Thông tin tài liệu
FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS -& - ECONOMETRICS ASSIGNMENT FACTORS THAT INFLUENCE CHIEF EXECUTIVE OFFICER’S SALARY Instructor : Ms TU THUY ANH Group : 21 Members : Pham Le Thao Chi Le Thi Minh Duyen Nguyen Thi Dung Table of contents Content Summary Introduction Literature review Theoretical background Page 3 Descriptive statistic of data Econometrics model Robustness check Finding and discussion Conclusion Reference Appendix 10 - Summary The essay examines the factors affecting salary for the Chief Executive Officer (CEO) of which the data is collected from random samples reported in Businessweek by Wooldridge The objective of this paper is to define the relationship between a set of factors and CEO compensation that will enable companies to imply better corporate governance practices in their management process Developed econometric model is tested on the data which focusee mainly on the CEO salaries of industrial firms that have been vastly successful, along with CEO of large financial firms The study revealed that CEO compensation is strongly and positively related to revenue and return on equity of the company, and unrelated to return of stock or types of firms These results enable companies to use CEO compensation system as an effective mechanism to eliminate agency problem and, consequently, agency costs Introduction In the current market economy, human resources are always an important factor for the success of each company In order to develop your company, managers need to motivate their employees through their needs, interests, passion, enthusiasm One of the most important way to create motivation is paying salary for workers and company executive board Moreover, the chief executive officer (CEO) is also a hired labor but he/she has the highest-ranking in a company because of having ultimately responsible for making managerial decisions Because the CEO plays a such special important role to the company's operations, there has been a debate over the issue whether the CEOs are now paid appropriately and aligned with their contribution and how to pay them rationally is always a challenge for companies In our report, we will focus on the analysis of CEO’s salary to clarify the issue The salary of the CEO has been attracting attention of researchers The researchers suppose that the salary information for the CEO brought by the salary database system and be public That’s why it is competitive and how easy that a CEO can move from one firm to another to get a higher position or higher compensation Therefore, the CEO’s salary has generated a large number of studies on this area The most discussed topics salary for the CEO is the analysis factors affecting salary for CEOs And this also is the objective of this essay Data and analysis on this relation will enhance the knowledge on the role of different factors that may influence the managerial performance and help identify the trends of organizational performance for all the firms in the industry There are a lot of papers, that will be examined further, that analyze different industries from the point of view of salary system In this paper we decided to focus on industry firm and financial firm as previous researchers did not analyze this industry in details and that brings novelty to the paper We will define the main factors that influence CEO’s salary It is assumed that the evidence of this research will fulfill the literature gap that exists now in the field of the relation between salary and accounting and market measures; will enhance the knowledge on the role of different factors that may influence the managerial performance and help identify the trends of organizational performance for all the firms The essay is organized in the following way: The first part provides a theoretical background on the topic The second part represents methodology overview and the regression model used in the paper In the last part the conclusions and managerial applications are discussed Literature review on the topic will show that the pay-performance topic has been investigated a lot from different perspectives We are members of group 21 and our group have worked hard to complete this project: Pham Le Thao Chi ID: 17155200 Le Thi Minh Duyen ID: 1715520016 Nguyen Thi Dung ID: 1715520014 We are willing to receive your comments to improve our knowlegde and skill Thank you for giving us the nice and useful lessons through our Econometrics course and spending time to consider this study Literature review Nowadays a lot of attention has been paid to executive compensation as to an effective mechanism of corporate governance and in particular of agency problem Properly awarded executive in most cases does not have an incentive to operate in self-interest and act irresponsibly, but maximization of the company’s value Thus the main objective of this paper is to identify the