University of Oulu

CEO compensation and pay-for-performance sensitivity

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Author: Koskelo, Eerik1
Organizations: 1University of Oulu, Oulu Business School, Department of Accounting, Accounting
Format: ebook
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 17.9 MB)
Persistent link: http://urn.fi/URN:NBN:fi:oulu-201403131171
Language: English
Published: Oulu : E. Koskelo, 2014
Publish Date: 2014-03-13
Physical Description: 77 p.
Thesis type: Master's thesis
Tutor: Kallunki, Juha-Pekka
Reviewer: Kallunki, Juha-Pekka
Sahlström, Petri
Description:

Abstract

This thesis determines the state of recent developments in CEO compensation in the spirit of corresponding literature. Besides the literature review, empirical study provides further evidence on CEO pay-for-performance sensitivities in the US listed companies during 2007–2011 and containing Compustat Execucomp data of more than 33,000 CEOs from more than 3,000 companies. I build the regression similar to methods in a groundbreaking paper from Jensen and Murphy (1990a) and expecting positive and significant relationship between the change in CEO total compensation and shareholder wealth. My estimate of the pay-for-performance relation for chief executive officers indicates CEO wealth changes by $4.93 per $1,000 change in shareholder wealth. Role of the value of CEO stock holdings plays the most important role determining pay-for-performance sensitivity a $4.7 change in CEO wealth per 1,000 change in shareholder wealth. I also report CEO total mean compensation during 2007–2011 is $5,968,000 a year. The mean value of option awards have declined by 18% and median stockholdings have increased during the same period by 130%. Relatively high value of pay-for-performance sensitivity and CEO stockholdings may help other shareholders to solve the differing interests of their and CEOs. Besides stock rewards, other compensation methods are needed to minimize the effect of systematic risk. Relative performance evaluation RPE, could be used together with equity-based incentives but they are not widely used in US listed companies. However, further research is needed to determine how equity-based compensation affects on CEOs excessive risk taking.

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Copyright information: © Eerik Koskelo, 2014. This publication is copyrighted. You may download, display and print it for your own personal use. Commercial use is prohibited.