of compensation ever used in contracts. The
base salary is an important component of compensation because it is often used by
organizations as a reference or measurement level for setting up bonuses and option grants.
The base salary can be paid in cash and non-cash. Examples are cash or wage, but could also
include extras like (mobile) phone cost coverage, car leasing or lower mortgage interest.
Figure 3 illustrates the median base salary, were according the definition of
ExecuComp the base salary is the cash and non-cash earned by an executive during that
fiscal year. In all three the S&P’s the base salary slightly increased in a straight line. It has
almost doubled from 1992 to 2010. In the S&P Mid-Cap 400 it even more than doubled, it
increased from 198.40 to 412.68 thousands of dollars. It also illustrats that for the first
couple of years the increase in base salary was almost the same as the U.S. inflation rate.
From 1998 the increase for base salary was higher than the U.S. inflation rate.
The second component is results-oriented pay, annual bonus pay or performance
bonus. These are paid if certain results or performance levels are achieved, mostly over a
period of one year. That is why this compensation is a short term incentive, paid within a
year.
Normally there is no bonus paid until a performance threshold is achieved. Above
that point the bonus increases in relation with the performance, as described in a bonus
plan, until a certain cap is reached. If the performance level achieved would be better than
the level of the cap there is no extra bonus paid. Figure 4 illustrates the basic system of a
bonus plan. It illustrates the “incentive zone”, which is the range where improvements in
performance are related to improvements in bonuses. Figure (4a) illustrates the incentive
zone as a straight line, however in practice it is better illustrated in Figure (4b). There are
many small steps which all have a specific bonus level. The performance threshold is the
minimum performance level which has to be achieved before a bonus is paid and the bonus
cap is the maximum amount of bonus paid in a specific year. Examples of result-oriented pay
are cash or non-cash (shares) bonuses.
The amount of payouts depends on the results or performance levels achieved which
are made by the organization. These results or performance levels used are called the
performance measure. These performance measures can be allocated to only one person,
but it is also possible that a group of executives is responsible for achieving a certain
performance. Each specific bonus plan may include one single performance measure (which
is the case in less than 50% of the organizations) or two or more measures (on average >2
criteria) (Murphy, 1998). In case of multiple measures, each measure can be treated as a
separate plan in which each measure has separate bonus payments. Or it is an aggregated
plan in which all measures need to be positive to receive a bonus. These performance
measures can be non-financial (customer satisfaction, increasing plant capacity, new
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computer system implementation, reducing time to market) and financial (Earnings,
Operating Profit (EBIT), Economic Value Added (EVA), Sales, Margins).
In Figure 5 the median result-oriented pay from 1992 to 2010 is represented for the
S&P 500, S&P Mid-Cap 400 and S&P Small-Cap 600. Were the result-oriented pay is
according the definition of ExecuComp variable bonus, the dollar value of a bonus (cash and
non-cash) earned by the executive during that fiscal year. It illustrates that bonuses have
more than doubled from 1992 to its peak in 2005 for the S&P Small-Cap 600 (from 75.00 to
153.88) and even more than tripled for the S&P 500 (from 168.28 to 580.00) and S&P MidCap 400 (from 85.51 to 297.94). There are two decreasing periods; the first one in 2001 and
the second decrease in 2006 until 2007-2008. For example the S&P 500 decreased in 20002001 from 339.90 to 325.00 and in 2005-2008 from 580.00 to 300.00. However during the
financial crisis in 2009 and 2010 the result-oriented pay has increased again which looks a bit
strange. An explanation for this increase could be that from 2005 (before the start of the
financial crisis in 2007) results were disappointing so the compensations also were less. Then
in 2007-2008 the results were getting better or the organizations noticed that they had to
adjust their performance levels in order to remain achievable. This could mean that
adjustments in performance levels have a lag of a couple years after results getting worse or
in this case maybe because in 2007 experts officially labeled the period as the start of a
financial crisis. So by lowering the performance levels more executives realized their
bonuses levels and more bonuses were paid to executives. This could be the reason why the
bonuses paid increased again in 2008-2010 during the financial crisis.
Long-Term Incentive Plans (LTIPs)
Long-term incentive plans (LTIPs) are in essence the same as result-oriented pay or
annual bonus pay. Both have a structure were the pay is related to some performance
standards. The difference between both is that result-oriented pay is based on short-term
incentives and these LTIPs are long-term incentives (thus longer than one year). LTIPs are
based on an average three to five year cumulative performance (Lawrence, Sagolla and
Laverty, 1989). The idea behind it is to give executives extra compensation at a later time or
period to make sure they have good intentions (or the same as shareholders) for the
organizations future (Slimmering, 2006). For the executive to make use of the oppertunity to
receive the extra compensation, they need to make sure the stock prices are higher than the
options exercise price, the restricted stock price or they have to stay a certain time period in
the organization. Examples of LTIPs are stock options, restricted stock plans and cash
performance plans.
Figure 6 illustrates the median long-term incentive plans payouts from 1992 to 2006,
because there is (following ExecuComp variable LTIP – Long-Term Incentive Payouts) no data
available from 2007 to 2010. According the definition of ExecuComp LTIPs (Long Term
Incentive Payouts) is the amount paid out to the executive under the company’s long-term
incentive plan. These plans measure company performance over a period of more than one
year (generally three years). Probably this is only the cash payments without stock options
and restricted stock because they are represented separately in the database. Which could
mean that these cash versions are not used anymore. However it is not sure why these LTIPs
are only represented until 2006. For all the S&P’s the payouts increased over the years with
the biggest increased in the S&P 500 from 141.29 in 1992 to 1,170.48 thousand dollars in
2006.
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Stock Options
Stock options can be seen as part of the long-term incentive plans or as separate
compensation component. Stock options are contracts carrying the right, but not the
obligation, to buy a certain amount of shares in the company at a predetermined price.
Some options give the right to buy the shares at one specific time (expiration date), while
others give the right to buy them in a specific time period until the expiration date. These
are also known as respectively American and European stock options. Executive stock
options are slightly different from regular stock options because they are not traded on an
exchange, there is no put component and they are mostly forfeited if the executive quits his
function or leaves the organization before exercising the option (Bliss, 2003). Furthermore
they first typically must wait a specified period or have achieved a specific performance level
before being allowed to exercise their options. The time period an executive has to wait
before exercising the option can differ for example from one to twenty years. Therefore this
component could be a short term as well as a long term incentive. The last one is more
common, because most options have a maximum lifespan of ten years (Murphy, 1998) and
an average of two to five years (Lawrence, Sagolla and Laverty, 1989). Therefore options
could be seen as a deferred accounting compensation. For that reason and because they are
more complicated it is more difficult to find the entire options plans in a financial report.
If an organization does not want to issue options but would like to get almost the
same effect. They could use a stock appreciation right (SAR), were they pay the executive the
difference between stock and strike price value in cash without having to buy the actual
shares (Bliss, 2003).
Figure 7 illustrates the median value realized on option exercise from 1992 to 2010.
According the definition of ExecuComp the value realized on option exercise is “the value
calculated as of the date of exercise and is based on the difference between the exercise
price and the market price of the stock on the exercise date”. It illustrates two peaks, the
first in 2000 and the second in 2006-2007. After 2006-2007 it declined until 2009 and
increase again in 2010, but it has almost doubled from 1992. For example in the S&P 500 it
increased from 425.27 in 1992 to 1,950.06 in 2000. Then it decreased until 2002 to 930.55
after that it increased again to 1,811.58 in 2007 and then decreased again until 2009. The
declines in 2001 and 2007-2008 illustrated by this Figure could be related to two main
events in these two periods. In 2001 the terrorist attack (9-11) at the twin towers which
resulted in a big decrease in stock prices in the S&P’s (Thomasson and Stanton, 2008) and in
2007-2008 the start of the financial crisis. Both events had a negative effect on market stock
prices which negatively influences the value realized on option exercise because the exercise
prices were determined before these events and are not changing after being setup. This
could be the reason for the decreases in those periods.
Figure 8 illustrates the median number of options granted from 1992 to 2010. The
number of options granted has another trend line then the value realized on option exercise.
It has increased and has a peak in 2001 and 2009. The increase in number of options granted
is at a slower and reasonable steady slope. For example in the S&P 500 it increased in 1992
from 20.00 shares to 85.32 shares in 2001. Then decreased a little bit until 2004 (70.00
shares) and increased again until 2009 to 93.19 shares.
It has to be noted that the value of stock options can be calculated with different
models namely the Black-Scholes model and the binominal model. The Black-Scholes model
is a widely known and used method for calculating the (companies) cost of granting a stock
option. It only does not include the reduction of the probability of forfeiture and it also
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assumes that they can only be exercised at the expiration date which is not the case in
executive options. The International Accounting Standards Board (IASB) and the Financial
Accounting Standards Board (FASB) have agreed that as of 2006 the fair value should be
estimated using an option pricing model. We can see that this agreement is implemented
because of the data availability in the ExecuComp Database. Figure 9 illustrates the median
dollar value of the options granted for executives using the Black-Scholes model, as reported
by the company and the grant date fair value. Until 2006 the first two options are used in the
organizations. Where the Black-Scholes model has a lower value than the value reported by
the companies. Starting from 2006 only the grant date fair value is used like agreed by the
IASB and FASB. These values are more in line with the Black-Scholes model than with the
value reported by companies.
Restricted stocks can, just like stock options, be seen as part of the long-term
incentive plans or as separate compensation component. Restricted stocks are stocks or
shares made available for executives which are not the same as normal stocks. They differ
on the fact that they cannot be sold until certain conditions are met and/or after a certain
period of time and they have forfeiture conditions. For example an executive could receive a
fixed number of shares in a time period of five years (at least if he keeps working for the
organization), the ownership of these shares are transferred at a rate of 20% each year. The
dividend payments belonging to these shares could be paid yearly, at the end of the time
period (in this example after five years) or not at all. These payments then affect the vested
shares, the not vested shares or both of them.
The difference with stock options is that these restricted stocks have even a value if
the stock price decreases, unless they decrease to zero or the organization gets bankrupt.
Although an executive of course would like to have stock were the value is as high as
possible, thus were his personal earnings when selling them are as high as possible.
The idea behind restricted stock is to increase loyalty towards the organization and to
make sure executives stay at least until the shares are vested and these earnings are more
tied up with the organizations or shareholders success.
In Figure 10 and 11 the median restricted stock holding and the number of restricted
stock holdings from 1992 to 2010 are represented. It illustrates that the median restricted
stock holdings have increased and even more than doubled in the S&P 500 (from 620.04 to
2,017.52) and S&P Mid-Cap 400 (from 236.27 to 1,118.58) but not completely in the S&P
Small-Cap 600 (from 291.25 to 543.75). The peaks are in 2005-2006 and 2010. On the other
hand the number of restricted stock holdings has increased in a more straight forwarded
line. It more than doubled in the S&P 500 (from 20.00 shares to 55.83 shares) and S&P MidCap 400 (from 11.25 shares to 34.31 shares) in the period 1992-2010. The S&P Small-Cap
600 also increased but not doubled in this period (from 15.61 shares to 27.50 shares). It does
not have any real peaks in the period. The highest point is reached in 2010. The difference in
trends is probably influenced by the fact that the value of the shares are related to the
current value of the shares on the stock markets and the number of shares does not depend
on the stock markets.
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Other Compensations
The remaining parts of the compensation, grouped as other compensations, can
consist of several different components like secondary labor conditions or special benefits.
Secondary labor conditions could be for example health insurance, disability coverage,
interest free loans, retirement benefits but also payouts for unused vacations. Examples of
special benefits are severance arrangements (for when they are fired), signing bonus and
leaving bonuses. All these compensations are mostly not clearly presented in the financial
statement which makes it difficult to exactly calculate these values for each of them
separately and together.
Figure 12 illustrates the median of the variable “all other compensation” from 1992
to 2010. In total these compensations have increased steadily over time. There are no peaks
or great declines in the Figure. It has tripled in the period 1992-2010 in the S&P 500 (from
20.77 to 68.23) and almost tripled in the S&P Mid-Cap 400 (from 12.94 to 38.09) and the
S&P Small-Cap 600 (from 9.54 to 24.43). The only disadvantage of this variable is that it does
not clearly illustrates which component or components causes this growth or how between
these components trends differ.
Each of these components separately or together may affect the attitudes and work
behavior. The components separately have different trends over this period. Figure 13
illustrates the trend of the total compensation structure and level from 1992 to 2010. It
illustrates the shifts between the components base salary, result-oriented pay, stock
options, restricted stock holdings and all other compensations over these years. It illustrates
that the base salary, result-oriented pay and all other compensations are just a slight part of
the total compensation with respectively total median percentages of 14.31%, 11.15% and
1.39%. Stock options and restricted stock holdings have increased in use and/or increased in
value over the time period of 1992-2010. They have respectively a total median percentage
of the total compensation of 32.95% and 40.20%. The historical chart of Forbes (2011) also
illustrates the trend from CEO pay over the last two decades. They used data from the U.S.
Bureau of Labor Statistics. It illustrates that the total pay increased over the years and was
higher that ever in 2007 after that it declined, which is in line with the result in Figure 13.
There are not only differences in compensation components, but there are also great
differences between CEOs. For example in 2003 the smallest paycheck was for Steven P. Jobs
CEO of Apple Computers with a base salary of $1 and no bonus. He earned his money with
his shares just like all other shareholders, by an increase of the stock price or share payouts
(dividends). The biggest paycheck in the same year was for Reuben Mark CEO of ColgatePalmolive of $147.97 million consisting of $5.05 million from the base salary and bonuses
paid (Forbes, 2004). These reductions of the standard median income (base salary) are often
done to reduce the perception of losses in case results are worse and bonuses are not paid
(Meza and Webb, 2007). In Table 1 some characteristics about the sample data is illustrated,
for the entire period of 1992 to 2010, which also gives some insight about the differences
between executives’ compensation. It illustrates that almost all executives in the S&P 500
(99.58%) get some amount of base salary in the total period. Result-oriented pay or bonuses
are normal for the biggest part (72.02%) of executives in the entire period. On the other
hand stock options and restricted stock are only used in respectively 38.16% and 43.50% of
the cases.
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2.2
Compensation strategy
Organizations that use compensations have a compensation strategy mostly
redefined in a compensation policy which explains how the compensations work.
Compensations policies or supporting reward systems in organizations are in alignment with
the business strategy (McDermott, 1997). They can be an important motivator to perform
better and reinforce the organizations culture that is desired. The objective is to give the
right rewards for the right behaviors. For a specified period there will be an agreement on
the goals and performance criteria (Claudius, 2011). So first a compensation system will be
developed and afterwards the performance level achieved will be evaluated and the amount
of compensation to that level will be paid (Slimmering, 2006).
The development of these compensations systems can differ between organizations.
The normal procedure is that these are set by a compensation committee consisting of only
“outside” directors but often also with a couple of “inside” directors. The compensation
committee receives the pay level information by plans made by the organizations human
resource department and with help from outside accountants and consultants. The
compensation committee then just has to accept or decline the recommendations. After
accepting they sent the recommendations to the full board of directors for approaval. If
rejected the human resource department receives recommendations from the committee
about changes which have to be adjusted in the plan.