set of factors that influence the executive compensation on the example of industry nowadays Up to the present moment huge amount of researches investigated that payperformance relationship is connected with the fact that there is no common approach which could enable to evaluate the quality of corporate governance in a company Thus, all the existed research could be divided into four main groups The first group is the most valuable for current empiric research It considers the correlation between the executive compensation and performance of the company The researches include analysis which is also based on market, accounting and cost measures In this group the researches investigate the influence of economic value added and market value added on the executive compensation The field really took off with the work of Murphy (1985) who considered the panel data on compensation of individual executives and performance over the number of years He introduced “fixed-effects models” and considered the effects of six performance-sensitive components of remuneration (salary, bonus, option awards, deferred compensation, value of stock options, total compensation) Overall he documented that compensation is strongly positively related to corporate performance as measured by shareholder return and growth in firm sales Hall and Liebman (1998) conducted a research identifying the strong link between wealth and firm performance They also pointed out that the relationship is very sensitive so that small changes in performance can have large effects on the lifetime wealth of an executive (Florin, Hallock and Webber 2010) Another perspective on the role of executive compensation in agency theory is considered in the works of Hambrick and Finkelstein (1995) They argue that the relationship between the compensation and company’s performance is necessary for explaining the hidden parts of compensation Beer and Katz (1998) revealed the results of research devoted to executive compensation The research documented that the average salary in American corporations is much higher than the remuneration in Asian or European ones and has a positive impact on managers’ behavior For current research the peculiarities of American companies are of great importance It is unique due to the fact that option awards are the biggest part of compensation That means that the level of executive remuneration is much higher than the level of general employee All these results enabled researches to a major conclusion that the more executive compensation is dependent on the performance of the company Most studies that explore the pay-performance relationship used the accounting-based measures of corporate performance, i.e ROA or ROE However the trend is shifting nowadays and more and more studies use risk adjusted firm-performance – market value added Corporate governance is of paramount importance for every organization History has revealed that there is never-ending evolution of corporate governance and its fundamental theories Companies strive for good corporate governance practices as a yardstick for strategic development of a company After conducting research, many authors stress the importance of firm specific characteristics as a determining factor of the CEO’s salary Firm’s size is argued to be the most important characteristic In this respect, a meta-analysis of Tosi, Werner, Katz and GomezMejia (2000) demonstrates that firm’s size accounts for over 40% of the variance in CEO pay, whereas firm’s performance contributes less than 5% This analysis used empirical evidence of 105 studies on the relationship between managers’ salary and firm performance Earlier, Finkelstein and Hambrick (1988) as well concluded that firm’s size accounts for the greatest proportion of variance in the executive compensation level while firm’s performance accounts for very little Managers of larger firms need to be rewarded for the greater complexity and risk according to the literature Higher wages need to be offered in order to attract highquality managers that are demanded in firms with greater complexity and risk (Core, Holthausen, & Larcker, 1999) Furthermore, the relationship between the use of debt financing and the salary of the CEO is expected to be negative (Alves et al., 2016) Besides the fact that debt may positively influence firm’s performance due to the advantage of tax deductible interests (Lubatkin & Chatterjee, 1994), it can reduce agency costs since the cash flow of the firm – that can be used for spending by managers – is reduced (Jensen, 1986) Consequently, the ability of the CEO to extract extra rents form the firm is reduced as well A final firm specific factor is whether the company is regulated or not In regulated firms, CEOs earn less compared with unregulated ones according to the results of Alves et al (2016) The ownership of the firm (regarding the management team) is another