Apa style dissertation pay for performance sensitivity on executive equity ownership, across studies between us and japan
1. Pay-for Performance Sensitivity on Executive Equity Ownership
PAY-FOR PERFORMANCE SENSITIVITY ON EXECUTIVE EQUITY OWNERSHIP:
ACROSS STUDIES BETWEEN U.S. & JAPAN
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(22nd, February, 2011)
2. Pay-for Performance Sensitivity on Executive Equity Ownership 2
Abstract
The paper sought to find out the relationship between CEO’s equity ownership and
corporate performance, similarly, it was of interest to establish sensitivity of the same when
equity ownership went beyond 35%. Companies from U.S and Japan were sampled; out of 50
from each country only 29 and 21 in that order were suitable for analysis. The findings were that
CEO’s equity ownership was negatively related with company performance for U.S but positive
for Hong Kong companies. On the same note, the sensitivity between CEO’s equity exceeding
35% and market prices was stronger as compared to low level CEO’s equity ownership. The
findings provide a mixed finding as some are in line with previous studies while others are not.
Keywords: Chief Executive Officer, Equity ownership, CEO compensation; CEO ownership;
corporate governance, Pay-for Performance Sensitivity.
3. Pay-for Performance Sensitivity on Executive Equity Ownership 3
Pay-for Performance Sensitivity on Executive Equity Ownership:
Introduction
The strongest pay-performance sensitivity has been seen as the main metric in the
alignment of the divergent incentives of both the shareholders as well as the executives. On
the other hand, a more skeptical view looks at compensation contract as a perverse greed
instrument other than a shareholder friendly incentive technique. One form of managerial
opportunism, or private positives of control, is at the moment when the CEO and the top
management awards themselves stupendous pay-without performance to the detriment of the
stakeholders.
The ample empirical evidence has suggested that the compensation of the executive is
mainly insensitive to the performance of the firm. “This low pay-for-performance sensitivity
raises concern that executives’ pay arrangements do not provide sufficient incentives to
deliver performance,” (Conyon, & He, 2004). On the other hand, they may also create agency
costs in the excess pay form. There have been many researches which have taken place in the
name of unrevealing the ways in which the links for pay-for-performance can be
strengthened, to ensure that a promise of executive as a mechanism of aligning the interests of
stakeholders as well as executive is fulfilled.
Most research on executive compensations has been conducted in the past enough for
general reviews but those on corporate governance like stock based compensation, option
compensation as well as the equity incentives on the managerial level have remained
controversial and have yielded contradictory results especially by being controversial to the
institutional activists, shareholders and to the government regulators. Therefore most
fundamental question like effects of possessing share capital; on the corporate performance
4. Pay-for Performance Sensitivity on Executive Equity Ownership 4
among other have remained elusive in finding a straightforward solution. Studies have been
conducted on the influence of remuneration committee adoption in U.S and Hon Kong
companies, and have concluded that, there are no significant impacts on the pay for
performance sensitivity. It has been shown that, the sensitivity of CEO compensation to
accounting performance is connected to governance quality of remuneration committee.
In addition, ownership structure also plays some vital roles in the relation of pay to
performance. Studies have concluded that, CEOs pay to performance responsiveness is much
great in owner-controlled firms as compared to management controlled firm in the United
States manufacturing sector. It has been concluded that, it is the size not the performance has
been the predictor of the CEO pay in management controlled organization, while
performance-related pay is much prevalent in owner-controlled organizations. Other evidence
on the significance of ownership structure in the pay-for-performance linkage for nations, on
their side, studies have shown that in Hong Kong, the pay for performance connection is
much weaker or insignificance in listed companies that are owned by state bureaucracy.
It has been suggested that the interrelationship found between executive compensation
and the corporate governance technique has remained fruitful research area in the whole
world. It has been said that, country level institution need to be factored in when analyzing the
executive pay. It has been shown that, when focusing on different views that exist for
executive compensation alternatives concerning the observed arraignments of contracts as it
affects the organizations and their executives. It is much true that, most corporate executive
officers have alternatives with which they are in a position of manipulating issues in financial
statements, in trying to boost their corporate performance much better in a given period of
time.
5. Pay-for Performance Sensitivity on Executive Equity Ownership 5
Across studies between U.S. & Japan
Corporate performance is considered by many academicians to be a set of complimentary
mechanisms that are utilized to align both the choices and the actions that managers make with
the interest of their shareholders. According to studies conducted by Jensen (19890, Core et al
(1999) and Mehran (1995), various factors like the monitoring actions by the company’s board
of directors, institutional block holders and the debt holders critically impacts on the economic
[performance of such organizations. In addition tot that is the widely debated component on the
structure of governance which is the compensation contracts that are selected for provision of
the remuneration to its managers for instance the choice made on performance measures or on
the levels of remuneration.