For the most components there are standard ways to set the compensation levels
but there are different ways on how to set these compensation levels.
Typically the base salary is firstly determined by means of competitive benchmarking
(Murphy, 1998). These surveys are mostly in relation with industries, firm revenues and peer
groups. This would indicate that a person’s specific criterion like age, experience and
education are second in line when determining the base salary.
For the result-oriented pay performance standards need to be determined. For
determining these standards they can base it on the budget, prior-year, discretionary (set
subjectively following the company’s business plan, budget, prior-year, etc.), peer group
(based relative to other companies), timeless standards (relative to a fixed standard) or cost
of capital (Murphy, 1998). Most of these standards are based on measures related to
accounting results or financial statement results. However there are some other
measurements which can be used. For example the number of new clients secured or the
volume of investments of these new clients (Thierry, 2001). These performance standards
are more organizational specific and use therefore more the company’s business plan or
prior-year results.
Stock Options
When using stock options it is important to determine the exercise price, the amount
of options, the type of options and possible some extra criteria before the options can be
exercised. First the exercise price of executive options is determined before the date they
are granted. They need to choose between: discount options, fair-market-value (FMV)
options and premium options, which indicate that the exercise price on the day granted are
below, the same or above the market price. It can be chosen for a fixed value basis or a fixed
10 | P a g e
share basis option, which means they choose for a fixed amount of money to buy shares or a
fixed amount of shares (independent of the price). The shares for the executives stock
options can be made available by introducing new shares (and increasing the outstanding
shares) or by buying back shares from shareholders. Finally they need to set the time period
of the share, forfeiture conditions and optional performance standards which is done the
same way as with result-oriented pay.
For restricted stock the time period, amount of shares (value or share basis), the
dividend payment agreements and possible some extra criteria before the stock can be
exercised need to be settled. It has to be noted that the dividend payments can affect only
the vested shares, the not vested shares or both. If they decide that dividends are paid for
unvested shares they can choose between paying yearly, when they get vested or all at the
end of the time period.
There are some general implications when setting up the compensations systems or
amounts of compensations which could result in different compensations.
The amount of compensation can be influenced by the bargaining power or
motivation to bargain and the role of outsiders perception of executives (Bebchuk and Fried,
2004). This means that it is possible that an executive with the same function (position),
organization and year can earn a different amount of money. Which is possible because one
executive has a better bargaining power, has a better relation with the human resource
department or is more motivated to bargain about his compensation with the compensation
committee or the human resource department.
The role of outsiders perception of executives’ compensation means that an
organization tries to hide or camouflage the compensation of executives. They could do this
because they want no reactions from outsiders (like shareholders) about the amount of
compensation. Or they just want to create the idea that the compensation committee,
human resource department or organization has done a better job when setting up the
compensations. By camouflaging the compensation it is approved more quickly by outsiders
(compensation committee or shareholders) because it is more difficult to notice what
exactly an executive gets paid. However the problem with this is that it can lead to
inefficient compensation structures.
Because these possible implications excist there are many studies who investigate
the influence of the structure and working behavior of the compensation committee.
Examples are the influence of outside and inside members, separated duties, consultants,
voting rights, shareholders’ approval etc. (Bebchuk, Fried and Walker, 2002; Kroos, 2009;
Brown, 2004). For research about the relation between compensation and performance
these implications make it difficult to achieve good and reliable results because this
information is not available.
2.3
Incentive Implications
The components result-oriented pay, stock options and restricted stock are
introduced in the compensation strategy to introduce some short or long term incentives.
With these components and incentives there arise some implications which could have a
negative effect for shareholders value or for the organizations future.
11 | P a g e
For the result-oriented pay a couple of implications could arise. Most of the
performance measures use accounting data and managers have daily data available about
the current state of these measures. So they can see how great their chances are to receive
a bonus and take appropriate actions with respect to the performance levels. Managers
could focus from the beginning only on the short term profitability, for example by cutting
R&D expenses, which could reduce future profitability but increases current profits. They
could also do this when they almost reach their performance threshold and need to quickly
increase the current profit for receiving their bonus. Another action they could take for
improving their bonus levels in different years is income smoothing, thus shifting their
earnings across periods. By doing this they can adjust the profits or results to achieve the
performance levels in more years and receive their bonuses several years.
Keeping the process steps of setting up the performance standards in mind,
executives could try to avoid actions that would negatively influence the budget or prioryear results. In case of the prior-year performance standards executives know that good
results are penalized in next year’s bonus plan. Thus when a manager is at the cap of his
bonus, he will withhold his effort to improve performance further because he keeps next
year in mind (Healy, 1985). The same holds for when he is far below the performance
threshold and a bonus seems highly unlikely.
Stock Options
The most important implication of stock options has to do with the dividend
payments. In some cases the executive gets at the end of the period his dividend payment
from the whole period, which started accumulating when the options are granted. If this is
not the case an executive could focus on increasing the market price by share repurchases
instead of paying dividends and thus profiting from previous years without missing
dividends.
With restricted stock the executive has received shares he could sell at a certain point
in time or when he has achieved a certain condition. For the executive the stock price of the
shares at the point he receives them is less important. More important for him is the stock
price when he wants to sell his shares. Therefore the stock price is not important for him,
only at the point he wants to sell them. At that point he could try to increase the stock price
and does increase his compensation.
Another implication for all these components is the effect of excessive risk-taking by
executives. There are many studies that confirm a positive relation between the
compensation and risk-taking (Bebchuk, Cohen and Spamann, 2010; Ditmann, Maug and
Spalt, 2010; Suntheim, 2010; Meza and Webb, 2007; Mehran and Rosenberg, 2007).
2.4
Industry and country differences
The compensation policies or systems can defer between industries, sectors and
countries. Some have higher amounts of compensations, different measure standards and
cultures. The focus will be on the differences between the U.S. industries and sectors and
between the U.S. and other countries.
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Industrial differences
The total U.S. industry can be divided in two broad sectors, the public and private
sector. A difference between these sectors is that compensation is more governed by
legislation in the public sector. They have fewer possibilities in the compensation systems
than organizations in the private sector, thus governments have influence on differences in
industries. National governments may enact laws forcing organizations to change their
compensation systems (Claudius, 2011). These laws could be focusing on all national
organizations or a specific industry group which could result in shifts between industries. For
example since the financial crisis the U.S. government has special interest in regulating the
CEO transparency in publications and to discourage the risk taking by introducing the DoddFrank Act. They focus on the financial sector (especially banks) (Aversa, 2010) but these rules
also effects all other industries like the care organizations (Bjork, 2009). Another example is
the Troubled Assets Relief Program (TARP), which has been implemented in the U.S. for
providing capital injections in the financial sector and sets limitations on executive
compensation (Suntheim, 2010). The introduction of the TARP and the Dodd-Frank Act with
the say-on-pay provision affect the compensation systems or trends in these sectors
(O’Donnell, 2010; Bjork, 2009).
Another way of dividing the national industry in different industries is by using the
SIC (Standard Industrial Classification) system. This divides the U.S. industries in several
divisions by using a four digit code. Figure 14 and 15 illustrate the trends of the median total
and current compensation for the different SIC divisions from 1992 to 2010 represented in
the S&P 500. It illustrates that almost all the SIC divisions or industries have the same trends.
the divisions A, H and K are the divisions with the greatest differences. So has division A.
Agriculture, Forestry and Fishing a really high peak in 2006-2008 for the median total
compensation. The Finance, Insurance and Real Estate division (H) has over almost the
whole period a higher median total and total current compensation. It also has the highest
decrease in 2005-2006 in the total current compensation. Division K, the Nonclassifiable
Establishments have the most differences from the rest of the divisions. This division has the
most fluctuations and it has almost always one of the highest compensation payouts.
Other differences between industries could be in performance measures and
standards. For example according Murphy (1998) the industrial sector is more likely to use
financial performance measures than the financial sector and the result-oriented pay by
financial industries is slightly less capped than by industrials. The cause of these differences
is not clear. It could be that this is caused by laws and legislations or that it is a result of the
use of benchmarking when setting up reward systems.
Country differences
There are not only differences between industries, but also between countries. The
differences between countries can be influenced by cultural difference and regulations. The
Hofstede’s (2001) cultural dimensions are a good example of the differences between
countries. It uses several dimensions (Individualism, Masculinity, Long term Orientation,
Power Distance and Uncertainty Avoidance) that influence the differences between cultures
and countries. The type of reward systems (result-oriented pay, stock options and restricted
stock) used in a country is affected by these cultural differences (Schuler and Rogovksy,
1998). Differences in regulations are divided in different policies, laws and legislation which
are developed by (inter)national governments and agencies. These governments and
agencies can differ between countries. Some of them are represented in more countries and
13 | P a g e
some are country specific. All these things seperataly and combined can influence and shift
the differences in compensations between countries.
These differences have resulted in the fact that the executive pay in the U.S. is very
high compared to the rest of the world (Slimmering, 2006; Freeman and Katz, 1995). The
difference between executive pay and the lowest paid worker in the same organization is
bigger in the U.S. than in Europe and Asia. Not only the pay level is higher in the U.S. than for
example in the U.K. but also the CEO incentives were higher for the U.S. than the U.K. while
these countries use the same compensation components (Conyon, Core and Guay, 2005).
Although the different countries use the same compensation components, the U.S.
Executives receive a greater share in result-oriented pay, stock options and restricted stock
forms (Suntheim, 2010; Fernandes, Ferreira, Matos and Murphy, 2010). So they get better
paid in the components which are related to incentives (Adams and Giannetti, 2009). In
China and India the executive pay is a lot lower than in the U.S. Therefore U.S. multinationals
that have executives working in other regions like China or India hire executives from that
region which are cheaper (Kanellos, 2007). Finally, the introduction of the Dodd-Frank Act,
an U.S. rule, should result in decreasing the gap towards the international compensation
standards (Leggett, 2011).
2.5
Policies, laws and legislation
Different policies, laws and legislation are developed by (inter)national governments
or agencies to provide guidelines on compensation strategies for organizations which can
affect compensation and benefits systems. Government legislation specifies job grades,
salary increases, salary bands or ranges, allowances and benefits (Claudius, 2011). These can
differ between the public and private sector. In public sectors practically every aspect is
governed by legislation, there is almost no space for specific new ideas of compensations. In
private sectors organizations have more freedom. They can determine their own
compensation strategy and payment levels. Governments may enact laws forcing
organizations to change compensations systems and practices. For example during the
economic recession in 2007 when these systems came under public investigation. The laws
and acts from governments can differ between, or are restricted to, certain states because
each U.S. state can implement their own acts. Most of the acts focus on employees in
specific industries and in relation to illness, unemployment and injuries. Examples are the
“Energy Employees Occupational Illness Compensation Program Act (EEOICPA)”, “Federal
Employees’ Compensation Act (FECA)” and the “Fair labor Standards Act (FLSA)” (Cornell
University Law School, 2011; Free Management Library, 2011; EmployeeIssues, 2011).
The most recent and important act implemented by the government related to
compensation systems is from 2010, the “Dodd-Frank Act”. The “Dodd-Frank Wall Street
Reform and Consumer Protection Act” (H.R. 4173), a federal statute, was signed into law on
July 21st. This after it was initially proposed in 2009 in the House of Representatives. The Sayon-Pay rule from the Dodd-Frank Act, where shareholders have the right to vote for
approving executive compensation, is designed for the complete financial services industry,
but is especially focused on publicly traded banks. The Dodd-Frank Act has effect on the
compensation committee by making it mandatory to be more independent. Furthermore the
executive compensation should become more transparent or better explained in financial
statements and it has to discourage the excessive risk-taking (Bjork, 2009; SEC, 2010; Affairs,
2010; United States Senate Committee on Banking, Housing & Urban O’Donnell, 2010;
Weinberg, 2011). This Act is a result of the 2009 meeting from the G-20 leaders who
14 | P a g e
stressed the importance of reforms, regulating compensation structures in all financial firms
to discourage excessive risk-taking (Bebchuk, Cohen and Spamann, 2010). Before that date
the financial industry was not required to report individual compensations of their
employees or executives. This is probably the reason why there is almost no data available
about the compensations in the banking industry before 2011.
Not only governments but also agencies may enact laws. For example stock
exchanges have also rules for firms that are represented in the stock exchange and are
required to report to the U.S. Securities and Exchange Commission (SEC). One of them is the
New York Stock Exchange (NYSE). It requires organizations to have solely independent
directors in the compensation committee. Other stock exchanges are the National
Association of Securities Dealers Automated Quations (NASDAQ) and the American Stock
Exchange (AMEX) which requires organizations to have at least a majority of independent
directors in the compensation committee (Brown, Robinson and Cayler, 2004).
The most recent and important implemented rule by the Securities and Exchange
Commission (SEC) in relation towards compensation is from 2006, the “Executive
Compensation Disclosure” (SEC Release Nos. 33-8765). This final rule release requires
organizations to provide investors with executive officers compensation explanation in the
disclore of the financial statements. These disclosures are required to include the
performance measures employed, standards and horizon. Only organizations that prove that
publication of this information would harm their competitive level can request exemption
(SEC (Release Nos. 33-8732A), 2006; SEC (Release Nos. 33-8765), 2006; Angelis and
Grinstein, 2010; Dorsey & Whitney LLP, 2011).
2.6
Compensation effects towards performance
There is already literature and studies which researched the relation between
compensation and performance. Most of them have their own approach and data sets. It
illustrates that there are many different ways and approaches to research this relationship
and it gives an indication of the effects.
The research of Brown, Robinson and Cayler (2004) has illustrated that executive and
director compensation is most highly associated with good performance and governance.
Fich and Shivdasani (2004) found that stock options plans for directors result in higher
profitability and that only announcing stock option plans for directors already has a positive
effect on stock market prices. Thierry (2001) suggests that results-oriented pay stimulates
work motivation, effort or performance. Therefore it can be suggested that there is a
positive relation between compensation and performance. Suntheim (2010) illustrates that
granting more stocks resulted in a better increase in performance for banks or the financial
service industry than other industries. However the reasons for these differences are not
explained.
A restriction or limitation that needs to be kept in mind in measuring the
performances is the managers accounting choice (Palepu, Healy and Peek, 2010). Managers
can introduce noise and bias into the performance levels by their accounting decisions. The
choice comes from the motivation for managers to achieve their goals for compensations
and job securities.
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More important than this restriction or limitation in studies of compensation and
performance is the endogeniteity problem. The focus of these studies is the influence of
compensation () towards performance (), thus what is the response of if changes. The
problem with these tests are the unobserved variables were depends on or which
influence . Furthermore it is possible that there is a backward causal loop, reverse causality
or correlation between the variables (Antonakis, 2011 and Duncan, Magnuson and Ludwig,
2004). For example the endogeneity problem could be caused by reverse causality which
might complicate relations among the variables. This means that not only compensation has
effect on performance achieved but performance also influences the compensations paid.