important characteristic Alves et al (2016) argue that there are less agency costs in family owned firms based on evidence demonstrating better performance in firms where the CEO is a family member compared with the performance of firms managed by outside CEOs (Anderson & Reeb, 2003) As a consequence, CEO earnings would be lower in family firms Moreover, executive pay in owner-controlled firms was found to have a greater correlation with company performance than in managercontrolled firms (Werner, Tosi, & Gomez-Mejia, 2005) Furthermore, the authors argue that the link with firm size is greater in manager-controlled firms (Werner et al., 2005) Two of the most important CEO specific characteristics are the age of the CEO and tenure Older CEOs with longer tenure are paid more in general because of their specific knowledge regarding the firm and their experience that they have built up over the years (Alves et al., 2016) Moreover, Hill and Phan (1991) argue that longer tenure is associated with increased managerial power As such, these executives would be able to use their power to positively influence their compensation (Hill & Phan, 1991) Others expect that there is more management entrenchment with respect to these executives As a consequence, they would be more risk-averse (Berger, Ofek, & Yermack, 1997) The structure of the board of directors is an additional important factor when analysing the formation of the CEO compensation contract in public companies A number of committees are important, namely the remuneration committee, the nomination committee and the audit committee The audit committee has the authority of oversight of the financial reporting process It has a monitoring function Both committees, remuneration and audit, can consist out of same directors Without the separation of the remuneration and audit committee, the directors have the incentive to lower the proportion of pay that is sensitive to performance to reduce the need for monitoring (Laux & Laux, 2009) This can be explained by the fact that earnings manipulation (by the executive) is expected to be greater when a higher proportion of their compensation is linked to performance This in turn puts the directors under greater pressure to perform their oversight duty (Laux & Laux, 2009) Conyon and Peck (1998) found that boards and remuneration committees comprised of higher proportions of outside directors were more likely to tie CEO compensation to market performance to ensure that they are working on behalf of the shareholders Furthermore, it is not uncommon that CEOs are part of the remuneration committee, which would present them the opportunity to influence their compensation When the CEO is part of the nomination committee he or she can exert power and appoint directors that are willing to act in his/her favour The higher number of independent directors in turn, would reduce the ability of the CEO to successfully negotiate overpaid contracts (Conyon & Peck, 1998) Finally, the size of the remuneration committee was found to be positively associated with CEO earnings, suggesting that the efficiency of the board monitoring role decreased as a consequence (Alves et al., 2016) In summary, four main sets of characteristics influence the compensation of the CEO The relationship between company performance and CEO compensation is of importance In addition, firm size and the use of debt as specific firm characteristics can explain the compensation to some extent Furthermore, CEO age and tenure would be positively related to the compensation Another CEO characteristic is whether he is a controlling family member or not Finally, the structure of the board of directors has explaining power as well These are factors that could be important to control for Methodology This report uses the OLS econometric and least squares method to solve the set objectives and the Gretl software to analyze the factors affecting the CEO’s salary Assumptions of classical linear regression model: - Hypothesis Independent variable Xi is non-random, their values must be predetermined Hypothesis 2: Expected conditional of random error equals to 0: - E (Ui / Xi) = Hypothesis 3: (homogeneous variance) Random errors have - equal variance: Var (Ui / Xi) = σ2∀i Hypothesis 4: There is no correlation phenomenon between - random errors: Cov (Ui, Uj ) = ∀i≠j Hypothesis 5: There is no correlation phenomenon between the - independent variable Xi and random error Ui: Cov (Ui, Uj ) = ∀i≠j Hypothesis 6: The model is correctly defined - Gauss-Markov theory With the assumptions of the classical linear regression model, the estimation of the linear regression model by the normal least squares method is that the linear estimation is not the best OLS-BLUE estimation - OLS parameter estimates have properties: + Linear: Estimates are linear functions of Y + Not biased: E(1 )= β1 E(2 )= β2 + There is the smallest variance in the class, the