Most research on executive compensations has been conducted in the past enough for
general reviews but those on corporate governance like stock based compensation, option
compensation as well as the equity incentives on the managerial level have remained
controversial and have yielded contradictory results especially by being controversial to the
institutional activists, shareholders and to the government regulators. Therefore most
fundamental question like effects of possessing share capital; on the corporate performance
among other have remained elusive in finding a straightforward solution.
In the context of corporate governance especially when focusing on executive
compensations alternatives views exist regarding efficiencies of the observed arraignments of
contracts as it concerns to firms and their executives therefore as it regards to this dissertation
the traditional framework and agency theory is utilized and it hence defines an efficient contract
as one that is able to maximize net expected economic value to the shareholders after other
6. Pay-for Performance Sensitivity on Executive Equity Ownership 6
transaction costs for instance the contracting costs as well as the payments made to employees
thus the contracts can be summed that as those that minimize agency costs. Such costs can
therefore be found to be efficient in certain periods and within specific sectors of economy as a
functions of diverse cost f transactions therefore contracts described as efficient in Japan a
decade ago can as well b described as inefficient in modern times and the varying definitions can
be attributed to decline in informational costs or even to evolution of contracting arrangements as
a result of changed technological contracting environments in the organization (Cheung, &
Wong, 2005).
Most corporate executives officers have the option of manipulating several items in a
typical financial statement to try and boost their efforts in making their corporate performances
better in a specific or a given fiscal periods. Most executives are often getting compensations
with incentive contracts that feature relationships that are non-linear in nature between the pay
and the revenues generated. Agency and other related theories have in the past proffer usefully
especially as theoretical frameworks for conduction of an examination of relationships that exist
between principals as well as their agents in diverse disciplines. The agency theories focus on
determining the most efficient contracts that can be used to govern particular relationships that
are given certain parties involved considering the environmental uncertainties. And costs
incurred in obtaining information required for the study. Many theories have arisen in an effort
of explaining the prevalence of these non linear contracts but none has been completely
satisfactory. In studying the effects of possessing share capital has on the corporate performance
of the pooled regression model can be utilized to critically discuss the effects of CEO ownership
and the corporate governance on the CEO compensation.
7. Pay-for Performance Sensitivity on Executive Equity Ownership 7
When it comes to the background of the institution the equity incentives as well as the
stock-based compensation features forms take a very important level when it comes to the
contracting environments between the executives and the shareholders which are represented by
the board of directors. According to Liebman & Hall(1998) from the samples derived from
United Sates firms deduced that the CEO stock as well as the option ownership constituted the
overall sensitivity of the CEO stock based and the vast majority of sensitivity and the changes in
the stock prices. In addition to that they also found out that median values that standard and poor
industrial CEOs were 30 million and fifty five million dollars respectively and that such values
and sensitivities were larger relative tot the annual flow pay.
In modern times executive remuneration has gained prominence as one of the topic in
contemporary corporate governance with the mainstream point of view acquiring on the principal
agent framework that a compensation contract that is well designed is very critical in helping to
incentive executives hence enhancing the value of the shareholder. Generally a strong pay for
performance is often viewed as a key metric when it comes to alignment of the divergent
incentives of the shareholders as well as the executives. However according to Bebchuk & Fried,
(2006) they have amore skeptical view that considers compensations contract as more of a
perverse instrument that fosters greed rather than a mechanism that is shareholder friendly and
this is evident by the managerial opportunism or equally same the benefits that are derived from
private control that are seen when the CEOs and other top management awards themselves
stupendous pays that are done without performance to the detriment of the corporate
shareholders. This idea of the board of directors to set compensations that deviate from the arms
length of contracting results to the negative coverage of the grossly overpaid members f staff
8. Pay-for Performance Sensitivity on Executive Equity Ownership 8
constituting of the top management which are often featured in the international financial press.(
Core, Guay & Larcker (2008).
Ample empirical evidences gathered from past studies strongly suggests that most
incentive compensations made are largely insensitive to the firms performance and that the
sensitivity of the low performance raises a concern that most of such executive pay arrangements
do not in most case serve well in providing sufficient incentives in delivering performance and
fail to create agency’s costs that are inform of excess pays. as a result of the decoupling of the
pay performance various studies have been undertaken in attempting to unravel the ways in
which the links of pay for performance can be strengthened to foster fulfillment of the executive
compensations to be used as a mechanism of aligning the interests of both the shareholders and
the executives in the cooperate world. In 1997 Conyon examined the influences that adoption of
remuneration by companies and he deduced that in some circumstances ,its adoption serve to
lower the growth rates especially in the top director compensation and as also that in the
remuneration committee decisions, the outside directors enhances the pay for performance
sensitivity. More studies conducted in the United States in (2003) by Anderson, Bizjak and
Vafeas reported that there were no significant results when it comes to the influences of the
remuneration committee independences on the levels of CEO pays. In amore recent study
conducted by Cahan &Sun (2009) on United States companies with full independent committees
showed that sensitivity of CEO compensation to accounting is also is relates to the governance
quality of its remuneration committees. The study focuses on a broader and richer measure of the
remuneration committees rather than solely having a focus on independence.
In 2009 Mei-Lun studies with respect to the various variables of board of directors came
up with results that were consistent with those of Core et al (1999). He found out that CEO
9. Pay-for Performance Sensitivity on Executive Equity Ownership 9
compensations were higher when the CEO was also the board chair, a director and the boards
were also larger. In addition to that he also found out that the CEO compensations was a
decreasing function of the ownership of the director as well the existence of block holder who is
a owner of at least ten percent of the equity therefore the suggestion that CEOs who are from
firms characterized with weaker structures of governance often have greater compensations.
Conyon (2006) challenged researchers in this field to lay an emphasis in distinguishing
between the two competing theories used in executive compensation namely the managerial
power and the principal agent or optimal contracting which hold the idea that well designed
incentive contracts help to align the managers and the shareholders interests while on the other
hand Bebchuk (2003) hold that the promise of the managerial contract yielding a partial solution
to the problem presented by the agency theory still remains void. In addition to that they also
argue that the executive compensation does nothing less that exuberating on the problem of the
agency through promotion of rent-extracting especially on the part of the executives, thus to
them powerful CEOs have a greater sway regarding their own pay through their advantages of
capturing the board leading to the rent extraction in the form of increased CEO pay or even
payments s without performance to the detriments of the shareholders.
Based on the results from the study by Mei-Lun & Chung (2003-2005), its evident that
companies whose rewards systems are related to performances often ‘do what they say’ while
those companies characterized with strong remuneration committees seem to design their
packages for executive pay such that it rewards their executives for the act of creating a
shareholder value. Therefore its appears that the investors of such institutions are closely
associated with a higher pay-for performance relationships and that the performance
relationships appears to weaken especially when the managerial ownership goes beyond 35%
10. Pay-for Performance Sensitivity on Executive Equity Ownership 10
and this is most probably attributed tot the dark side that is associated with the managerial
power. Therefore the situation where managerial power is most destructive is when the
companies involved have very high levels of managerial ownership while at same time fail to
subscribe to the performance related pay schemes thus resulting to high likelihood of rent
extraction by the company executives in form of making of excessive payments (Conyon, 2006).
By exploiting the an enhanced disclosures especially on the activities regarding directors
pay and the remuneration of committees it doesn’t matter whether a company is observing the
principle of cooperative governance through the linking of its executive pay to the pay
performance or not ,it highly expected that such companies are to be subjected tot the effects that
result from the dark side of the managerial power especially when considering that such
companies have not subscribed to the performance related pay schemes. The scenario is
particular for the companies that are a higher level of managerial ownership and that their level
of pay constitutes an increasing function of the company’s managerial ownership.
Most prominent scholars including Fama & Jensen (1983) and Jensen & Murphy (1990;
2004) have all inclined on the argument that invectives (remuneration) or monitoring (board
characteristics and ownership structures) form important mechanisms of corporate governance
especially when it comes to the roles they play in aligning the interests of the executives and the
shareholders. The theory presumes that considering the authority bestowed upon the board of
directors by the shareholders into looking into the matters of executive remuneration they are
therefore able to greatly affect on the exercise of executive enumeration of the organization. This
is of particular concern as according to Jensen& Murphy (2004), the board of directors can exert
its effects especially through its enumeration committee which is involved in the role of
designing the executive’s desirable enumeration package in accordance with the governing
11. Pay-for Performance Sensitivity on Executive Equity Ownership 11
objectives as well as inline with the corporate strategy and vision of the company (Cordeiro &
Veliyath, 2003).
They further argue that remuneration policies and the corporate governance highly relate
and thus bad governance may easily result to value-destroying practices of payment. Therefore
leading to their recommendations of curbing the problem especially as regards to the roles as
well as functions that remuneration committee plays in the process of pay setting (Boyd, 1994).
They recommended that the remuneration committees should be abler to take a full control of the
remuneration process, practices and the policies. Also the remuneration committee should be
capable of employing their own contract agents when it comes to the process of hiring of new
top level mangers an finally they should be in a position to giving careful considerations when
issuing the stock options with exercise prices especially those that increase with the cost of
capital of the company.
Studies have revealed that in order to ensure that remuneration committee is effective in
their delivering their duties it should be independent especially from the influence that
executives exert and that its members should constitutes of non executive member exclusively.
Murphy (1999) also notes that in United sates most corporations often have a compensation
committee that constitute of two or more directors which Bebchuk & Fried (2003) cautions that
are in most cases proposed and nominated by the influential executive directors into the boards
thus the legitimacy of being described as a truly independent executive committee. Some of the
challenges that limits the attainment of a truly independent remuneration committee include: the
fact that the non executive directors often need good relationships with the executive directors if
to deliver in their duties, they also must rely on the executives regarding information they
receive, the process of their nomination by the CEO and finally the fact that most non executives
12. Pay-for Performance Sensitivity on Executive Equity Ownership 12
often share background with the CEOs as some of the are even CEOs in other companies thus
the challenge in separating the two hence the idea of true independency of the non executives
remains to be a open question to debate.
One of the famous scholars in the same issue Vaefas (2003) also examined on the
possible relations that exist between the remuneration committee and insider membership in the
remuneration committee and came up with the results that their exist a steady decline when it
come to the number of remuneration comities with the opportunistic behaviors in the setting of
the pay as well as the insider participation (Palmon, & Wald, 2006). Generally study findings
reveal that a committee that consist of insiders or even CEO often don’t award excessive
remuneration nor lower overall incentives and finally that there is no evidence that total
incentives increase or pay decrease when the CEOs are removed from the remuneration
committee.
Finally mixed evidence derived from past research and studies clearly indicates that an
association exists between the pay performance and the ownership structure thus the increasing
speculation that both variable play a crucial relevance when it comes to the managerial power
and the principal agent CEO compensation views, the us the challenge for current and future
studied is to disentangle the two variables and yield result of differentiating the effects of the two
in the corporate performance .
2.5 Pay-For Performance Sensitivity
The performance of a firm has been mainly linked to the effectiveness and efficiency of
the C.E.O. The actions of the executive will determine much of the direction the company is to
take; in view of the fact that the policies developed will impact on the profitability of the firm.
13. Pay-for Performance Sensitivity on Executive Equity Ownership 13
According to Jensen and Murphy (1990) in the article “Performance Pay and Top Management
Incentives” there is an average change of CEO wealth by $3.25 per $1000 of the shareholder
value. This translates to $8.05 for the small firms and as much as $1.85 for large firms. Much of
the stakes described above is mainly owned through stocks. In the article managerial ownership
continues to decline in the last 50 years and thus resulted to lower pay performance sensitivities.
The CEO is the highest paid in all the firms; in addition their compensation also affects
the shareholders returns since the compensation may be very large. This means that it will also
affect the profits the company is to get. This issue therefore becomes a sensitive issue in that
anything that affects the profits in a significant manner will cause alarm. The changes of the
CEO pay with respect to the shareholders value or a return is the source of sensitivity since less
pay for the CEO may increase the shareholder value. This may be a positive impact on the
shareholders return but may result to poor performance of the firm in the future. This is due to
the fact that the CEO may not be properly motivated to implement the best policies. In addition
he or she may be intimidated since they are not recognized by the shareholders. They may also
opt to move if the payments are not in line with his or her requirements and experience in the
company.
Jensen and Murphy (1990) finds out that in every $1000 increase of the shareholder value
the CEO salary and bonus rise by 2 cents. When other benefits such as salary revisions,
dismissals and stock options are included the CEOs pay rises by 75 cents. In addition to stock
ownership of $2.50 then the total rises to $3.25. In the study 2,213 CEOs were involved that
headed 1295 companies from 1974 – 1986 that were in the Forbes list. The salary and bonuses
are calculated as the present value of the change that is related to the enhanced performance. For
this reason the CEO will be subject to receiving the high pay till he retires at a very late age.
14. Pay-for Performance Sensitivity on Executive Equity Ownership 14
Also pay performance sensitivity in the payment for CEOs dismissals presume that the CEO will
have no other potential job. In this presumption may be incorrect and thus cause the firm to pay
higher pay to young executives in view of the fact that they will not find work for a longer period
than the older executives. This however is not the case since CEOs are rarely dismissed when
they are appointed because the management believes that they will need time to perform even if
the firm is making losses. This is the same case when the make profits and the shareholders want
to retain the executives to continue enjoying the profits and dividends that are brought by the
policies of the CEO.
According to Jensen and Murphy (1990) the percentage ownership for the small firms
was higher; while the investment is greater in large firms. This means that small firms have
higher pay performance sensitivity in view of the fact that there are more options and more
ownership which was measured at $8.05 in every $1000. On the contrary, large companies have
lower pay performance sensitivity due to closer alignment of interests among the shareholders
and CEO. The low pay sensitivity is explained as maybe that CEO is not very important in the
firm or they are easily monitored at all times. In addition, there may be political influences in the
contracting of the CEO which may cause the low pay.
There will always be a conflict of interest among the CEO and the shareholders since the
shareholders want an increase of share value while the CEO wants the maximum salary and
bonuses and therefore this will always be an agent of the problem. In this regard, when the
shareholders are properly informed they will be able to design a contract that will specify and
enforce the managerial plans to be carried out by everyone. The plans on the other hand will not
always be welcomed by the CEO and this may include the pay given. However, this will be a
basis for negotiations that will reduce the conflicts and ensure a memorandum of understanding.
15. Pay-for Performance Sensitivity on Executive Equity Ownership 15
Baek & Pagán (2006) in the article ‘Pay-Performance Sensitivity and High Performing
Firms’ give the benefits that are associated with a performance based compensation to CEO. In
the study the relationship involving pay performance sensitivity and firm performance are
explored especially on the higher performing managers. In the study the author hypothesize the
need to have a higher pay for the managers so as to improve performance of a firm. The authors
are quick to point the mixed results that have been reflected in previous studies done on the
impacts of equity based compensation strategies on the performance of the firm.
In the mixed results the equity based compensation relation to performance is seen to
have been caused by deficiency in positive relations. The authors quote “When CEOs of public
U.S. firms possess a larger set of firm-specific information than outside shareholders; a potential
selection bias could arise. CEOs with private information on good prospects of their own firms
would be more likely to accumulate shares and/or influence compensation committees to
increase equity-based compensation” (Baek, & Pagán, 2006 p.88). The study indicates that the
CEOs from higher performing firms may accumulate more shares of the company than the firms
that are performing ones. This means that the firms that have the CEO with a larger equity will
be able to perform better that where the CEO has fewer stakes. This can be as a result of trying to
protect what is his stake in the company and thus better management. In addition, when he is
better paid then the performance is likely to increase since the managers see it as a good source
of equity to them.
According to Perry, & Zennerb, 2001 in the article “Pay for performance? Government
regulation and the structure of compensation contracts” they find out the sensitivity of the CEOs
equity is affected by the changes in the shareholders wealth. This is deduced after data from
1993 – 1996 in companies that have approximately a million dollar compensation plan. in
16. Pay-for Performance Sensitivity on Executive Equity Ownership 16
addition, the pay performance sensitivity is calculated by the total yearly compensation and the
CEOs equity in the firm and this is expected to rise simultaneously.
Larcker et al. (2010) in the article ‘Sensitivity of CEO Wealth to Stock Price: A New
Tool for Assessing Pay for Performance’ tackles the issue of compensation in the US companies.
It has been observed that firms have awarded hefty sums of salaries and bonuses to CEOs.
However, questions still abound whether the huge compensations encourage an excessive risk
taking or it contributes to the performance of the firm. The debate ranges on and some argue that
the compensation may be justified based on the annual targets that the executive is able to
achieve each year. In addition, some firms are able to award bonuses of stock options or
restricted stocks as compensations for their performance to be able to enhance performance.
Given the above arguments of compensation then the CEO payments are related to performance
and hence must be able to perform to get the awards. On the contrary there are hefty payments
that are not linked to performance. For instance, Robert Nardelli was given a salary of $210
million in 2007 but was later forced out by pressure from shareholder due inconsistent
nonperformance of the Home Depot firm in his six year tenure (Larcker, et al. 2010). Another
example is Richard Fuld the CEO of Lehman Brothers and Angelo Mozilo the CEO of
Countrywide in 2008 who sold stocks worth $200 million and $500 awarded by the firms they
were CEOs after collapse Angelo Mozilo (CEO of Countrywide). These are few cases that
reflect pay performance sensitivity and performance of the CEOs.
To be able to elaborate pay performance for the executives there is no need to look at
annual payments. This is because it may involve payouts of compensation that are accrued in
years and also it is not structured in terms of the shareholders value that has been created during
the tenure of the CEO. It is therefore good to scrutinize the CEO wealth i.e. the equity ownership
17. Pay-for Performance Sensitivity on Executive Equity Ownership 17
and the performance of the firm in the stock markets. This can be done through the “measure the
dollar change in CEO wealth over small percentage changes in the stock price. Based on a
sample of 4,000 publicly traded U.S. companies, the average (median) CEO stands to gain
roughly $58,000 in wealth for every 1 percent increase in stock price. Among the largest 100
companies, this figure approaches $640,000” (Larcker, et al. 2010).
Another method that can be used would be to judge the executive wealth change over the
stock price change. To assist in this method then one may “plot the percentage change in the
expected value of the CEO’s equity portfolio against percentage changes in stock price ranging
from -100% to 100%” (Larcker, et al. 2010). The 0 percent mark will be the price that they CEO
find prevailing at the market and the 100 percent mark is when the equity value goes to zero.
After plotting the graph; one must compare the results with other similar companies which will
help in establishing the risks involved and the rewards involved. The prominent note to take is
the convexity of the payout curve which might either be high or low. Low convexity means that
the wealth of the CEO has coincided with the change in the value of the shareholders wealth.
While the high convexity means that the firm has enjoyed high change in growth of shareholders
wealth with respect to the CEO’s wealth. The payout curves that are at the high convexity
possibly will encourage the firm to take more risks as opposed to lower convexity curves;
indeed, these risks may have positive or negative impacts based on the strategies of the company.
Ozkan (2007) in the article “CEO Pay-for-Performance Sensitivity and Corporate
Governance” finds that the ownership of firms is positively connected to the pay performance
sensitivity of the compensation of the CEO; in addition, it is negatively related to the CEO level
of compensation which is not affected by firm size, industry, corporate governance
characteristics performance and investment opportunities. What's more, is that many non
18. Pay-for Performance Sensitivity on Executive Equity Ownership 18
executive board members do not significantly affect the pay performance sensitivity of the CEO;
while those executives with a longer tenure on their contract have a lower pay for performance
sensitivity of option grants; which is a view of the entrenchment of the executives. The
shareholders on the other hand have a larger say in the tenure of the executives since they have
the right to vote them out or retain them if they perform as expected. In this case any CEO that
does not perform will have a sensitive pay performance since they may be censured by the
shareholders if they don’t increase their wealth.
For the managers they are faced with a challenging situation which they must perform
failure to which their career is largely dented (Chen, & Jiang, 2006). This is a major reason why
they make certain decisions some of which may be risky. They also have to fulfill the
compensation contract with the shareholders which will ensure they have optimal pay for
performance. One may conclude that where the wealth is the heart is and so with the CEO having
equity and stake in the company they are managing will have a greater impact on the
responsibilities of the manager. However, this may prevent him or her making increasing risky
decisions that may at times bring positive revolutionary change. The pay should also be very
attractive so that the best talent may be attracted to manage the firm especially when the firm is
being faced by turbulent times.
Methodology
Sampling and data
This study has used pooled cross-sectional as well as time series data. The executive
remuneration as well as corporate governance are just derived from the annual reports of the
selected 50 United States companies, as well as 50 Hong Kong companies, for the years 2004,
2005, 2005 as well as 2007. The selection of 2004 and 2005 period is based on the reason
19. Pay-for Performance Sensitivity on Executive Equity Ownership 19
that, the disclosures as it is much needed under the MCCG are much effective for annual
reports after June 2001. By 2006 January, approximately over 1,000firms had been listed on
the Bursa Malaysia, comprising 646 on the main board, on the second board, there were 269,
while110 on the MESDAQ. This study also excludes PN4, MEDSDAQ, as well as PN17
companies. The process of excluding MESDEQ companies, is based on the fact that, their
issued as well as paid-up capital are considered as being much small, as compared to the
companies on the second and the main board. Basing on their adverse financial conditions, the
list of eliminated companies included both PN4 as well as PN17.
Out of the remaining 876 organizations or companies, there was a further elimination
of 409 firms. This was based on the fact that, there were changes of financial year end.
Another factor was de-listing, as well as the presence of incomplete annual reports for the two
consecutive years. That is in 2004 along with 2005. On top of all stated reasons, there were
also some difficulties in the assessment of their annual reports online. Last but not least, the
companies annual reports found on the net had some sort of anomalous data. The remaining
476 sample companies, undergoes some sort of further elimination. This type of elimination is
based on the presence of unclear on no separation between the executive as well as the non-
executive remuneration in their annual reports. This form of segregation is much significance,
as this research concentrates on the executive remuneration, where the large number of
directors ‘total pay goes to the executive directors. By taking these factors into consideration,
175 companies from the United States and other 170 companies from Hong Kong were
selected as samples in this study. This means that, in this study, around 100 companies are
being used as a sampling frame. Due to the intensive, as well as time consuming nature of
hand collecting the executive remuneration as well as the corporate data used in governance, a
20. Pay-for Performance Sensitivity on Executive Equity Ownership 20
total of 200 companies were chosen out of the 350 companies in the previous selection. Since
there were no enough or adequate from the DataStream, or the conflicting data between
DataStream and the available annual reports, the financial sample was again reduced to a total
of 100 companies, (Cheng, & Firth, 2005).
The information that was extracted from the annual reports on the remuneration
committee traits are just based on the standards, as well as poor’s Governance Disclosure
Scorecard 2004, (SPGDS), which gives the reflections of the global best practices of what is
referred to as corporate governance. By having a critical look at the SPGDS; it is found that,
there is around 34 items that remuneration matters entail. On the other hand for this study:
pay-for performance sensitivity on executive equity ownership: across studies between U.S. &
Japan. Only 15 items have been selected, this is based on the fact that, the remaining group of
issues is not found from the statement of corporate governance disclosed in the annual reports
of Malaysian group of companies.
Qualitative Research Methods
This method has a very special value for the investigation of complex and issues that
are sensitive. It usually excels in the generation of detailed information. It also involves the
collection of numerical data. However in the detailed research, data themselves both shaped
and this might limit the analysis.
Documentary research
This involves the use of texts, documents and internets as sources of data. This was
used due to its reliability as a source of evidence in the research. This was used in support of
viewpoint or argument. The process of documentary research involved some conceptualizing,
21. Pay-for Performance Sensitivity on Executive Equity Ownership 21
assessing and using documents. The document analysis in documentary research was
combined qualitative quantitative analysis. (Prior, 2003)
Validity of the Research
Validity of the research ‘is concerned with the idea that the research design fully
addresses the research questions and objectives’ that the researcher is trying to answer and
achieve (White, B., 2000:25). As the literature review section revealed, the pay-for
performance sensitivity on executive equity ownership: across studies between U.S. & Japan
were all focused in the research. The internal validity of the sample was improved, as the
selection procedure followed the appropriate sample selection criteria.
Reliability of the Research
White, B. (2000:25) suggests that ‘reliability is about consistency and research, and whether
another researcher could use your design and obtain similar findings’, though the
interpretation and conclusions will be different of the individual researcher’s judgment.
The fact that the research sample selection was not biased as it started a very large number of
companies, and settled at a reasonable number, means that, the survey was from different
walks of life within the researched demographic region, the U.S. and Japan, the results could
be generalized to the U.S. and Japan pay-for performance sensitivity on executive equity
ownership companies. In the same manner the in formation search was too wide, it can be
said that, the analysis and results represents the United States as well as Japan Company’s
Pay-for Performance Sensitivity on Executive Equity Ownership. This study can be
reproduced under a similar methodology with no difficulty and hence it is considered reliable.
Modeling Pay-For-Performance
22. Pay-for Performance Sensitivity on Executive Equity Ownership 22
According to (Murphy 1999), pay for performance son the independent elasticity is
measured by the regressing the dependent variable. Concerning the independent variables
“log of (1 + contemporaneous return) and log (1 + lagged return).” (Zhou, 2000). With this in
mind, the following formula is (“created; in PAYit = α + β1ln(1+RETit) + β2ln(1+RETit-1) +
uit)” (Zhou, 2000).
The formula is similar to the one used by Zhou (2000). The stock prices as well as the
dividend data are taken from the DataStream.
In the process of testing Companies that discloses that they reward executive directors
on the basis firm or individual performances have stronger pay-for-performance relationship,
hypothesis, the sample is first partitioned into two subdivisions depending on the corporate
governance statement disclosed, that the pay is connected to the performance, or if not,
looking at the performance –based versus non-performance subdivision.
Descriptive statistics
Descriptive statistics has been used in this paper to give a description of quantified
data collected. its aim was to give a summary of a data set quantitatively hence avoiding
probabilistic formulation, other using the data in making the inferences about the population
that the data represents. Even though data analysis has drawn much from inferential statistics,
descriptive statistics has also been presented. For example the tables have been used to
describe the executive pay, as well as the return on stock for the sample companies for 2004
to 2007.