The endogeneity issue is important because it effects the results of these studies. For
example more profitable firms could be more likely to adopt effort based compensation
structures which influences the data used for these studies. Furthermore could observable
and unobservable variables influence the compensation variables or other firm specific
variables (for example growth opportunities, firm size and ownership) which might also
influence the performance (Zhichuan, 2011 and Ozkan, 2007). For example the crisis could
be a reason for organizations to change the performance levels in a reward plan. Some
reward plans or performance levels could be more difficult to achieve than others. The
difference in difficulty of the reward plans could be an unobservable variable that influences
the compensations and performance.
For this research the endogeneity problem affects the tests and the interpretation of
the results. It is not sure what the effect of the backward causal loop or reverse causality is.
But it has to be taken into account that there could be a relation which is not visible. This
relation could be positive or negative and influencing the results of the test. Furthermore it
is not sure if there are more observable or unobservable variables and the effects they could
have on the variables and results.
There are different general methods that mitigate the endogeneity problem to some
degree. These are: instrumental variable (IV), fixed effect model, generalized method of
moments system (GMM), lag variables and adding more control variables (Zhichuan, 2011,
Shepherd, 2008, Ozkan, 2007 and Gebel and Pfeiffer, 2007). However the effects of these
methods vary considerably and does not mean the problem is solved. So for example it is
possible to lag the independent compensation variables by one year to mitigate the
endogeneity problem but does not mean the endogeneity problem is solved.
For this research the variables will not be lagged. This because the reward
compensation variables which are paid last year are paid because the performance levels are
already achieved. If the variables would be lagged, it means that the research investigates if
an executive works harder (improve performance) for already received reward
compensation. This would result in a complete different research of the relation between
compensation and performance. It would also conflict with the reward systems and does not
solve the endogeneity problem.
But also with this restriction, limitation and endogeneity problem all these U.S. data
studies, varying from 1992 to 2009, imply that there is a positive relation between
compensation and performance.
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2.7
Theories related to compensation
Finally to complete the overview of literature and research related to this topic some
psychological and economical theories will be explained that are often mentioned in
literature related to compensation and performance. These are the incentive theory, agency
theory, utility theory and prospect theory (also known as loss-aversion theory). These
theories try to explain the psychological and economic effects of introducing compensation
in an organization.
The incentive theory states that when a goal is present, a person will try to reach that
goal. They will try this because they want to get the feeling of self-satisfaction or recognition
(tangible) or for intrinsic rewards (intangible). For the research this would mean that only
implementing a reward system would already improve the performance without actually
paying anything. Thus it is possible that there are reward systems implemented in an
organization which positivily effects the performance but are not visible in the data. This is
possible when an executive works hard for receiving his bonus, stock options or restricted
stocks but fails to be better than the performance thresholds. The results of these
organizations would be better than organizations without reward systems. However the only
problem is the information about which organizations have reward systems.
The agency theory is concerned with resolving problems in agency relationships.
These problems are the conflict of different goals of the principal and agent and the
difficulty or expenses to verify what the agent is actually doing. In this relation it would be a
problem if the principle (shareholders) and the agent (executives) prefer different actions
because they have different risk preferences or goals. For example in this research
executives could have as primairy goal to achieve their rewarding goals which could be
different then the optimal goals for the organization or shareholders.
The utility theory is formulated by von Neumann and Morgenstern (1944 and the
prospect theory, which is an extention of the utility theory, is developed by Kahneman and
Tversky in (1979). The difference is that the utility theory depends on final wealth and
prospect theory on individual gains and losses. Prospect theory deals with the behavior of
decision makers who have to choose between alternatives. It states that people evaluate
gains and losses, viewed in contrast with a reference point, differently. In case of a gain the
decision maker will tend to be risk averse and in case of losses they will be risk seeking. For
example in this research if an executive has achieved his goals which is receiving a gain
(bonus) he will tend to be risk averse. This because he does not want to lose his acquired
compensation. If the executive knows he will lose money because he is not receiving his
bonus or has to pay a fine, he will be risk seeking. This means that executives have different
risk preferences when they can gain or lose money. Therefore results will not increase as
fast in the gain range as that they could increase in the lose range. This means it is more
sensitive to fluctuations in the lose range than in the gain range.
This section illustrated how the process of executive compensation works, which
forms there are, how it changed over the years and that there is a lot of literature and
research available about this topic. However the financial crisis has just happened, that is the
reason why there is almost no research which includes results of the financial crisis. Now it is
possible, because of the data availability of the last years, to test what the effect is of a crisis
and if there is a difference in the relations between compensation and performance before
and during a crisis. The rest of this paper focuses on the analysis of these effects.
17 | P a g e
3. Research and Data information
To have a good understanding of the research on the relationship between compensation
and performance the methodology, (sample) data, variables and limitations will be explained
in this section.
3.1
Methodology
The literature illustrated that there a many different studies and ways to research the
relation between compensation and performance. These are based on theories such as the
general relation towards shareholder value (market stock price, shareholders returns) or
accounting values (earnings, sales, etc) (Murphy, 1998), the (internal and external) reference
wage (Dittmann, Maug and Spalt, 2010) and the relative performance evaluation (RPE)
(Angelis and Grinstein, 2010; Garvey and Milbourn, 2003; Murphy, 1998). In this research all
these theories (models) will be used in different industries and periods to examine and
compare the relationships.
The focus of this research is the influence of compensation () towards performance
(), thus what is the response of if changes. This relationship will be investigated in two
different set of tests in which all the previous mentioned models will be used. The first tests
will focus on the relationship for the whole period from 1992 to 2010 and the influence of
the crisis. The second tests will examine if the relationship is the same (positive, zero or
negative) in two different periods, which are before and during a crisis.
These relationship are never strictly linear therefore the error variable (), which is
y – ( 0 + 1 + ... + n) with the assumption of linearity, E (|) = 0, is inserted in all tests.
Furthermore is assumed that the sample or subpopulation is homoscedastic, normally
distributed and each variable is independent of each other.
The dependent variable used in these tests is one of the performance variables.
These are: Market Stock Price (MSP), Shareholders Return, Earnings, Operating Profits (EBIT),
Sales, Profit Margins, Relative Market Stock Price (MSP), Relative Shareholders Return,
Relative Earnings, Relative Operating Profits (EBIT), Relative Sales and Relative Profit
Margins.
The independent variables are the compensation variables and the control variables.
The compensation variables are: Base Salary, Result-Oriented Pay (Bonus), Stock Options,
Restricted Stock or Delta Base Salary, Delta Result-Oriented Pay (Bonus), Delta Stock Options
and Delta Restricted Stock. The control variables which are used are the variables: Crisis,
Total Assets Group and Number of Compensations. Where the variable Crisis is used in the
first tests to illustrate the effect of the crisis and in the second tests to divide the sample in
two groups. The variable Total Assets Group illustrates the effect of company size or scale
advantages and the variable Number of Compensations illustrates if the incentive theory
holds.
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Test 1 (Relationship and influence of the crisis)
The first tests will focus on the relationship for the whole period from 1992 to 2010
and the influence of the crisis. The basic formula of the first test is:
() Performance = ∝ + 1 Compensations + 2 Controls + (1)
The first model (1.1) is the general linear relation. It is the most basic model and it is
based on the research by Murphy (1998). In this model the dependent variable is the
performance variable: Market Stock Price (MSP), Shareholders Return, Earnings, Operating
Profits (EBIT), Sales or Profit Margins. The independent variables are: Base Salary, ResultOriented Pay (Bonus), Stock Options and Restricted Stock and the control variables are Crisis,
Total Assets Group and Number of Compensations.
The second model (1.2) is the internal reference wage which is based on the research
by Dittmann, Maug and Spalt (2010). It is based on the utility theory which views gains and
losses in contrast with a reference point. It implies that the performance will be better if the
compensation is higher than the reference wage. In this research internal reference wage
means that the executive refers his compensation to previous years earnings and/or other
executive’s earnings in the same organization. This research focuses on previous years
earnings because it is probably much easier for executives to compare their own
compensation from this year with last year than with compensations of other executives. It
is the only model that uses data from a year earlier, yeart-1. The internal reference wage
does not use the normal compensation variables but the delta compensation variables.
These are calculated by this years compensation (yeart) minus last years, reference point,
compensation (yeart-1). In this model the dependent variables and controls are the same as
in the first (general) model. The independent variables will be changed in this model. This
will result in the independent variables: Delta Base Salary, Delta Result-Oriented Pay
(Bonus), Delta Stock Options and Delta Restricted Stock.
The third model (1.3) is the external reference wage which is also based on the
research by Dittmann, Maug and Spalt (2010). It is also based on the utility theory and also
implies that the performance will be better if the compensation is higher than the reference
wage. The difference is that external means that the executive refers his compensation to
earnings of other executives in other organizations, his benchmarking group, in the same
industry or in different industries. With this model it is difficult and not sure what the peer
group of each organization or executive is. That is the reason why this research uses the
total industry (division) as peer group. This external reference wage will be investigated by
using the delta’s in compensation which is the compensation of the executive in yeart minus
the median compensation of all executives in the same industry (division) in yeart. In this
model the dependent variables and controls are the same as in the first (general) model. The
changed independent variables are: Delta Base Salary, Delta Result-Oriented Pay (Bonus),
Delta Stock Options and Delta Restricted Stock.
The fourth and final model (1.4) of the first tests is the relative performance
evaluation (RPE). It is based on the research by Angelis and Grinstein (2010) and Garvey and
Milbourn (2003). This model implies that the performance achieved by an executive is
evaluated relative to that of peers, most of the time organizations belonging to the same
19 | P a g e
industry. It means that the performance achieved by an executive is not only the result of
the executive but also depends on the trend in the total peer group or industry. The idea
behind this method is that it eliminates the portion of performance that can not be
influenced by the executive. With this model it is difficult and not sure what the peer group
of each organization or executive is and the trends of which groups influence the
performance of the organization. That is the reason this research uses the total industry
(division) as peer group. In this research the elimination of the portion of performance that
can not be influenced by the executive is done by comparing the organizational performance
with the trend or median performance of the industry in the same year. Thus the
organizational performance divided by the median industry performance. This results in a
model where the dependent (performance) variable illustrates if the performance of the
organization is better or worse than the median industry. This difference in performance
should indicate the effect of the executive and not the industrial trend. Thus the dependent
variables will be changed in this model which will result in the dependent variables: Relative
Market Stock Price (MSP), Relative Shareholders Return, Relative Earnings, Relative
Operating Profits (EBIT), Relative Sales or Relative Profit Margins. The independent variables
and controls are the same as in the first (general) model.
The second tests will examine if the relationship is the same in two different periods,
which are before and during a crisis. The basic formula of the second test is:
() Performance = ∝ + 1 Compensations + 2 Compensations x Crisis Dummy
+ 3 Controls + 4 Controls x Crisis Dummy + (2)
The models 2.1 to 2.4 are based on the same facts as the models 1.1 to 1.4 and use
the same controls, dependent and independent variables. The only difference between the
two tests is that this test does not uses the variable Crisis as control variable. This because it
does not investigates the effect of the crisis but now it is used to create two different
periods. This tests divides the total sample in two groups (Compensation and Compensation
x Crisis Dummy) and it investigates if relationships in one period also hold in the other
period. The first group is the relationship before the crisis (until 2006) and the second group
is during the crisis (from 2007). It has been chosen for these dates because several literature
such as Fontana and Setterfield (2009) & Landskroner and Raviv (2009) indicate that at that
moment the crisis began. Thus this test investigates if the variables have the same (positive,
zero or negative) relationship in both periods.
3.2
Data and Variables
The data sample used in the previous sections of this paper is extracted from
Compustat’s ExecuComp Database and includes the S&P 500, S&P Mid-Cap 400 and S&P
Small-Cap 600 from 1992 to 2010.
For the analysis of the relation between compensation and performance data from
the S&P 500 is used. This data is extracted from the Compustat Database. The compensation
data is from Compustat’s ExecuComp Database and the performance data is extracted from
Compustat’s Global Database. Compustat is a database that collects data from companies
around the world and different industries and can be accessed by Wharton Research Data
20 | P a g e
Services (WRDS). The sample covers the entire U.S. industry from the S&P 500 from 1992 to
2010. It has been chosen for this period because of the limitations of Compustat’s
ExecuComp Database. There is only executive compensation data available for these years.
By using data from one database it is sure that the calculations of data between years,
executives and organizations for all variables are consistent. Furthermore the U.S. is chosen
because this is one of the most important and biggest economies in the world. For this
reason it also creates a bigger sample which is important for the reliability of the research. In
the previous section is illustrated that there are differences in the compensations between
industries or SIC codes. These findings of industry differences are in line with the studies of
Angelis and Grinstein (2010) and Murphy (1998) who found large variations across them.
Therefore this research will investigate the relation by industry, using the SIC divisions. The
focus is on the four industry divisions with the largest data sample, which are;
Manufacturing (division D), Transportation, Communications, Electric, Gas and Sanitary
Service (division E), Finance, Insurance and Real Estate (division H) and Services (division I).
These industries are researched seperatly to investigate the differences between them. For
example it illustrates if the difference in compensation systems, pay levels, compensation
components and performance measured used by industries influence the relation and
successfulness of the implemented compensation systems. The data items (variables) of
interest are:
•
Executive information
(ID Number, Age and Executive is Director)
•
Organizational information
(ID Number, SIC Codes, Fiscal Year and Total Assets)
•
Compensation or salary information
(Base Salary, Result-Oriented Pay, Stock Options and Restricted Stock Holdings)
•
Organizational performance information
(Market Values, Dividend Payments, Earnings, Operating Profit (EBIT), Sales and Profit
Margins)
All these variables are needed to complete the research. The organizational
performance information is the information needed for the dependent variables. These are:
Market Stock Price (MSP), Shareholders Return, Earnings, Operating Profits (EBIT), Sales,
Profit Margins, Relative Market Stock Price (MSP), Relative Shareholders Return, Relative
Earnings, Relative Operating Profits (EBIT), Relative Sales and Relative Profit Margins. Were
the Market Stock Price (MSP), Earnings, Operating Profits (EBIT) and Sales are variables
found respectively under the labels “Market Value – Total – Fiscal”, “Net Income (Loss)”,
“Earnings Before Interest and Taxes” and “Sales/Turnover (Net)”. Shareholders Return is the
delta in total assets (“Assets – Total”) plus the dividend payments (“Dividends – Total”) and
Profit Margins are the earnings (“Net Income (Loss)”) divided by the sales (“Sales/Turnover
(Net)”).
The independent variables needed are the compensation variables and the control
variables. The compensation variables are: Base Salary, Result-Oriented Pay (Bonus), Stock
21 | P a g e
Options, Restricted Stock or Delta Base Salary, Delta Result-Oriented Pay (Bonus), Delta Stock
Options and Delta Restricted Stock. This research assumes that these compensations will be
paid in the same year as the performance levels or goals are achieved. Therefore these
compensation variables are based on data which can be found respectively under the labels
“Salary ($)”, “Bonus ($)”, “Value Realized on Option Exercise” and “Restricted Stock Holdings
($)”. This means for the results of this research that it only investigates the relationship
when payments and performance are achieved in the same year. It will not illustrate If there
is a relationship over several years.