linear estimates are not biased 5.2.Building theoretical models - Mathetical model: Score = β1 + β2 Year+ β3 Hour per day + β4 Teacher’s Capacity + Sample regression function (SRF) can be written as: In order to fully understand the data sets relative to our goal, we will run several tests on each of the variables specifying industry (the dummy variables) We will run the regular regression models on each of the industries, and then performs ttest, F-tests We will test for Multicollinearity, Normality, Heteroskedasticity Descriptive statistics of data Abstract In order to complete this regression analysis, we chose from the given data file “CEOSAL1_CEO Salary and Return on Equity” different variables that we believed would have significant influence on CEO’s salary Actually, with the salary acting as the dependent variable, there are plenty of factors which could possibly affect a CEO’s salary, that is the reason why obviously not all the variables were included There are important factors that we decided to analyze: natural log of sale, return on equity, return on firm’s stock, industrial firms, financial firms, utility: *Data tab: 10 There are 46 firms are financal firms which account for 22.01% g utility 3, Discription of variable correlation: Before going deeper into the econometric model, we’ll have a look at the correlation between variables The table that we run by Gretl below displays this: From the table, we can see that the correlation coefficient between salary to lsales, roe, ros, indus, finance, utility respectively are: 0,1941; 0,1148; -0,0337; -0,0711; 0,0248; -0,1843 - The highest is the correlation coefficient of salary and lsales (0,1941) In another way, volume of sale has the most important impact on CEO’s salary The positive number illustrates a positive correlation between variables or simply, the increase in natural log of sale leads to the rise in salary 17 Besides, the variable utility (-18.43%) that hardly affect salary per month, in which the negative number shows a negative correlation between utility and salary - The lowest is the correlation coefficient of salary and finance (0,0248) so the finance firm has less considerable impact on CEO’s salary - All the correlation coefficients are smaller than 0,8 which means that our model will not be suffered from multi-collinearity Econometrics model Population regression function and sample regression function Population regression function (PRF) shows the relationship between explained variable salary and explanatory variables in the equation: Sample regression function (SRF) can be written as: Running Multiple regression model We will run the regression model by Gretl, and the table below is the result: 18 From the table, we get the multiple regression equation: Result analysis - Number of observations: 209 - Sum squared residual – RSS: 352396058 - measures the sample variation in the - R – squared: 0,100418 This means that independent variables explain about 10.04% of the variation in CEO salary for this sample of firms - Adjusted R – squared: 0,073697 – to evaluate and consider whether to add more variables or not - Meaning of coefficient: + is the predicted salary if other factors including: lsales, return on equity, return on firm’s stock, firm is industrial firm or financial firm,… set as zero +means that if we keep other factors fixed, then when the sales revenue increases by 1%, the expected value of CEO’s salary increases by 2.383625 thousand dollars + > means that if we keep other factors fixed, when return on equity increases unit of measurement, the expected value of CEO’s salary increases by 9,184353 thousand dollars + means that if we keep other factors fixed, when return on firm’s stock increases unit of measurement, the expected value of CEO’s salary decreases by 1.10015 thousand dollars + means that if we keep other factors fixed and the firm is industrial firm, the expected value of CEO’s salary decreases by 626.5739 thousand dollars + means that if we keep other factors fixed and the firm is financial firm, the expected value of CEO’s salary decreases by 382.1899 thousand dollars +means that if we keep other factors fixed, if the firm receives utilities, the expected value of CEO’s salary decreased by 895.9311 thousand dollars 19 Robustness Check I Hypothesis test Testing individual regression coefficient – P value method: By P-value method we will test the influence of each independent variable, which includes lsales, roe, ros, indus, finance, utility, on the expected value of dependent variable salary - Two side testing: + β0: Pair of hypothesis: : =0 : p-value = 0,7168 > α = 0,05 => not reject => is insignificant to y + : Pair of hypothesis: : =0 : p-value = 0,0159 < α = 0,05 => reject => is significant to y + : Pair of hypothesis: : =0 : p-value = 0,4623 > α = 0,05 => not reject => is insignificant to y + : Pair of hypothesis: : =0 : p-value = 0,4806 > α = 0,05 => not reject => is insignificant to y + : Pair of hypothesis: : =0 : p-value = 0,0150 < α = 0,05 => reject => is significant to y + : Pair of hypothesis: : =0 : 20 p-value = 0,1813 > α = 0,05 => not reject => is insignificant to y + : Pair of hypothesis: : =0 : p-value = 0,0052 < α = 0,05 => reject => is significant to y => Conclusion: the regression coefficients of variables lsales, indus, utility are statistically significant Testing the overall significance – F test: The F-test is a formal hypothesis test that is designed to deal with the null hypothesis that all the independent variables jointly not explain any variation in the value of Y (which means R^2=0) - Pair of hypothesis: : β1 = β2 = β3 = β4 = β5 = β6 = : β1^2 + β2^2 + β3^2 + β4^2 + β5^2 + β6^2 - Or equivalent hypothesis: : R^2 = : R^2 > F = = 3.76 > 0.05 => reject In another way, after using Gretl, we have the result: As can be seen from the result, the P-value for the F-test of overall significance test is less than significance level (P-value Conclusion: All the correlation coefficients are smaller than 0,8 which means that our model will not be suffered from multi-collinearity Testing for Normality - According to the Basic assumptions of OLS (Gaus-Makov), we have the th assumption: u ~ N(0,σ2) - Consequence: + If this assumption does not hold, then estimates are still unbiased, but we will not be able to assess which parameters are significant + The normality of the estimates is not hold + The significant tests will not follow the t-student distribution + The joint significant test will not folloe an F distribution Pair of hypothesis: : u follows normal distribution : u doesn’t follow normal distirbution 23 Using Normality of Residual in Gretl, we get the result: - From the result, p-value < 0.05 => reject 24 - Eventhough is rejected means that u does not follow the normal distributions, our number of observations is 209 (the sample size is large enough to achieve nomality in the parameter estimates) => Conclusion: The parameters estimates will be asymptotically normal and consequently we will be able to perform the usual inference Heteroscedasticity testing - Heteroskedasticity: Recall that OLS makes the assumption that Vj(ε) = σ2 for all j That is, the variance of the error term is constant (Homoskedasticity) If the error terms not have constant variance, they are said to be heteroskedastic - We have the pair of hypothesis as below: - Using White’s test for heteroskedasticty in Gretl, we get the result as below: 25 From the result, p-value = 0,911363 > 0,05 => not reject => Conclusion: Heteroskadasticity does not happen in this model 26 Finding and discussion As you can see from our analysis that CEO’s salary affected significantly and clearly by factors of sales and return to equity in positive direction Specificly, if sale and return on equity increase, salary could go up considerably Therefore, to improve the salary, the company should conduct some method to push sales or return on equity Firstly, there are most common ways to increase roe: - Use financial leverage: Companies can finance themselves with debt and equity capital By increasing the amount of debt capital relative to its equity capital, a company can increase its return on equity Increase profit margins: As profits are in the numerator of the return on equity ratio, increasing profits relative to equity increases a company's return on equity Increasing profits does not necessarily have to come from selling more product It can also come from increasing prices of each product sold, lowering the cost of goods sold, reducing its overhead expenses, or a combination of each Improve asset turnover: Asset turnover is a measure of a company's efficiency You can calculate it by dividing sales by the company's total assets In general, the more sales a company produces relative to its assets, the more profitable it should be, and the higher return on equity it should earn Distribute idle cash: This is becoming a common problem among corporate giants, particularly those in the technology industry: idle cash in excess of what the business needs to continue operations reduces the apparent profitability of the company when measured by return on equity Lower taxes: The lower the tax rate, the higher the profits that can lead to increase in return on equity Besides, there are several way to increase sale for any company: Improving marketing and sales processes, reducing price, offering sale discounts,… Conclusion 27 Throughout this analysis, we have fully implemented the proposed goal: to fully, accurately and strictly follow the steps to conduct a quantitative and qualitative study; identify the influence of some factors to CEO’s salary and make appropriate recommendations based on the analyzed results Since then, the research team has concluded that CEO’s salary affected significantly and clearly by factors of