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The determinants of top management pay

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Author Info

  • Firth, M.
  • Tam, M.
  • Tang, M.
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    Abstract

    Agency theory argues that companies need to structure their top management pay so as to attract, retain, motivate, and reward senior executives. It is implicit in this literature that managers should be rewarded for performance and that company size should not be a significant determinant of compensation. Empirical evidence in many countries has concluded, however, that size is a major determinant of management remuneration and the pay-for-performance link is very weak. This study examines the determinants of senior executives' remuneration and bonus payments in Hong Kong companies using recently available data. We examine both the level of pay and changes in pay. Corporate size is found to be a major explanator of remuneration levels and of changes in the pay of the CEO and executive directors. Accounting profitability is also a significant explanator of compensation. Performance, as measured by stock returns, has little or no statistically significant relationship with pay; in fact, some of the results show negative relationships. Some share ownership characteristics have influences on the levels of remuneration. In particular, share ownership by directors and share ownership by institutional investors moderate the compensation levels. In contrast, corporate governance variables have little association with change in pay. Overall, the results imply agency arguments that advocate pay-for-performance compensation schemes are not major factors in setting top management remuneration in Hong Kong.

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    Bibliographic Info

    Article provided by Elsevier in its journal Omega.

    Volume (Year): 27 (1999)
    Issue (Month): 6 (December)
    Pages: 617-635

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    Handle: RePEc:eee:jomega:v:27:y:1999:i:6:p:617-635

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    Keywords: Incentives Management performance Top management Compensation;

    References

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    1. Kato, Takao, 1997. "Chief executive compensation and corporate groups in Japan: New evidence from micro data," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 455-467, July.
    2. Garvey, G.T. & Grant, S. & King, S.P., 1996. "Talking Down the Firm: Short-Term Market Manipulation and Optimal Management Compensation," Papers 297, Australian National University - Department of Economics.
    3. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
    4. Conyon, M.J. & Leech, D., 1993. "Top Pay, Company Performance and Corporate Governance," The Warwick Economics Research Paper Series (TWERPS) 410, University of Warwick, Department of Economics.
    5. Martin J. Conyon, 1994. "Corporate Governance Changes in UK Companies Between 1988 and 1993," Corporate Governance: An International Review, Wiley Blackwell, vol. 2(2), pages 87-100, 04.
    6. Lewellen, Wilbur G & Huntsman, Blaine, 1970. "Managerial Pay and Corporate Performance," American Economic Review, American Economic Association, vol. 60(4), pages 710-20, September.
    7. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    8. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
    9. H.Y. Izan & Baljit Sidhu & Stephen Taylor, 1998. "Does CEO Pay Reflect Performance? Some Australian Evidence," Corporate Governance: An International Review, Wiley Blackwell, vol. 6(1), pages 39-47, 01.
    10. Conyon, Martin J., 1997. "Corporate governance and executive compensation," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 493-509, July.
    11. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
    12. Cosh, Andy & Hughes, Alan, 1997. "Executive remuneration, executive dismissal and institutional shareholdings," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 469-492, July.
    13. Jonathan S. Leonard, 1990. "Executive pay and firm performance," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 13-29, February.
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    Cited by:
    1. Nor Shaipah Abdul Wahab Author_Email: shaipah@uum.edu.my, 2011. "Directors’ Pay: Significance As A Tax-Motivated Expense Allocation ," 2nd International Conference on Business and Economic Research (2nd ICBER 2011) Proceeding 2011-218, Conference Master Resources.
    2. Li, Donghui & Moshirian, Fariborz & Nguyen, Pascal & Tan, Liwen, 2007. "Corporate governance or globalization: What determines CEO compensation in China?," Research in International Business and Finance, Elsevier, vol. 21(1), pages 32-49, January.
    3. Firth, Michael & Fung, Peter M.Y. & Rui, Oliver M., 2006. "Corporate performance and CEO compensation in China," Journal of Corporate Finance, Elsevier, vol. 12(4), pages 693-714, September.

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