Furthermore as seen in the previous section there are differences in the
compensations between the three S&P’s (S&P 500, S&P Mid-Cap 400 and S&P Small-Cap
600. The differences in the S&P’s could indicate that compensation differs between
company sizes, because the S&P 500 is presented by bigger organizations than the S&P MidCap 400 which is also represented by bigger organizations than the S&P Small-Cap 600
(Suntheim, 2010; A to Z Investments, 2011; Investing Answers, 2011). These findings of
company size are in line with the studies of Angelis and Grinstein (2010) and Murphy (1998)
who also eliminate these effects. For this reason all the dependent and independent
(compensation) variables, except the profit margins, are scaled by dividing them by the total
assets of the organization. By dividing these dollar values, percentages are created to
eliminate differences caused by company size.
The controls, which are used are the variables: Crisis, Total Assets Group and Number
of Compensations. Where the variable Crisis is used in the first tests to illustrate the effect of
the crisis and in the second tests to divide the sample in two periods. This variable is 0 (zero)
in case the fiscal year is lower or equal to 2006 or 1 (one) in case the fiscal year is 2007 or
higher. It has been chosen for these dates because several literature like Fontana and
Setterfield (2009) & Landskroner and Raviv (2009) indicate that 2007 officially is the first
year of the crisis . The only problem with the variable fiscal year is that it is not exactly from
January 1 to December 31. For example the fiscal year of some organizations end in April or
May. In this sample if the fiscal year ends in the first 5 months of a year the fiscal year is
previous year. Thus if the fiscal year ends in April 2007 the fiscal year is 2006 because most
of the months are in 2006. This limitation of the sample data could provide differences in the
results of this research because it is not sure when exactly the crisis took effect for each
organization. The second control variable is the Total Assets Group. The company size
matters for the relation between compensation and performance. Therefore this variable is
inserted which illustrates the effect of company size or scale advantages. It divideds the total
sample in four different groups from 1 to 4, indicating their size. In the total sample the
median total assets are 7,200 millions of dollars. Each group has a range of 3,500, so that
around the line of demarcation between the second and third group the median is
presented. Now each case can be in group 1 which indicates the total assets are between
0<3,500, group 2 between 3,500–6,999, group 3 between 7,000–10,499 and group 4 if
>10,500. The last control variable is the Number of Compensations. In the previous section
the incentive theory is explained (when a goal is present, a person will try to reach that goal)
which would imply that only setting up a reward plan would improve performance. So each
extra compensation creates the idea you are receiving more compensation or you have
more goals. If each goal really increases performance then the number of compensations or
goals would be important. Therefore this variable will illustrate if the incentive theory holds.
Each executive receives one compensation component, therefore this variable indicates the
number of extra compensation components received which can be in this test range from 1
22 | P a g e
to 3. The only problem for this research is that the sample data only illustrates the received
compensations. So if an executive would have a reward plan but not received it because the
goals are not achieved, it is not illustrated in the data. This limitation influences the results of
this research because some performances could be higher because there are rewards plans
available in the organization which are not represented in the data.
For more information about the variables used from Compustat’s ExecuComp
Database and Compustat’s Global Database there is a complete list with explanation (using
Compustat’s Global and ExecuComp Database definitions) in the appendix.
The total sample consists of one executive per organization per year. If there were
more executives in an organization in the same year, only the highest placed executive or
otherwise the best paid executive is used. The sample consists in total of 8,049 cases, 1,411
different executives and 500 different organizations. There are 1,423 combinations of
executives (Executive ID’s) and organizations (Organizations ID’s). The executives are median
64 years old, work median 5 years in an organization, worked in 1.009 different
organizations and 85.09% served as a director. More characteristics and explanations about
the sample such as the percentage of used compensation components, median
compensation, executive median age, median years worked within an organization and the
percentage that served as director for the total sample and per division are represented in
Table 1 and 2.
3.3
Limitations
In the previous section a couple of implications and limitations are mentioned. The
most important for this research are the endogeneity problem, the time period of incentives,
setting peer groups and changes in performance levels.
This research has to recognize, just like other existing studies on the topic, that there
could excist a endogeneity problem. This means it is not known if estimated relations are
due to omitted variables, backward causal loop, reverse causality or correlation between
variables. So it has to be kept in mind that other variables and relations could have a positive
or negative influence on the relationships illustrated.
The time period used for each incentive is not represented in the database. Therefore
it is not entirely sure how much is affected by short term or long term objectives. This
because the long term incentives can differ from 1 to 10 or 20 years. In this research the
variables of realized compensations such as value realized on option exercise are used. This
research assumes that these are paid or realized if the goals of receiving them are achieved
in the same year. In that way the time period should not matter. However the research does
not illustrate if the relation excist if these are not in the same year.
With this research it is difficult and not sure what the peer group of each organization
or executive is. Therefore this research uses the total industry (division) as peer group.
However if this is not the precise case in practice it could influence the results of this
research.
Finally it is not possible to extract the performance level settings from the data. So
changes in performance levels (or difficulty levels of achieving them) over time or in
particular years are not available. It could be possible that between years or during the crisis
performance levels are adjusted downwards or upwards. This could influence the number of
performance levels achieved.
23 | P a g e
4. Empirical analysis
The tests in this research relate to the relation between compensation and
performance in the S&P 500 from 1992 to 2010. Especially the divisions manufacturing
(division D), transportation, communications, electric, gas and sanitary service (division E),
finance, insurance and real estate (division H) and services (division I). This relationship is
investigated in two different set of tests in which four different models are used. These
models are the general relation, internal reference wage, external reference wage and
relative performance evaluation. The first tests focuses on the relationship for the whole
period from 1992 to 2010 and the influence of the crisis. The second tests examines if the
relationship is the same (positive, zero or negative) in two different periods, which are
before (until 2006) and during a crisis (from 2007).
4.1
Test 1 (relationship and influence of the crisis)
The first tests, using models 1.1 to 1.4, is the relationship for the period from 1992 to
2010 and the influence of the crisis. The results are illustrated in the Tables 3 to 6.
This test starts with model 1.1, the general relation. Table 3 illustrates that this model
found positive relations for the performance compensations in all divisions and for all
different performances. The only exception is the stock options compensation that has two
negative relations. The first is in the manufacturing division towards sales and the second is
in the transportation, communications, electric, gas and sanitary service division towards
earnings. Furthermore is no relation found towards profit margins in the finance, insurance
and real estate division. From the six dependent (performance) variables the market stock
price, earnings and operating profits have the most (9) and profit margins the fewest (3)
positive relations. From the four divisions the manufacturing division has the most (14) and
the service division the fewest (6) positive relations.
The Table also illustrates that the base salary has positive relations. Except in the
manufacturing division towards operating profits, sales and profit margins it is negative. The
effect of the crisis differs between divisions and performances. For the performance variable
shareholders return it has found only negative effects and for earnings and operating profits
only positive effects. This test found that the total assets group is more consistent. It has
only negative relations towards the performace variables. Finally the number of
compensations has positive relationships, only towards market stock price it has a negative
relation.
The next model in this test is model 1.2, the internal reference wage. Table 4
illustrates that this model is less consistent than the previous model. In total it found more
negative (14) than positive (11) relations. These relations are divided over the performance
measures and divisions. No relationships are found towards profit margins in the
manufacturing division, finance, insurance and real estate division and services division.
Furthermore there are no relations towards shareholders return, earnings and operating
profits in the services division. The model differs greatly from the previous model and the
results are far less consistent. From the six dependent (performance) variables the market
stock price has the most (4 positive and 4 negative) and profit margins the fewest (1 positive
and 0 negative) relations. From the four divisions the manufacturing division and the
24 | P a g e
transportation, communications, electric, gas and sanitary service division have the most (8)
and the services division the fewest (2) relations.
The Table also illustrates that the base salary has negative relations. Except in the
manufacturing and services divisions there is a positive relation. In the transportation,
communication, electric, gas and sanitary service division and finance, insurance and real
estate division they are all negative. The effect of the crisis is the same as in the previous
model. It differs between divisions and performances. For the performance variable market
stock price and shareholders return only negative effect and for earnings and operating
profits only positive effect are found. Again the total assets group is consistent. It has only
negative relations towards the performace variables. Finally the number of compensations is
also more consistent. It has positive relations except towards market stock price in the
service division it has a negative relation.
The third model in this test is model 1.3, the external reference wage. Table 5
illustrates that this model found, just like the first model, positive relations for the
performance compensations in all divisions and for all different performances. The only
exception is the stock options compensation in the manufacturing division towards sales
which has a negative relation. Furthermore, there is again no relation found towards profit
margins in the finance, insurance and real estate division and now also in the services
division. The market stock price and earnings have the most (10) and profit margins the
fewest (3) positive relations. The manufacturing division has the most (15) and the service
division the fewest (5) positive relations.
The Table also illustrates that the base salary has most of the tests a positive relation.
The effect of the crisis differs between divisions and performance measures. For the
performance variables market stock price and shareholders return it has found only negative
effects and for operating profits only positive effects. It also illustrates that the total assets
group is again consistent and has only negative relationships. The number of compensations
has mostly positive relations. It is only negative towards market stock price in all divisions
and towards sales in de finance, insurance and real estate division.
The last model in this test is model 1.4, the relative performance evaluation (RPE).
Table 6 illustrates that this model is very much the same as the general relation and the
external reference wage model. It also found positive relations for the performance
compensations in all divisions and for all relative performances. The only exception is the
negative relation of stock options compensation towards relative sales in the manufacturing
division and towards relative earnings in the transportation, communications, electric, gas
and sanitary service division. Furthermore there is again no relation found towards relative
profit margins in the finance, insurance and real estate division. From the six dependent
(relative performance) variables the relative market stock price has the most (9) and relative
profit margins the fewest (4) positive relations. From the four divisions the manufacturing
division has the most (14) and the services division the fewest (6) positive relations.
In the Table the base salary illustrates positive and negative relations. Where all the
negative relations are in the manufacturing division. The effect of the crisis and the relation
of the number of compensations is mostly positive but differs between divisions and
performance measures. The total assets group illustrates only negative relations towards the
performace variables.
25 | P a g e
The first set of tests illustrates that there are positive relation between reward
compensations and performance levels achieved. There are only a few exceptions in the
models general relation (1.1), external reference wage (1.3) and relative performance
evaluation (1.4). These three models illustrate almost the same results. They vary slightly
and are very consistent. The model internal reference wage (1.2) is the only model were a
lot of negative relations were found. It is also the only model were data from previous years,
yeart-1, is used to calculate the reference point. Possible that this (lag) is the reason for the
differences in results. The effects of the base salary, crisis and number of compensations are
positive and negative. Their influence depends on the model, performance measure and
division. The total assets group on the other hand is very consistent. In all cases were a
relation is found it has a negative relation.
4.2
The second tests, using models 2.1 to 2.4, is the comparison in relationship in two
different periods, which are before (until 2006) and during a crisis (from 2007). The results
are illustrated in the Tables 7 to 10.
This test starts with model 2.1, the general relation. Table 7 illustrates that this model
found the same positive relations for the period before the crisis in all divisions and for all
different performances as in model 1.1. The only negative relations are from the stock
options compensation which are also the same as in the previous model. For the period
during the crisis there are still positive relations. However the results illustrate that there are
found more negative relations. It implies that the relations between before and during the
crisis can differ. There are relationships which are the same in both periods, other
relationships differ and some are only illustrated in the period before or during the crisis.
The column difference between both periods illustrate that there are 20 cases where a
positive and 12 cases where a negative difference are found. However 40 times (more than
50%) there is not found a difference between both periods. The most (7) positive differences
are found in the manufacturing division and the fewest (3) in the services division. The most
(5) negative relations are in the finance, insurance, and real estate division and the fewest
(0) in the services division.
For the base salary, total assets group and number of compensations the same
applies. However the base salary and number of compensations differ even more from
model 1.1. The total assets group has still in most of the cases a negative or no relation. Only
during the crisis there is a positive relation towards shareholders return in the finance,
insurance and real estate division. The differences illustrate that where differences are
found, the base salary (11 out of 14) and total assets group (9 out of 13) have positivily
changed. The only negative differences for the base salary are all in the transportation,
communication, electric, gas and sanitary service division. The number of compensations
found 3 times a positive and 3 times a negative difference. Where the positive differences
are all found in the finance, insurance and real estate division.
The next model of this test is model 2.2, the internal reference wage. Table 8
illustrates that this model has a lot of differences. It has more differences between the two
periods and also from model 1.2. For both the periods there are a lot of positive and
negative relations which only are illustrated in one of the periods. It also implies that the
relations between before and during the crisis can differ. Only the services division is very
26 | P a g e
consistent in both periods. The relationships which are found before the crisis are the same
during the crisis. This is not the case in the other divisions. The column difference between
both periods illustrate that there are 14 cases where a positive and 14 cases where a
negative difference is found. 44 times there is not found a difference between both periods.
The most (8) positive differences are found in the transportation, communication, electric,
gas and sanitary service division and the fewest (0) in the services division. The most (4)
negative relations are in the services division and the fewest (2) in the finance, insurance and
real estate division. In the transportation, communication, electric, gas and sanitary service
division towards all performance measures differences are found and in the services division
only towards operating profits and sales.
The Table also illustrates that the base salary relation is in both periods the same in
the manufacturing and services division. For the total assets group the relations are again
negative. Only ones there is a positive relation for this variable. This is towards shareholders
return during the crisis in the manufacturing division. The number of compensations has
positive relations except in the services division were also negative relations are found. The
differences illustrate that where differences are found, the base salary (9 out of 11), total
assets group (8 out of 12) and number of compensations (8 out of 12) have negatively
changed. The only positive differences for the base salary are all in the transportation,
communication, electric, gas and sanitary service division and for the number of
compensations all in the finance, insurane and real estate division. For the total assets group
the positive differences are found in the manufacturing division and the finance, insurance
and real estate division towards shareholders return and sales.
The third model of this test is model 2.3, the external reference wage. Table 9
illustrates that this model found for the period before the crisis almost all the same relations
as in model 1.3. The only difference is that there are a couple more negative relations than
in model 1.3. For the period during the crisis there are still positive relations. However the
results illustrate that there are more negative relations. Furthermore are there many
relations before the crisis which are not found during the crisis. The column difference
between both periods illustrate that there are 19 cases where a positive and 17 cases where
a negative difference is found. However 36 times (which is 50%) there is not found a
difference between both periods. The most (7) positive differences are found in the
transportation, communication, electric, gas and sanitary service division and the fewest (4)
in all the other divisions. The most (8) negative relations are in the manufacturing division
and the fewest (3) in all the other divisions.
For the base salary, total assets group and number of compensations the same
applies. However the base salary and number of compensations differ even more from
model 1.3. The total assets group has still in most of the cases a negative or no relation. The
differences illustrate that where differences are found, the base salary (10 out of 13) and
total assets group (9 out of 13) have positivily changed. The only negative differences for the
base salary are all in the transportation, communication, electric, gas and sanitary service
division, just like in model 2.1. For the total assets group these are found in the
transportation, communication, electric, gas and sanitary service division and finance,
insurance and real estate division. The number of compensations found 3 times a positive
and 3 times a negative difference. Where the positive differences are all found in the
finance, insurance and real estate division, also like model 2.1.