sales, utility and return to equity, besides, it is not affected considerably by financial or industrial firms and return on stock However, it is not possible to confirm for sure because the amount of statistical samples is limited, not large enough to determine the influence of factors in the model Moreover, there are also other factors can affect CEO’s salary such as education levels, years with the company, and perhaps even qualitative variables likes “is this a family company?” or “is this CEO the intellectual property provider for the start of this company?” Utilizing some of these more obscure data points we could paint a better picture of what goes into CEO salary and discount some of the more commonly assumed parameters Although our team worked hard and carefully on this project but could not avoid shortcomings So we look forward to receiving comments from teacher to deeply understand and correct them We would like to express our sincere thanks to Ms Tu Thuy Anh for her sincere guidance with the necessary knowledge through class sessions! 28 References 1, Alves, P., Couto, E B., & Francisco, P M (2016) Executive pay and performance in Portuguese listed companies Research in International Business and Finance, 37, 184-195 2, Anderson, R C., & Reeb, D M (2003) Founding‐family ownership and firm performance: evidence from the S&P 500 The journal of finance, 58(3), 13011328 3, Berger, P G., Ofek, E., & Yermack, D L (1997) Managerial entrenchment and capital structure decisions The journal of finance, 52(4), 1411-1438 4, Beer M., Katz, N., 1998 Do incentives work? The perceptions of senior executives from thirty countries Harvard Business School Working Paper 5, Conyon, M J., & Peck, S I (1998) Board control, remuneration committees, and top management compensation Academy of Management Journal, 41(2), 146-157 6, Core, J E., Holthausen, R W., & Larcker, D F (1999) Corporate governance, chief executive officer compensation, and firm performance Journal of financial economics, 51(3), 371-406 7, Finkelstein, S., & Hambrick, D C (1988) Chief executive compensation: A synthesis and reconciliation Strategic Management Journal, 9(6), 543-558 8, Florin B., Hallock K.F., Webber L.D., 2010 Executive pay and firm performance: methodological considerations and future directions Research in personnel and human resources management, 29: 49-86 9, Hall B.J, Liebman J.B., 1998 Are CEOs really paid like bureaucrats? The Quarterly Journal of Economics, MIT Press, 113(3): 653-691 10, Hambrick D.C., Finkelstein S., 1995 The effects of ownership structure on conditions at the top: the case of CEO pay raises Strategic Management Journal, 16(3): 175-193 29 11, Hill, C W., & Phan, P (1991) CEO tenure as a determinant of CEO pay Academy of Management journal, 34(3), 707-717 12, Jensen, M C (1986) Agency costs of free cash flow, corporate finance, and takeovers The American economic review, 76(2), 323-329 13, Laux, C., & Laux, V (2009) Board committees, CEO compensation, and earnings management The Accounting Review, 84(3), 869-891 14, Lubatkin, M., & Chatterjee, S (1994) Extending modern portfolio theory into the domain of corporate diversification: does it apply? Academy of Management Journal, 37(1), 109-136 15, Murphy K J., 1985 Corporate performance and managerial remuneration: an empirical analysis Journal of Accounting and Economics, 7: 11-42 16, Tosi, H L., Werner, S., Katz, J P., & Gomez-Mejia, L R (2000) How much does performance matter? A meta-analysis of CEO pay studies Journal of Management, 26(2), 301-339 17, Werner, S., Tosi, H L., & Gomez‐Mejia, L (2005) Organizational governance and employee pay: How ownership structure affects the firm's compensation strategy Strategic Management Journal, 26(4), 377-384 1, Introduction to Econometrics, Brief Edition - James H Stock and Mark W.Wastson 2, file:///C:/Users/Administrator/Downloads/GaraninaLadyzhenko.pdf 3, http://luanvan.net.vn/luan-van/tieu-luan-tien-luong-va-su-tac-dong-boi-cacnhan-to-anh-huong-thong-qua-mo-hinh-hoi-quy-57290/ 4, http://is4profit.com/increasing-sales/ 5, https://cran.r-project.org/web/packages/wooldridge/wooldridge.pdf 6, https://brage.bibsys.no/xmlui/handle/11250/2394731 30 7, https://scholar.harvard.edu/files/xgabaix/files/executive_compensation.pdf 31 ... details and that brings novelty to the paper We will define the main factors that influence CEO’s salary It is assumed that the evidence of this research will fulfill the literature gap that exists... of the most important way to create motivation is paying salary for workers and company executive board Moreover, the chief executive officer (CEO) is also a hired labor but he/she has the highest-ranking... of CEO’s salary to clarify the issue The salary of the CEO has been attracting attention of researchers The researchers suppose that the salary information for the CEO brought by the salary database
Ngày đăng: 22/06/2020, 21:30
Xem thêm:
