Only a few other issues in the history of the modern corporation have generated the amount of fury as the escalating chief executive officer (CEO) compensation. While workers real income stagnated or even dropped over this period, there has been unprecedented growth in total pay for top executives. The record growth in CEO pay was accompanied with steady decline in stockholders’ returns and the growing lack of accountability at the top. This decoupling of pay and performance at the very top caused considerable concern and public outcry, renewing the calls for compensation reform.
This case study, in part influenced by the conditions described above, looked at the automotive sector and assessed the relationship between the CEO compensation and company performance. The study focused on U.S. auto firms that were members of the S&P 500 list. The period investigated were years 2006 and 2007. The pay level and the pay mix were the dependent variables in the study. The independent variables were the economic and accounting performance indicators, consisting of financial ratios such as earning per share, return on assets, and shareholders equity, plus the stock price and the company size.
This financial data on auto companies and their CEOs came from the firms’ self-reported proxy statements filed with the SEC. The study relied on this secondary data, obtained from the commercial and public data aggregators.
The study tested five hypotheses for positive linear relationship between the CEO pay and firm performance, utilizing the Pearson correlation coefficient, ordinary least square regression, ANOVA, and factor analysis.
The study found one strong, positive relationship between the CEO pay levels and firm performance—company size was a predictor for the CEO pay. The other accounting and economic performance indicators exhibited no significant correlation with the CEO pay levels. Furthermore, the results showed that great majority of chief executives received hefty raises during both years of the study, despite turning some of the most dismal financial performances. Also, the study found that automotive sector’s pay design is favoring cash-based compensation more than the equity-based mix found in the rest of S&P 500 companies.
|Adviser||Keith B. Grant|
|Subjects||Management; Organization theory|
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