27 | P a g e
The last model in this test is model 2.4, the relative performance evaluation. Table 10
illustrates that this model has also found differences between the two periods. There are
relations which are the same in both periods but there are also a lot of relations which differ.
Especially in the services division the relations differ between periods. The only relations
which are the same in both periods is the positive relation of stock options towards the
relative market stock price and restricted stock holdings towards relative sales. The column
difference between both periods illustrate that there are 16 cases where a positive and 12
cases where a negative difference is found. Which means 44 times there is not found a
difference between both periods. The most (5) positive differences are found in the
transportation, communication, electric, gas and sanitary service division and the fewest (3)
in the finance, insurance and real estate division. The most (5) negative relations are in the
finance, insurance and real estate division and the fewest (0) in the services division.
The base salary and number of compensations differ also between both periods.
However the total assets group has still in most of the cases a negative relation. There is only
one positive relation found which is towards relative shareholders return in the finance,
insurance and real estate division. . The differences illustrate that where differences are
found, the base salary (10 out of 12) and total assets group (8 out of 14) have positivily
changed. The only negative differences for the base salary are all in the transportation,
communication, electric, gas and sanitary service division, just like in model 2.1 and 2.2. For
the total assets group these are found in the transportation, communication, electric, gas
and sanitary service division and finance, insurance and real estate division. The number of
compensations illustrate that it has changed 3 times positive and 8 times negative. These
positive differences are all found in the finance, insurance and real estate division, also like
model 2.1 and 2.2.
The second set of tests illustrates that the relations can differ between the two
periods. Again the internal reference wage model has the most negative reward
compensation relations. The period before the crisis has the most similarity with the first set
of tests. In the period before the crisis most relations are positive. During the crisis the
reward compensations have more often a negative effect towards performance than before
the crisis. In all the models (except model 2.2) the differences illustrate more positive than
negative changes in the relations for the performance compensations. This does not mean
that all the changes were large enough to change a positive (negative) relation into a
negative (positive) relation. However in all models at least 50% of the times there is not even
found a difference in the relations. This illustrates that most of the times relations before the
crisis have not changed during the crisis.
The effects of the base salary and number of compensations are positive and
negative. Their influence depends on the performance measure, period and division. The
total assets group on the other hand is very consistent. In all cases where a relation is found,
except three, it has a negative relation. This could illustrate that smaller organizations are
more efficient in implementing reward systems than bigger organizations. The exceptions
are in the period during the crisis and towards shareholders return. The differences illustrate
in all models (except model 2.2) more positive than negative changes for the base salary and
total assets group. For the number of compensations the models 2.1 and 2.3 found an equal
amount of positive and negative changes. The models 2.2 and 2.4 found more negative than
positive differences between both periods.
28 | P a g e
Comparing the set of tests, it is illustrated that in both tests the reward
compensations (result-oriented pay, stock options and restricted stock holdings) have a
positive relation. However there are some exceptions in the results were negative relations
are found. The first set of tests illustrate the same results as the period before the crisis in
the second set of tests. The period has an influence on the relation because the results
illustrate that there are more negative relations during the crisis than before the crisis.
Comparing the models, the results illustrate that the models found almost the same
relations. Except the internal reference wage, models 1.2 and 2.2, where the results are very
different from the other models. These results illustrate more negative relations than the
other models. Why this model is so different is not sure. It could be that this is caused by the
fact that this model uses data from a year earlier (yeart-1) to calculate the reference wage. It
is the only model were data from previous years is used. All other models use data from the
current year, yeart. These other models differ in the fact that some found slightly more
relations. The most are found in the external reference wage model followed by the general
relation model and finally the relative performance evaluation model.
Comparing the industry divisions, the results illustrate that manufacturing has the
most and services the fewest relations. It could indicate that in some divisions, like the
manufacturing division, it is more common to use performance compensations for
executives towards financial performance measures. In the services division these
compensations are possibly more related to non-financial measures. However this difference
could also be caused by differences in the implementation or monitoring of the reward
systems or by differences in laws and legislation. Furthermore the results illustrate that
between the divisions different performance compensations could be used for improving a
performance measure in a reward system. For example in the manufacturing division all
performance compensations are used to improve operating profits. However in the
transportation, communications, electric, gas and sanitary service division only the
performance compensations result-oriented pay and restricted stock holdings are used. The
exact reason for all these differences between the divisions is not sure.
Comparing the different performance measures, the results illustrate that the most
relationships are found towards the market stock price, earnings and operating profits. The
fewest are found towards profit margins. This could indicate that the performance measures
market stock price, earnings and operating profits are mostly used for reward systems and
profit margins not at all.
29 | P a g e
5. Conclusion
The paper provides a rich and up-to-date description of executive compensation. The
theoretical literature illustrates that over time different compensation components were
developed with the idea to improve organizational performance. These components are
result-oriented pay (bonus), stock options and restricted stock. In the historical charts of the
components is illustrated that they increased over time, except in 2001 and 2007-2008
where most of them declined. The base salary, result-oriented pay and other compensations
are just a slight part of the total compensation. Stock options and restricted stock on the
other hand have increased in use and/or increased in value over time. The literature also
illustrates that policies, laws and legislation have effect on the compensations. They can
create shifts between compensations or systems and between countries or industries.
Furthermore the paper updates the research on executive compensation. A new
dataset is used to research the effects of a crisis and if there are differences in the period
before and during a financial crisis. The paper uses two different set of tests to investigate
the relationship between compensation and performance. The first tests examined the
relationship for the whole period from 1992 to 2010 and the influence of the crisis. The
second tests examined if the relationship is the same (positive, zero or negative) in two
different periods, which are before and during a crisis. In both test four different models are
used. These are general relation, internal reference wage, external reference wage and
relative performance evaluation.
The main findings of the tests are that most reward compensations have a positive
relation towards performance. Furthermore that the influence of a crisis differs between
divisions and performance measures and that the relationships can differ between the
period before and during the crisis. The first set of tests have almost the same relations as in
the period before the crisis in the second set of tests. However during the crisis there are
more negative relations. The differences between both periods illustrate that at least 50% of
the relations have not changed between the periods. Furthermore there are found more
positive than negative differences during the crisis than before the crisis. But they are
practically never large enough to change the relation from positive to negative or visa versa.
Most of the positive relations are found in the models general relation, external reference
wage and relative performance evaluation. The internal reference wage model is not
consistent with these other models. It found many negative relations for the compensations
variables. This could be caused by the fact that this model is the only model where data from
previous years ,yeart-1, is used to calculate the reference wage. The other models differ in
the fact that some found slightly more relations. The most relations are found in the external
reference wage model followed by the general relation model and relative performance
evaluation model. Due to the small difference in results the general relation model is
prefered because it is the easiest model to calculate.
The results also illustrate that the relations of base salary and number of
compensations differs between performance measures, industry divisions and periods. The
difference in the variable number of compensations means that the incentive theory does
not hold in all cases. The variable total assets group is very consistent and had practically
allways a negative relation. This could illustrate that smaller organizations are more efficient
than bigger organizations. However during the crisis bigger organizations improved more
than smaller organizations which means the difference between them got smaller.
30 | P a g e
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33 | P a g e
Appendix
Data Variables
De used data variables in this research with explanations are represented here on
basis of name and between brackets the label:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Executive information
EXECID (Executive ID Number) is a permanent executive ID number which an executive
gets assigned from the Compustat ExecuComp Database. It gives us the opportunity to
see if an executive is restricted to one industry or has the ability to work in different
industries.
PAGE (Present Age) is the age of the named executive officer. It is said that an older
executive is more experienced and has a higher wealth.
EXECDIR (Executive served as a director during the fiscal year) indicates if the executive
officer served as director during that fiscal year. It gives us the opportunity to see if
there are differences between executives and executive directors.
CO_PER_ROL (ID number for each executive/company combination) is a ID number
which is assigned from the Compustat ExecuComp Database to each unique
executive/company combination.
Organizational information
GVKEY (Company ID Number) is the companies ID number. It identifies an issue and
serves as the primary key.
SIC (SIC Code) is the Standard Industrial Classification Code which makes it possible to
group organization in industries.
YEAR (Fiscal Year) is the data year for which the data is collected.
AT (Assets – Total) is the Assets Total. It represents the total assets of a company at a
point in time.
Compensation or salary information
SALARY (Salary ($)) represents the dollar value of the base salary (cash and non-cash)
earned by the named executive officer during the fiscal year in thousands of dollars.
BONUS (Bonus ($)) is the dollar value of a bonus (cash or non-cash) earned by the
named executive officer during the fiscal year in thousands of dollars.
LTIP (LTIP Payouts) is the amount paid to executives under the company’s long-term
incentive plan in thousands of dollars.
OPT_EXER_VAL (Value Realized on Option Exercise (S)) is the value realized on option
exercise in thousands of dollars.
STOCK_UNVEST_VAL (Restricted Stock Holdings ($)) is the dollar value of the restricted
stock holdings earned by the named executive officer during the fiscal year in thousands
of dollars.
OTHCOMP (All Other Compensation ($)) is the dollar value in thousands of dollars of all
other compensation.
TDC2 (Total Compensation (Salary + Bonus + Other Annual + Restricted Stock Grants +
LTIP Payouts + All Other + Value of Options)) is the total compensation for the
34 | P a g e
•
•
•
•
•
•
•
•
•
•
•
individual year, comprised of the following: Salary, Bonus, Other Annual, Total Value of
Restricted Stock Granted, Net Value of Stock Options Exercised, Long-Term Incentive
Payouts, and All Other Total in thousands of dollars.
TOTAL_CURR (Total Current Compensation (Salary + Bonus)) is the total compensation
for the individual year, comprised of salary and bonus in thousands of dollars.
OPTION_AWARDS_NUM (Options Granted) is the number of options granted.
STOCK_UNVEST_NUM (Restricted Stock Holdings) is the number of the restricted stock
holdings earned by the named executive officer during the fiscal year.
OPTION_AWARDS_BLK_VALUE (Options Granted ($ - Compustat Black Scholes value))
is the value in, thousands of dollars, of the options granted using the Black-Scholes
model.
OPTION_AWARDS_RPT_VALUE (Options Granted ($ - As Reported by Company)) is the
value in, thousands of dollars, of the options granted as reported by the company.
OPTION_AWARDS_FV (Grant Date Fair Value of Options Granted ($ - as valued by
company)) is the value in, thousands of dollars, of the options granted using the grant
date fair value.
Organizational performance information
MKVALT (Market Value – Total – Fiscal) is the Market Value – Total. It is the common
shares outstanding multiplied by the month-end price that corresponds to the period
end date.
DVT (Dividends – Total) is the variable Dividends - Total. It represents the total amount
of dividends, other than stock dividends, declared on all equity capital of the company,
based on the current year’s net income.
NI (Net Income (Loss)) is the Net Income (Loss). It represents the fiscal period income or
loss reported by a company after subtracting expenses and losses from all revenues and
gains.
EBIT (Earnings Before Interest and Taxes) are the Earnings Before Interest and Taxes. It
is the sum of sales (SALE) minus cost of goods sold (COGS) minus selling, general &
administrative expense (XSGA) minus depreciation/amortization (DP).
SALE (Sales/Turnover (Net)) is the Net Sales/Turnover. It represents gross sales reduced
by cash discounts, trade discounts, and returned sales and allowances for which credit is
given to customers, for each operating segment.
35 | P a g e
Figures
Figure 1: Median Total Compensation (from 1992 to 2010)
Median Total Compensation
3500
Dollars (1,000)
3000
2500
2000
1500
1000
500
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
U.S. Inflation Rate
The sample data is extracted from Compustat’s ExecuComp Database and is based on executive compensation
included in the S&P 500, the S&P Mid-Cap 400 and S&P Small-Cap 600 from 1992 to 2010. The total sample (where the
variable is not zero) consists of 113,896 (N) which means that 98.44% of the 115,703 (N) cases are included. Median Total
Compensation consists of the components: Salary, Bonus, Other Annual, Total Value of Restricted Stock Granted, Net value
of Stock Options Exercised, Long-Term Incentive Payouts and All Other Total. In the database it is available under the label
“Total Compensation” or the variable name “TDC2”. The U.S. inflation rate is extracted from the InflationData.com and uses
the 1992 S&P 500 figure as base level.
Figure 2: Median Total Current Compensation (from 1992 to 2010)
Median Total Current Compensation
1200
Dollars (1,000)
1000
800
600
400
200
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
U.S. Inflation Rate
variable is not zero) consists of 115,355 (N) which means that 99.70% of the 115,703 (N) cases are included. Median Total
Current Compensation consists of the components: Salary and Bonus. In the database it is available under the label “Total
Current Compensation (Salary + Bonus)” or the variable name “TOTAL_CURR”. The U.S. inflation rate is extracted from the
InflationData.com and uses the 1992 S&P 500 figure as base level.
36 | P a g e
Figure 3: Median Base Salary (Wage or Salary) (from 1992 to 2010)
Median Base Salary
600
Dollars (1,000)
500
400
300
200
100
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
U.S. Inflation Rate
variable is not zero) consists of 115,243 (N) which means that 99.60% of the 115,703 (N) cases are included. Median Base
Salary Compensation is based on the, in the database, variable which can be found under the label “Salary ($)” or the
variable name “SALARY”. According the definition of ExecuComp, salary is the dollar value of a salary (cash or non-cash)
earned by the executive during that fiscal year. The U.S. inflation rate is extracted from the InflationData.com and uses the
1992 S&P 500 figure as base level.
37 | P a g e
Figure 4: “Typical” Bonus plans
(A)
Incentive Zone
Bonus
Bonus "Cap"
Performance
Threshold
Performance
Measure
(B)
Incentive Zone
Bonus
Bonus "Cap"
Performance
Threshold
Performance
Measure
This Figure illustrates the basic system of a bonus plan. It illustrates the “incentive zone”, which is the range
where improvements in performance are related to improvements in bonuses. Part (A) illustrates the basic system where
the incentive zone is as a straight line, but most of the times it looks more like part (B). There are many small steps
illustrated which all have a specific bonus level. The performance threshold is the minimum performance level which has to
be achieved before a bonus is paid and the bonus cap is the maximum amount of bonus paid in a specific year.
38 | P a g e
Figure 5: Median Result-Oriented Pay (Annual Bonus Pay) (from 1992 to 2010)
Median Result-Oriented Pay (Bonus)
700
Dollars (1,000)
600
500
400
300
200
100
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
U.S. Inflation Rate
variable is not zero) consists of 77,170 (N) which means that 66.70% of the 115,703 (N) cases are included. Median ResultOriented Pay Compensation is based on the, in the database, variable which can be found under the label “Bonus ($)” or
the variable name “BONUS”. According the definition of ExecuComp, bonus is the dollar value of a bonus (cash or non-cash)
earned by the executive during that fiscal year. The U.S. inflation rate is extracted from the InflationData.com and uses the
1992 S&P 500 figure as base level.
Figure 6: Median Long Term Incentive Payouts (LTIPs) (from 1992 to 2006)
Median Long-Term Incentives Plans (LTIPs)
1400
Dollars (1,000)
1200
1000
800
600
400
200
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
U.S. Inflation Rate
included in the S&P 500, the S&P Mid-Cap 400 and S&P Small-Cap 600 from 1992 to 2006 because there is no data from
2007 to 2010. The total sample (where the variable is not zero) consists of 12,447 (N) which means that 10.76% of the
115,703 (N) cases are included. Median Long-Term Incentives Plans Compensation is based on the, in the database, variable
which can be found under the label “LTIP Payouts” or the variable name “LTIP”. According the definition of ExecuComp,
LTIP is the amount paid out to the executive under the company’s long-term incentive plan. These plans measure company
performance over a period of more than one year (generally three years). The U.S. inflation rate is extracted from the
39 | P a g e
Figure 7: Median Value Realized on Option Exercise (from 1992 to 2010)
Median Value Realized on Option Exercise
2500
Dollars (1,000)
2000
1500
1000
500
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
U.S. Inflation Rate
variable is not zero) consists of 39,495 (N) which means that 34.13% of the 115,703 (N) cases are included. Median Value
Realized on Option Exercise Compensation is based on the, in the database, variable which can be found under the label
“Value Realized on Option Exercise ($)” or the variable name “OPT_EXER_VAL”. According the definition of ExecuComp,
value realized on option exercise is the value calculated as of the date of exercise and is based on the difference between
the exercise price and the market price of the stock on the exercise date. The U.S. inflation rate is extracted from the
Figure 8: Median # Options Granted (from 1992 to 2010)
Dollars (1,000)
Median # Options Granted
100
90
80
70
60
50
40
30
20
10
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
variable is not zero) consists of 79,936 (N) which means that 69.09% of the 115,703 (N) cases are included. Median #
Options Granted is based on the, in the database, variable which can be found under the label “Options Granted” or the
variable name “OPT_AWARDS_NUM”. According the definition of ExecuComp, options granted is the “total number of
options awarded during the year as detailed in the Plan based Awards Table”.
40 | P a g e
Figure 9: Median Options Granted ($) (from 1992 to 2010)
Median Options Granted ($)
Dollars (1,000)
2000
1500
1000
500
0
S&P 500 (BLK)
S&P 500 (RPT)
S&P 500 (FV)
Fiscal Year
S&P Mid-Cap 400 (BLK)
S&P Mid-Cap 400 (RPT)
S&P Mid-Cap 400 (FV)
S&P Small-Cap 600 (BLK)
S&P Small-Cap 600 (RPT)
S&P Small-Cap 600 (FV)
included in the S&P 500, the S&P Mid-Cap 400 and S&P Small-Cap 600 from 1992 to 2010.
1
BLK represents the $ value of the options granted using the Black Scholes model. It is based on the, in the
database, variable which can be found under the label “Options Granted ($ - Compustat Black Scholes value)” or the
variable name “OPTION_AWARDS_BLK_VALUE”.
2
RPT represents the $ value of the options granted as reported by the company. It is based on the, in the
database, variable which can be found under the label “Options Granted ($ - As reported by Company)” or the variable
name “OPTION_AWARDS_RPT_VALUE”.
3
FV represents the $ value of the options granted using the grant date fair value. It is based on the, in the
database, variable which can be found under the label “Grant Date Fair Value of Options Granted ($ - as valued by
company)” or the variable name “OPTION_AWARDS_FV”.
41 | P a g e
Figure 10: Median Restricted Stock Holdings (from 1992 to 2010)
Median Restricted Stock Holdings
2500
Dollars (1,000)
2000
1500
1000
500
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
U.S. Inflation Rate
variable is not zero) consists of 45,622 (N) which means that 39.43% of the 115,703 (N) cases are included. Median
Restricted Stock Holdings Compensation is based on the, in the database, variable which can be found under the label
“Restricted Stock Holdings ($)” or the variable name “STOCK_UNVEST_VAL”. The U.S. inflation rate is extracted from the
Figure 11: Median # Restricted Stock Holdings (from 1992 to 2010)
Median # Restricted Stock Holdings
60
Dollars (1,000)
50
40
30
20
10
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
variable is not zero) consists of 44,876 (N) which means that 38.79% of the 115,703 (N) cases are included. Median #
Restricted Stock Holdings is based on the, in the database, variable which can be found under the label “Restricted Stock
Holdings” or the variable name “STOCK_UNVEST_NUM”.
42 | P a g e
Figure 12: Median All Other Compensation (from 1992 to 2010)
Dollars (1,000)
Median All Other Compensation
80
70
60
50
40
30
20
10
0
Fiscal Year
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
U.S. Inflation Rate
variable is not zero) consists of 105,408 (N) which means that 91.10% of the 115,703 (N) cases are included. Median All
Other Compensation is based on the, in the database, variable which can be found under the label “All Other Compensation
($)” or the variable name “OTHCOMP”. The U.S. inflation rate is extracted from the InflationData.com and uses the 1992
S&P 500 figure as base level.
Figure 13: Median Total Compensation Components (from 1992 to 2010)
Median Total Compensation Components
5000
Dollars (1,000)
4000
3000
2000
1000
0
Fiscal Year
Base Salary
Result-Oriented Pay
Stock Options
Restricted Stock Holdings
All Other Compensation
included in the S&P 500 from 1992 to 2010. The compensation percentages are calculated using the sample of executive
compensations which are used in the Figures in the explanation of each of these components and had a value higher than
zero. It consists of the median base salary (SALARY), median result-oriented pay (BONUS), median value realized on option
exercise (OPT_EXER_VAL), median restricted stock holdings (STOCK_UNVEST_VAL) and median all other compensation
(OTHCOMP).
43 | P a g e
Figure 14: Median Total Compensation per SIC Division (from 1992 to 2010)
Median Total Compensation
(SIC Divisions)
14000
Dollars (1,000)
12000
10000
8000
6000
4000
2000
0
Fiscal Year
A
B
C
D
E
F
G
H
I
J
K
included in the S&P 500 from 1992 to 2010. The total sample (where the variable is not zero) consists of 48,800 (N) which
means that 99.06% of the 49,262 (N) cases are included. Median Total Compensation consists of the components: Salary,
Bonus, Other Annual, Total Value of Restricted Stock Granted, Net value of Stock Options Exercised, Long-Term Incentive
Payouts and All Other Total. In the database it is available under the label “Total Compensation” or the variable name
“TDC2”.
The SIC Divisions consist of:
Division A. Agriculture, Forestry and Fishing (SIC 01-09)
Division B. Mining (SIC 10-14)
Division C. Construction (SIC 15-17)
Division D. Manufacturing (SIC 20-39)
Division E. Transportation, Communications, Electric, Gas and Sanitary Service (SIC 40-49)
Division F. Wholesale Trade (SIC 50-51)
Division G. Retail Trade (SIC 52-59)
Division H. Finance, Insurance and Real Estate (SIC 60-67)
Division I. Services (SIC 70-89)
Division J. Public Administration (SIC 91-97)
Division K. Nonclassifiable Establishments (SIC 99)
44 | P a g e
Figure 15: Median Total Current Compensation per SIC Division (from 1992 to 2010)
Median Total Current Compensation
(SIC Divisions)
3500
Dollars (1,000)
3000
2500
2000
1500
1000
500
0
Fiscal Year
A
B
C
D
E
F
G
H
I
J
K
included in the S&P 500 from 1992 to 2010. The total sample (where the variable is not zero) consists of 49,122 (N) which
means that 99.72% of the 49,262 (N) cases are included. Median Total Current Compensation consists of the components:
Salary and Bonus. In the database it is available under the label “Total Current Compensation (Salary + Bonus)” or the
variable name “TOTAL_CURR”.
The SIC Divisions consist of:
Division A. Agriculture, Forestry and Fishing (SIC 01-09)
Division B. Mining (SIC 10-14)
Division C. Construction (SIC 15-17)
Division D. Manufacturing (SIC 20-39)
Division E. Transportation, Communications, Electric, Gas and Sanitary Service (SIC 40-49)
Division F. Wholesale Trade (SIC 50-51)
Division G. Retail Trade (SIC 52-59)
Division H. Finance, Insurance and Real Estate (SIC 60-67)
Division I. Services (SIC 70-89)
Division J. Public Administration (SIC 91-97)
Division K. Nonclassifiable Establishments (SIC 99)
45 | P a g e
Tables
Table 1: Characteristics of compensation components data
Percentage of executives who get
1
paid a certain component:
•
•
•
•
•
•
S&P 500
S&P Mid-Cap 400
S&P Small-Cap 600
---------------------
---------------------
---------------------
Base Salary
Result-Oriented Pay (Bonus)
Long-Term Incentive Plans
Stock Options
Restricted Stock
99.58 %
72.02 %
17.00 %
38.16 %
43.50 %
93.35 %
99.55 %
66.79 %
8.38 %
33.33 %
38.86 %
91.41 %
99.68 %
59.17%
4.13 %
29.22 %
34.24 %
87.69 %
2
Median executive compensation:
------------------------------------------------------------(Thousands of dollars)
•
Base Salary
425.00
310.00
257.50
310.77
170.00
107.34
•
Result-Oriented Pay (Bonus)
•
Long-Term Incentive Plans
307.14
157.60
90.94
•
Stock Options
1043.50
521.55
301.05
•
Restricted Stock
1358.04
633.66
352.34
41.97
24.20
17.63
•
•
Total Compensation
1518.62
834.87
546.58
•
Total Current Compensation
640.56
425.00
321.39
1
These percentages are based on the sample of executive compensations which are used in the Figures in the
explanation of each of these components. For example, stock options is based on the variable “Value Realized on Option
Exercise ($) and restricted stock on the variable Restricted Stock Holdings ($).
2
These median compensations (in amounts of thousands of dollars) are based on the sample of executive
compensations which are used in the Figures in the explanation of each of these components and had a value higher than
zero. Thus this is the median compensation for the percentages represented above. All of them are from 1992 to 2010,
except long-term incentive plans only to 2006 because no data exist after that date. For the exact time periods of each
component look at the data belonging to their Figures.
Table 2: Characteristics of research sample data (S&P 500)
DIV
Total
D
E
H
I
500
201
72
87
52
# Executives
1,411
625
204
211
147
Organizations & Executives combinations
1,423
629
206
212
147
Median # organizations executives worked in
1.009
1.006
1.010
1.005
1.000
Total # cases
8.049
3,414
1,144
1,225
782
5.00
4.00
4.00
5.00
4.00
64
64
65
63
62
# Organizations
Median # years worked in an organization
Median Age
1
2
3
85.09%
83.50%
84.60%
89.10%
86.80%
Percentage served as director during the fiscal year
1
included in the S&P 500 from 1992 to 2010 for each division. The median number of years worked in one organization is
based on the, in the database, variable which can be found under the label “ID number for each executive/company
combination” or the variable name “CO_PER_ROL” by counting the number of times these ID numbers are represented in
the database.
2
included in the S&P 500 from 1992 to 2010 for each division. Median age is based on the, in the database, variable which
can be found under the label “Present Age” or the variable name “PAGE”.
3
included in the S&P 500 from 1992 to 2010 for each division. These percentage served as director during the fiscal year is
based on the, in the database, variable which can be found under the label “Executive served as a director during the fiscal
year” or the variable name “EXECDIR”.
46 | P a g e
Table 3: Model 1.1 (General Relation)
Model 1.1 (General Relation)
1
2
Market Stock Shareholders
Price (MSP)
Return
I ) Division D: Manufacturing (SIC 20-39)
B1 Base Salary
0.507 **
B2 Result-Oriented Pay (Bonus)
0.084
-0.003
0.034 ***
B3 Stock Options
0.174 ***
0.005 ***
B4 Resticted Stock Holdings
0.100 **
0.002
B5 CRISIS
-0.511 ***
-0.028 ***
B6 Total Assets Group
-0.141 ***
-0.004
3
4
5
6
Earning
Operating
Profits (EBIT)
Sales
Profit
Margins
-0.030 ***
-0.036 ***
0.037 ***
0.042 ***
0.115 ***
0.002 ***
0.003 ***
-0.007 ***
0.003 ***
0.005 ***
0.015 ***
-0.036
0.015 ***
-0.039 **
0.027 ***
-0.032 ***
-0.015 ***
-0.22
0.015 ***
0.006 *
0.025 *
0.022 ***
0.025 ***
B3 Stock Options
0.176 ***
0.006 ***
0.004 ***
0.000
B5 CRISIS
0.069
-0.001 **
0.000 ***
0.011
-0.003
7.645E-5
0.009 **
-0.001
5.771E-5 *
0.000
0.013 ***
0.097 ***
-0.015 ***
-0.007 ***
-0.012 ***
-0.120 ***
0.005 ***
0.003 **
-0.023
B1 Base Salary
0.621 ***
-0.035
0.033 ***
0.048 ***
0.848 ***
0.003
0.020 ***
0.050 ***
B3 Stock Options
0.300 ***
0.008 ***
0.003 ***
0.004 ***
0.086 ***
0.005
0.004 ***
0.005 ***
-0.018
B5 CRISIS
0.058 *
-0.062 ***
0.001
0.011 ***
0.034
-0.310 ***
-0.031 ***
B7 # Com pensations
IV ) Division I: Services
-0.032 *
1.299 *
B1 Base Salary
B3 Stock Options
-0.718
0.199 ***
0.034
-0.018 ***
0.000
0.009
-0.013
0.005 *
0.003
0.012 ***
0.674 ***
-0.034 ***
0.033
0.013 **
B7 # Com pensations
III ) Division H: Finance, Insurance and Real Estate (SIC 60-67)
0.003 ***
0.000
-0.008 ***
0.625 ***
-0.314 ***
0.044 ***
0.015 ***
-0.171 ***
-0.004 ***
-0.096 ***
0.001
0.009 ***
0.007 ***
B7 # Com pensations
II ) Division E: Transportation, Com m unications, Electric, Gas and Sanitary Service (SIC 40-49)
B1 Base Salary
-0.024
0.367 ***
-0.015
0.028 ***
-0.028 ***
-0.217 ***
-0.002
-0.018
0.000 ***
0.007
-0.007 **
0.014 ***
0.001
-0.022
-0.002
0.015
-0.072 ***
-0.031 **
0.018 *
0.038
0.016
0.019
0.332 ***
0.025
0.045 *
0.058 ***
0.038
0.092 *
0.001 **
0.000
-9.467E-6
0.000
0.000
-0.001
-0.001
-0.002
B5 CRISIS
-1.564 ***
-0.042 ***
-0.399 **
-0.005
B7 # Com pensations
-1.032 ****
0.003
0.044 **
-0.001
0.032 ***
0.035 ***
-0.008 *
0.022 ***
0.026 ***
0.035
-0.059 ***
0.050 ***
-0.002
-0.006
0.138 **
0.031
0.125 ***
*** = 1% significance, ** = 5% significance and * = 10% significance.
This table represents the relation of the independent variables towards the dependent variables. The
independent variables are base salary, result-oriented pay (bonus), stock options, restricted stock holdings, crisis, total
assets group and number of compensations. The dependent variables are market stock price (MSP), shareholders return,
earnings, operating profits (EBIT), sales and profit margins. The independent compensation variables and the dependent
variables, except profit margins, are percenteges towards the total assets of the organization in the same fiscal year. Thus
the compensation dollar value is divided by the total assets dollar value. Therefore the table indicates increases or
decreases in performance (per thousands of total assets) if the compensation increases by one percent towards total
assets. The available data in Compustat which is used for the liniear regression model is for the market stock price (MSP)
from 1998 to 2010, for the shareholders return from 1993 to 2010 and for the earnings, operating profits (EBIT), sales and
profit margins from 1992 to 2010.
47 | P a g e
Table 4: Model 1.2 (Reference Wage - Internal)
Model 1.2 (Reference Wage - Internal)
1
2
Price (MSP)
Return
B1 ∆ Base Salary
-4.301 ***
3
4
5
6
Earning
Operating
Profits (EBIT)
Sales
Profit
Margins
-0.495 ***
-0.045 ***
-0.047 ***
0.215 ***
-0.120 ***
-0.009
-0.008 *
-0.008 *
0.028
-0.015
B2 ∆ Result-Oriented Pay (Bonus)
0.235 *
B3 ∆ Stock Options
0.046 ***
0.000
0.000
0.000
B4 ∆ Resticted Stock Holdings
0.147 ***
-0.004 *
-0.001
-0.002 *
B5 CRISIS
-0.494 ***
-0.024 ***
-0.291 ***
-0.002
0.011 ***
0.012 ***
-0.049 ***
0.029 ***
-0.009 ***
-0.035 ***
0.002
B1 ∆ Base Salary
-4.736 ***
-0.243 ***
-0.009
-0.840 ***
-0.127 ***
-0.033 **
-0.103 ***
0.000
0.083
0.001
-7.803E-5
0.001 **
1.336E-5
0.014
-0.458 ***
0.000
0.004
1.070E-5
-4.196E-5
0.018 ***
-0.010
-0.023
0.002 *
4.391E-6
0.012 ***
0.070 **
-0.010 ***
-0.015 ***
-0.193 ***
0.130 ***
0.020 ***
B7 # Com pensations
0.006 ***
0.003 **
-0.037 ***
-0.034 **
0.012 **
0.015 **
0.066
0.013
0.001
0.001
0.007
0.001
-0.027 ***
0.000
0.000
0.052 ***
-0.058 ***
0.000
0.007 **
0.028
B1 ∆ Base Salary
-0.476 ***
-1.511 ***
0.603 ***
0.017
-0.067 **
0.007
B5 CRISIS
B7 # Com pensations
B1 ∆ Base Salary
-0.590 ***
0.019
-3.594 ***
0.111
-0.021 ***
-0.348 ***
-0.036 *
-1.972E-5
-0.014 ***
0.005
0.005
0.009
-0.031 ***
0.013 *
-0.013 ***
B5 CRISIS
-0.029 ***
0.000
-0.001
-0.004 ***
0.040
0.012 ***
0.013 ***
0.013 ***
B7 # Com pensations
0.002 *
-0.005
-0.029 ***
-9.407E-5
0.010
-0.008 **
-0.012
0.017 ***
-0.484 ***
0.009
-0.048 ***
-0.289 ***
-0.001
-0.020
-0.074 ***
-0.029 **
0.018 *
-0.469 ***
-0.092 **
-0.005
-0.033
-0.012
-0.014
-0.001
-7.308E-5
0.000
0.001
-0.003
-0.001
-0.009
0.000
0.010
-0.007
0.072
-0.020 ***
-0.143 ***
0.011
0.015 ***
0.067 ***
-0.001
B5 CRISIS
-1.229 ***
-0.017
-0.576 ***
-0.004
B7 # Com pensations
-0.455 **
0.026 **
0.030 *
-0.009
0.029 ***
0.149 *
-0.018
-0.009
0.002 **
0.064
-0.031
0.000
0.084 ***
48 | P a g e
Table 5: Model 1.3 (Reference Wage - External)
Model 1.3 (Reference Wage - External)
1
2
Price (MSP)
Return
B1 ∆ Base Salary
0.003
0.024 *
-0.003
0.002 *
0.087 ***
0.002 ***
0.039 ***
0.001
3
4
5
6
Earning
Operating
Profits (EBIT)
Sales
Profit
Margins
-0.003 **
0.004 ***
-0.005 ***
-0.004
0.005 ***
0.011 ***
0.001 ***
0.001 ***
-0.003 ***
0.014 ***
0.002 ***
0.006 ***
-0.027 ***
0.004 ***
0.001 ***
0.000
B5 CRISIS
-0.563 ***
-0.031 ***
-0.004 ***
0.015 ***
-0.047 ***
0.041 ***
-0.175 ***
-0.007 **
-0.004 ***
-0.008 ***
-0.036 ***
-0.017 ***
0.013 *
0.014 ***
-0.112 **
0.001
0.009 ***
0.007 ***
B7 # Com pensations
B1 ∆ Base Salary
0.014
0.028 ***
0.019 ***
0.001 ***
0.047
B5 CRISIS
-0.313 ***
-0.002 *
0.001 ***
0.001 ***
0.003
0.001 *
0.001 ***
0.001 ***
0.032 ***
0.001 ***
1.742E-5
-0.033 ***
-0.015 ***
0.038
0.013 **
B7 # Com pensations
0.004
-1.477E-5
0.700E-6 **
0.001 **
-4.157E-5
0.012 ***
0.092 ***
-0.007 ***
-0.011 ***
-0.116 ***
0.005 ***
0.003 **
-0.023
B1 ∆ Base Salary
0.012 ***
0.001 ***
0.002 ***
0.005 ***
0.025 ***
0.000
0.000 ***
0.001 ***
0.002 *
0.028 ***
0.001 ***
0.000 ***
0.000 ***
0.002 ***
0.008 ***
B5 CRISIS
0.052
-0.321 ***
B7 # Com pensations
-0.041 **
B1 ∆ Base Salary
-0.002 ***
0.000 **
2.362E-5 *
0.000
-0.058 ***
-0.036 ***
0.003
0.001
-0.001
0.000
0.000 ***
0.001
0.030
-0.016 *
-0.025 ***
-0.213 ***
-0.028 **
-0.001
-0.028 **
0.018 *
2.282E-5
0.002
0.005
0.008 **
0.003
0.006 *
0.007 ***
0.010
0.014 ***
0.010 ***
-5.443E-5
-6.336E-5
-0.001
0.000
0.000
B5 CRISIS
-1.729 ***
-0.053 **
0.030 *
0.015
-0.467 **
-0.012
B7 # Com pensations
-1.012 ***
0.003
0.007
-0.007 **
0.000 *
0.193
0.001 ***
0.000
5.698E-5 ***
0.001
-0.071
0.154 ***
0.001
-0.001
-0.003
0.032 ***
-0.009 *
0.022 ***
0.087 ***
0.001
-0.074 ***
-0.005
-0.001
0.013
-0.001
0.000
0.017 ***
-0.002
-0.055 *
0.116 *
-0.057 ***
0.022
0.049 ***
0.124 ***
49 | P a g e
Table 6: Model 1.4 (Relative Performance Evaluation)
Model 1.4 (Relative Perform ance Evaluation)
1
2
Relative
Relative
Price (MSP)
Return
4
5
6
Relative
Operating
Profits (EBIT)
Relative
Sales
Relative
Profit
Margins
B1 Base Salary
0.323 **
-0.352 ***
-0.278 ***
0.115
0.300 ***
0.512 ***
0.342 ***
0.154 ***
0.722 ***
B3 Stock Options
0.113 ***
0.037 ***
0.026 ***
0.021 ***
-0.005 ***
0.047 ***
0.014
0.037 ***
0.037 ***
0.014 ***
0.158 ***
0.142 ***
0.074 ***
0.175 *
-0.060 ***
-0.025 ***
-0.234 ***
0.067 ***
-0.045
3
Relaltive
Earning
B5 CRISIS
-0.102 *
-0.154 **
-0.109 ***
-0.022
-0.042 **
-0.071 **
0.001
0.114 ***
0.053 ***
B7 # Com pensations
-0.076 **
0.008
-2.592 ***
0.006
0.185 ***
B1 Base Salary
0.079
-0.161
0.310 **
0.023
0.004
1.366 ***
0.233
0.642 ***
0.372 ***
1.642 ***
-0.103
B3 Stock Options
0.303 ***
0.061 ***
0.021 **
-0.010
0.007 ***
0.001
0.118
B5 CRISIS
-0.603 ***
-0.067
-0.223 ***
0.086
0.154 **
B7 # Com pensations
-0.022 ***
0.002
0.004 ***
0.001
-0.001
0.070
0.005 ***
0.243 **
0.204 ***
0.253 ***
0.130
-0.198 ***
-0.140 ***
-0.299 ***
-0.077 *
0.163 ***
0.060 ***
B1 Base Salary
2.028 ***
-0.392
2.021 ***
1.461 ***
2.757 ***
-0.017
1.882 ***
1.776 ***
B3 Stock Options
1.173 ***
0.087 ***
0.422 ***
0.109
0.194 ***
-0.039
0.133 ***
0.033
-0.060 *
2.409 ***
-0.191
0.205 ***
-0.084
0.256 ***
0.162
-0.268
-0.010
0.101
1.143 ***
-0.312 ***
-0.140
0.237 ***
0.575 ***
-0.647 *
-1.377 ***
-0.264 ***
-1.016 ***
-0.787 ***
-1.587 ***
-0.303 *
B7 # Com pensations
-0.026
0.027
-0.020
-0.064 *
-0.123
0.190
0.070
0.010
B5 CRISIS
0.640 **
B1 Base Salary
B3 Stock Options
-0.287
0.083 ***
0.014
0.233
0.007 *
-0.015
B5 CRISIS
-0.400 **
0.096
-0.193 **
-0.019
B7 # Com pensations
-0.451 ***
0.090
0.537 ***
0.313 ***
0.204
0.127
0.460 ***
0.027
1.121 *
-0.002
0.001
0.000
0.004
-0.016
-0.009
0.669 ***
-0.010
0.370 ***
0.308 ***
-0.055
0.183 ***
0.031 ***
0.261 ***
-0.077 ***
0.068 ***
-0.065
1.462 *
0.391
1.512 ***
50 | P a g e
Table 7: Model 2.1 (General Relation) Before and During the Crisis
Model 2.1 (General Relation)
1
2
3
4
5
6
Market Stock Price
(MSP)
B
D
DIFF
Shareholders
Return
B
D
DIFF
Earning
Operating Profits
(EBIT)
B
D
DIFF
Sales
Profit Margins
B
D
DIFF
B
D
DIFF
B
D
DIFF
B1 Base Salary
+ *
+ ***
0.778
-
+
+ **
0.386
+ *** -
B3 Stock Options
+ *** + *** -0.021
+ *
+ ***
0.061
- **
- **
0.021
-
-0.007
- *** + ***
0.149 *** - *** + ***
0.208 *** -
-0.086 **
+ *** + ***
0.007
0.035 **
+ *** + ***
0.006 **
+ *** + ***
0.004 *** + *** + ***
0
+ **
0.012 *
+ *** +
0.000
- **
+
0.016 *
- *
0.006 *
+
+ *** + ***
+ *** - *** 0
B6 # Com pensations
- ** -0.022
+
-0.011
+ *** +
-0.006
+ *** +
B1 Base Salary
+
+ *
+ *** -
- *** -2.167 *
-0.001
+ *** + ***
0.005 **
-0.036 **
-
0.009 *
0.006 *
-0.003
+ *** - *** +
0.052 *** - *** +
0.013
-0.062
+ *** - *
-0.127 **
-0.191
+ *** - **
-0.183 *** + *** +
B3 Stock Options
+ *** + *** -0.147 *** + *** +
-0.006
- *** + **
0.004 *** +
+
0.001
+ *** + ***
0.004
+ *** + ***
0.015 *** + *
+ ***
0.020 *** +
- *** - *** -0.330 *** - *** - **
B1 Base Salary
+ *** + **
1.079 *
+ *** + ***
1.157 *** +
B3 Stock Options
+ *** + ***
0.333 *** + *** +
+ *** -
0.120 *** -
- *** - *** -0.210 **
- *** + **
B6 # Com pensations
- *** -
-
0.034
- **
+ ***
+ **
+ *
0.156 *** +
-0.006
+ **
+
-
B6 # Com pensations
+ *
0.071
+ ** +
0.241 ***
0.005 *** - *** -0.006 **
+
- *** +
+ *** +
-
0.403 *** +
+ ***
0.429 **
-0.030
+ **
-0.840
+ **
+ *** +
+
+ *** -
- *** -1.703 *** +
-0.020
0.022 ***
-0.016 **
-
-0.023
+ *** - *** -1.369 *** -
- **
-0.271 **
+ **
+
+ *
0.009
+ ***
0.401 *** 0 *
-
-
0.006 *
-0.005
-0.011
- *** - **
-0.007
- *** - *** -0.003
- *** - *** -0.077 **
- **
-
0.006
-0.007
+ *** +
-0.006
+ *
- **
+ *** +
-0.008
0.405 *** + *** + ***
-
0.203 *** + *** + ***
-0.066
+ *** - *** -0.102 *** + *** + ***
-0.011 **
+ *** 0
0.066 *** + **
+
-0.005 *** + *** +
0.729 *** -
+
0.253
0.054
-
-
-0.077
-
0.009 **
- *** - *** -0.011 **
0.020 *
0.007 **
- *** +
B1 Base Salary
+
-
-1.718
+
- *
-0.129
+
+ *
-
- *
-0.773
+
+
-0.009
+ **
-
B3 Stock Options
+ *** + *** -0.008
+ **
+ ***
0.010 *
0
+ **
+
+ **
0.082
-
+
0.004
-
-
- *
- ***
0.110
-
- *
-0.016
+
- *
B6 # Com pensations
- *
- ***
0.613
+
- **
-0.042
+ *** +
0.033
-0.131
+
+ **
+ *** - *
0.005
-
+ ***
-0.001
-
- *
-0.018
-
- **
-0.034
+ *** + *
-
+
-0.007 *** + *** + *
0.071 *** - *** -
0.004
0.271 *** + *** + ***
+ **
+ *
- *
0.006
0.003
- *
-
-0.004 *
-0.011 **
0.007 **
0.054
-0.176
0.007 **
-0.005
+
0.003
+ *** +
0.052
- *** - **
0.134 *** - *** -
0.011
-
0.006
0.024
-
-
+ *** + ***
+ *
-
-
+ ***
+ *** + **
-0.010
- *** +
-0.010
+ **
+
-0.018
0.015
0.389 **
-0.299
+ *** +
+
-
-0.032
+ *
-
-0.198
0.043 *** 0
+
0.000
0.017
-
0
0.006
0.066 *
+
-
-0.063
-0.029
+ *** +
+ = a positive relation, - = a negative relation and 0 = a 0.000 relation
B = before the crisis (fiscal years from 1992 until 2006) and D = during the crisis (fiscal years from 2007 until 2010)
and DIFF = the difference between both periods.
This table represents the relation (positive, zero or negative) of the independent variables towards the dependent
variables. The independent variables are base salary, result-oriented pay (bonus), stock options, restricted stock holdings,
crisis, total assets group and number of compensations. The dependent variables are market stock price (MSP),
shareholders return, earnings, operating profits (EBIT), sales and profit margins. The independent compensation variables
and the dependent variables, except profit margins, are percenteges towards the total assets of the organization in the
same fiscal year. Thus the compensation dollar value is divided by the total assets dollar value. Therefore the table indicates
positive, zero or negative relations in performance if the compensation increases by one percent towards total assets. The
available data in Compustat which is used for the liniear regression model is for the market stock price (MSP) from 1998 to
2010, for the shareholders return from 1993 to 2010 and for the earnings, operating profits (EBIT), sales and profit margins
from 1992 to 2010.
51 | P a g e
-0.154 *
Table 8: Model 2.2 (Reference Wage - Internal) Before and During the Crisis
Model 2.2 (Reference Wage - Internal)
1
2
3
4
5
6
Market Stock Price
(MSP)
B
D
DIFF
Shareholders Return
Earning
Operating Profits
(EBIT)
B
D
DIFF
Sales
Profit Margins
B
D
DIFF
B
D
DIFF
B
D
DIFF
B
D
DIFF
- *** - ***
B1 ∆ Base Salary
B2 ∆ Result-Oriented Pay (Bonus) + *
-
- *** - *** -0.946 *** - *** - *** -0.227 *** - *** - *** -0.136 **
+ *** + *
-0.331
0.604
-
+ ***
-0.052 **
0
-
0.070 **
0.013
-
-
0.007
+
-
-0.102 *
-
+
0.030
0 *
0
-6.519E-5
0
+
0.001
+ *
+
0.001
0
0
-0.001
-
+
0.004
- *
-
0.001
+
- *** -0.071 *** -
+ *** -
+ **
0.047
- **
+ *
0.017 **
- *** - *** -0.009
- **
+ ***
0.016 *** - **
- *** -0.004 *
+
+
0.000
+ *** +
-0.013 *
+ *** + ** -0.006 *
B6 # Com pensations
- *** -
B1 ∆ Base Salary
B2 ∆ Result-Oriented Pay (Bonus) - **
4.261 *
- *** -1.520
- *** - *** -0.202 *
+
+ ***
-0.001
0.235
-
+
+ *** + *** -0.005
0.015
+ *** +
-0.015 *
-0.366 *
+
+
+
+ *
-
0.011
0.028 **
-0.006
- *** - *** -1.652 *** -
-
-
-0.012
-
1.480 *
+
- *
- *** -
- **
- *** -0.199 *** - *** -
-0.040
- *** -
0.292
-
- *** -0.421 **
0
+ ***
-0.026
-0.138
+ *
- *** - *** -0.010 *** - *** -
- *** + **
0.178 *** +
+ **
0.006 *
+
+ ***
0.008 *** 0
0
0.000
+
+
0.007
0
0.341 *
- **
-0.050 *
+
+ **
0.027 **
+ **
0.018 **
-
+ ***
0.443 *** +
+
0.012
- *** - *** -0.230 *** - *** - **
-0.008
- *** - *** -0.006 *** - *** - *** -0.018 *** - *** - *** -0.113 *** - *** -
0.008
-0.021 *
+ *** 0
+ ***
-
+ ** + *** 0.021
+ *** +
B6 # Com pensations
- *** -
B1 ∆ Base Salary
B2 ∆ Result-Oriented Pay (Bonus) + *** + ***
1.256
- *** - *** -2.194 *** - *** -
2.030 *** -
- *** -0.193 *** + *** +
0.267 *** +
0
-
+ ***
-
- *** -0.259 **
-0.002
+ **
+
-0.059
+ **
+
-0.001
- *** -
-0.029
-
+
- *** -
0.041
0.286
-
-0.173
-
-0.031
-0.008
+
0
-0.002
0.069
+
-
0.011
-0.026
+
0.005
+
+
-0.007
-0.001
+ *
0
-0.001
+
+
-
+
0.007
-
+
- *** - *** -0.162 **
- *** +
0.032 *** - *** - *** -0.001
- *** - *** -0.016 *** - *** - ***
0.092 *** - *** -
B6 # Com pensations
-
+
0.022 **
-
+
0.003
-
0.012 *
B1 ∆ Base Salary
- *** - *** -0.918
0.090
B2 ∆ Result-Oriented Pay (Bonus) -
-
-0.633
+
+
+ **
+ **
B6 # Com pensations
+ **
- *** - ***
+
0.005 *
-
-
- *
- *
0.011
- *** - *** -0.175 **
- *
- *
-0.061
-
-
0.003
0
0
+
+
+ **
0.005
-
-
-0.001
- **
- **
+
0.001
-
-
-0.002
- **
- **
-
-
0.045
+ **
0.162
+
- *** - ***
0.137
- **
- **
-0.014
- *** - *** -0.016
- *** - ***
0.074
-
-
-0.054 **
+
+
-0.032
-0.017 *
+
+ **
0.191 *** - *
0.078 *
0.016 ***
+ *
0.010
0.012 **
+ *** +
- *** + ***
+ *
+
-0.007 *
+
0.028
+
+
-0.039
-
-
-0.014
-0.003 *
- *** - *** -0.026 *** +
+
0.002
-0.009 *
- *** - *** -0.070 *** +
+
0.005
- *** - *** -0.004
- *** - ***
+ *
+ *
- *
0.016
-0.004
+ *
-0.702 **
+ *** +
0.284
0.021
-
-
-0.028
-0.006
-
-
-0.107 *
from 1992 to 2010.
52 | P a g e
Table 9: Model 2.3 (Reference Wage - External) Before and During the Crisis
Model 2.3 (Reference Wage - External)
1
2
3
4
5
6
Market Stock Price
(MSP)
B
D
DIFF
Shareholders Return
Earning
Operating Profits
(EBIT)
B
D
DIFF
Sales
Profit Margins
B
D
DIFF
B
D
DIFF
B
D
DIFF
B
D
DIFF
-
B1 ∆ Base Salary
B2 ∆ Result-Oriented Pay (Bonus) +
+ ***
+ **
0.136 *
-0.001
- **
-
+ *** -
0.005
- *** + ***
-0.009 *** + *** + **
0.017 *** - *** + ***
+ *** + *** -0.031 **
+ *** + ***
0.002 *
+ *** + ***
0.002 *** + *** + ***
+ **
+ ***
0.001
+
+ *
0.003
+ *** +
0.000
- *** - ***
0.058
- **
+
0.018 **
- **
0.006 *
+
0.023 *** - **
- *
- **
0.009
+
-0.009
+ *** +
-0.006
B6 # Com pensations
+ *** - *** + *** +
0.007 *
-0.003
+ *** -
+ *** - *
-0.005 **
0 **
-0.005
+ *** - *
-0.005 **
+ *** -
+ *** + *** -0.016 *** + *** 0
-0.001
0 *** 0 **
0.001 *** -
0 *
0.000 *
+ *** + ***
0.001
+ *** + ***
0.002 *** + *
+ ***
0.003 *** -
- *** - *** -0.295 *** - *** - **
+ *
0.059
+ **
B6 # Com pensations
+ *** +
B1 ∆ Base Salary
B2 ∆ Result-Oriented Pay (Bonus) + *** + ***
+ *** + ***
+ *** -
0.010
+
+
- *** + ***
0.021 *** +
0.006 *** +
+
- *** -0.068 *** +
+ *** - **
+ **
+ *** -
-0.060 *** 0 *
0.023 ***
-0.016 **
-
6.221E-5
-
-0.006
+ **
0.002
+ *
+ ***
0.054 *** + *** -
0.001 **
-0.001
- *** - **
-0.004
- *** - *** -0.004
- *** - *** -0.072 *
- **
+
0.011
-0.008
+ *** -
-0.007 *
+ *
- **
+ *** +
-0.010
0.008 *** + *** + ***
+ *** - **
-
0.003 *** + *** + ***
-0.001
0.035 *** + *** 0
0.000
+ *** +
-6.050E-5
0 *** +
0.003 **
+ *** -
0.000
+ *** 0
+
0.002 **
0.003
+ *
-0.008
-
-0.018 *** - *
+ *** + ***
+
0.055 *** - *** +
9.482E-5
0.052 *** +
-0.001
-0.016 **
0.017
-
-0.001
0.038 ***
-0.008 ***
- *** +
-
-0.025
0.050 *** - *** +
-0.015 *** + *** +
+
- *
- *** -0.085 *
B2 ∆ Result-Oriented Pay (Bonus) + *** +
+ ***
0.002 *** - *** -0.003 **
+ **
+
B1 ∆ Base Salary
+ **
-0.004 *** + *** + *** -0.003 *** + *** +
-0.002 *** + *** + ***
-0.004
- *
0.004 *** + *** + ***
0.001 *** +
-6.664E-5
-0.001 **
+
0.003
0.016 *** 0
-7.515E-5
- **
+
0.004
-
-0.002
+ *** + *
-0.001
0 *** 0
0.000
+
-0.001
+ *** +
0.003
0
- *** - *** -0.212 **
- *** +
0.066 *** - *** - *
0.007 **
- *** - *** -0.011 **
- *** - **
0.128 *** - *** -
0.007
B6 # Com pensations
- *** -
-
0.022 *
0.006 **
- **
+
0.005 *
- **
0.014
0.022
B1 ∆ Base Salary
+
0.009
+
+ **
0.009
+ *** + ***
B2 ∆ Result-Oriented Pay (Bonus) -
- *
0.027
+ *
-
+
+ *
-0.344
+
- *
-0.012
-
0.110
+
-
-0.008
+ *** -
-0.018 *** + *** - *
-0.021 *** +
- *
+ ***
0.014
-0.016
+ *** +
-
-
0.013
+ *
-
-0.034 *
8.114E-5
+ *** + ***
0.042
+ *** + ***
0.009 *
-
+ **
0.004
-
+ ***
0.048 *** 0
0
+
+ *
0.029
-
-
0.001
-
-
0.001
-
-
-0.001
+ *** + ***
0.014 *
-
-
0.004
- *
- ***
0.160
-
- *
-0.009
+
- *
-0.013
-
- *
-0.006
- *** +
0.085 **
+
-
-0.051
- *** - ***
0.620
+
- **
-0.038
+ *** +
-0.032
+ *** + *
-0.009
+ **
B6 # Com pensations
0.006 **
-
+
-0.034
+ *** +
from 1992 to 2010.
53 | P a g e
-0.148 *
Table 10: Model 2.4 (Relative Performance Evaluation) Before and During the Crisis
Model 2.4 (Relative Perform ance Evaluation)
1
2
3
4
5
6
Relative Market
Stock Price (MSP)
Relative
Shareholders Return
Relative Earning
Relative Operating
Profits (EBIT)
Relative Sales
Relative Profit
Margins
B
D
DIFF
B
D
DIFF
B
D
DIFF
B
D
DIFF
B
D
DIFF
B
D
DIFF
B1 Base Salary
+ *
+ ***
0.726
-
+
+ ***
0.388
+ *** -
-
-0.185
- *** + ***
-0.633 **
+ *** + **
B3 Stock Options
+ *** + ***
0.013
+ *** + ***
0.065 **
+ *** + ***
+
0.050
+
+ **
0.113 **
+ *** +
- *** - *** -0.007
- *
+
0.119 *
-
+ ***
0.044 **
-0.003
+ *** + ***
+ *** + ***
+ *** -
1.661 *** - *** + **
0.166
0.075 *
- *** -
0.038
+ *** +
-0.023
B1 Base Salary
-
+ *** +
- *** -3.476
-1.325
B3 Stock Options
+ *** + **
+ *** + ***
- *** - *** -0.584 *** - *** - **
+ *** + ***
0.049
-
0.108
- *** +
0.041 **
- *** +
+
0.024
+ *** -
-1.669
+ *** - **
-3.728 **
-
-2.270
+ *** - **
-5.144 *** + *** +
-0.274 *** + *** +
-0.056
- *** + *
0.121 *** +
+
0.018
0.095
+ *** + ***
0.486 *** +
+ ***
0.284 *** -
+
+ *
0.092
+ **
B6 # Com pensations
+
- *** + ***
2.032 *** +
-0.220
-3.363 *
+ **
0.027
+
0.071
+ ***
1.005 *** + *** -
-0.053
- *** - *** -0.070 *
- *** - *** -0.185 **
- *
-0.210 *
+ *** -
- *** - **
+ *** +
4.556
5.194 *** +
B3 Stock Options
+ *** + ***
+ *** -
- *** - *** -1.983 *** - *** + **
0.715 *** - *** -
0.750 *** - *** - *** -0.222 *
B6 # Com pensations
- *** -
0.190 *
0.254 *
B1 Base Salary
+ *
-
+
-
-0.224 *
+ *** + ***
+ **
-
4.973 *** + *** + ***
9.523 *** + *** + ***
7.498 *** + *** + ***
-0.571
+ *** - **
-4.503 *** + *** + *** -0.620
-0.124 **
+ *** +
-0.322 *** + *** +
0.697 *** - *
0.278
-
+
-0.657
+
-
-1.026
- *
-0.679
+
+
0.211
+
-
+
+
+ *
+ **
-
0.322
0.608
-1.673
-
-
- *** +
-
+ **
+ *** - *
-
+
-0.222 *** + *** + *
-0.214
0.195 **
0.565
-1.448
0.010
-
0.063
-0.226 *
6.973 *** -
+
3.675
0.239
-
-0.710
-
+
0.030
+ **
+
0.568
- *** - **
0.928 *** - *** -
0.056
-
0.020
0.398
-
-
+ *** + ***
+ **
-
0
+ ***
-0.102
-
0.093
+ *** +
0.724 *** +
-0.398
+ *
-
-0.466
-
-2.011
0.007
B3 Stock Options
+ *** + ***
0.012
+
+ ***
0.093 *
-
+ **
0.061
+
+ ***
0.066 *** +
+
+
+ **
0.049
-
+
0.030
-
-
-0.019
-
- *
-0.042
+ *** + **
0.035 *
-
-
0.071
- *
- *** -0.009
+
- *
-0.219
+
- *
-0.233
-
- **
-0.099
- *** +
0.076 *
+
-
-0.719
+
- **
-0.490 **
+ *** +
-0.391
+ *** + *
-0.096
+ **
B6 # Com pensations
- *** - ***
0.179
0.055 **
0.329 ***
-0.268 **
- **
- *** - **
+ *** +
2.307 *** + *** +
+ **
-3.308 *** -
+ *** -
-1.357 *** -
- *** -4.380 *** +
+ *** - *
-0.021
B1 Base Salary
-
+
+
-0.203
-0.089 **
3.445 ***
-0.456
-0.033 **
-
-0.071
+ *** +
-0.008
-
+
+ ***
0.533 *** - *** +
-0.082
+ *** -
+ *
0.805 *** +
+
+ *** +
0.032 *** - *** - *
-0.043 *
- *
- *** -0.036
+
-0.115 *
+ *** +
-0.087 *
B6 # Com pensations
+
1.810 *** - *** + ***
-0.093
+
-0.040
+ *** +
from 1992 to 2010.
54 | P a g e
-1.880 *

Executive Compensation - University of Tilburg

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