Descriptive statistics has been used to provide simple summaries about the sample as
well as measures. In conjunction with simple graphic analysis, they have been used in making
the foundation of quantitative data analysis. Descriptive statistics summarizes data, like for
23. Pay-for Performance Sensitivity on Executive Equity Ownership 23
instance, the shooting percentages of every year. In the process of comparing performances of
the U.S companies and the Hong Kong samples, the tables have been used in showing which
has lower averages executive pay, though it ends up generating better market performances,
( Mann, 1995).
24. Pay-for Performance Sensitivity on Executive Equity Ownership 24
Results and findings
Out of 50 companies sought after from each country for inferences to be made; only 29
for U.S and 17 for Hong Kong were fit to be incorporated. This resulted to a mean of market gap
of USD 127.562m and USD 16,266m U.S and H.K respectively. The reasons for exclusion of the
rest of the companies included in availability of data that were to be included as variables, CEO
not working in the entire period of sampling as well as not having a CEO since some
organization were ETF trust fund.
The five companies from Hong Kong whose CEO equity ownership and other interest
exceeded 35% of total shares include Cheung Kong Holdings Limited, Li & Fung Limited, Sub
Hung Kai Properties Limited, Wheelock and Company Limited and Henderson Land
Development Holdings Ltd. It is also established that there is no single U.S company that had
CEO equity ownership and other interest exceeding 35% in all those years from 2003-2007. It
was only Berkshire Hathaway Inc which is seen in the years 2003, 2004 and 2005.
Objective one
To examine the first objective, a regression analysis was carried out to establish the
relationship between CEO’s equity ownership and company performance. This was attainable by
using percentage changes in stock prices as well as percentage changes in CEO’s equity
ownership. Dependent variable was percentage change in stock pricing while percentage change
in CEO’s ownership was independent variable (Refer to Table 6). I further analyzed the H.K.
companies data by dividing them into 2 groups by reference to their level of CEO ownership to
find whether the level of CEO ownership will have an effect on the pay and firm performance
relation (refer to Table 7).
25. Pay-for Performance Sensitivity on Executive Equity Ownership 25
The analysis was done for each year running from 2003-2007. It was interesting to find
out that in U.S companies, there was a positive relationship between percentage change of
CEO’s equity ownership and percentage change of stock prices in the year 2003. The same
applied to year 2006. The values for this years are y=0.126x+0.1471, R2=0.0017 and
y=0.1019x+0.1742, R2=0.0522. In the years 2004, 2005 and 2007 the relationship between the
two variables were negative, (y=-0.0795x+0.0829, R2=0.037, y=-0.0079x+0.1795, R2=0.0457
y=-1.0722xx+1.0964, R2=0.0049). Figures 1 to 7 in that order clearly depicts the regression
analysis. It is worth mentioning that there was a negative although very weak relationship
between CEO’S equity ownership only excluding other interests and options and corporate
performances in the case of American companies for the years 2004-07 (y=-0.034x+0.6295,
R2=0.0184). Similarly, this was the scenario in the years 2003-07 (y=-1.0722x+1.0964,
R2=0.0049).
The graphs below clearly demonstrates these findings
Fig. 1
29. Pay-for Performance Sensitivity on Executive Equity Ownership 29
When considering the relationship between CEO’s equity ownership only excluding other
interests and option for the 17 Hong Kong companies, in the year 2003-04, 2004-05, 2005-06 the
relationship was negative. (y=-0.3207x+0.2788, R2=0.2126, y=-0.3319x+0.2027, R2=0.0291,
y=-0.0005x+0.6482, R2=0.0007 and respectively). Nonetheless, the analysis revealed that the
relationship between the two variables under study was positive in the year 2006-07
(y=0.1632x+0.4692, R2=0.0171). in the years running between 2003 through 2007, the
relationship was negative and weak, y=-0.004x+3.3501, R2=0.0025, similar relationship was
found in years 2004 through 2007 y=-0.0047x+2.4303, R2=0.0063.
When 21 companies from Hong Kong were analyzed for the same relationship, there
were some changes in the relationship exhibited. In 2003-04 and 2006-07, the relationship was
negative and weak (y=-0.2005x+0.2985, R2=0.1098 and y=-0.1843x+0.5301, R2=0.0275 in that
order). For years 2004-05, 2005-06 the relationship was positive (y=0.4818x+0.1702, R2=0.031
and y=0.3327x+0.5405, R2=0.3413 respectively). It was interesting when analysis for years 2003
through 2007 and 2004 through 2007 were done. The relationship between CEO’s equity
ownership only without other interest and options and company performance was positive,
y=0.443x+03.2954, R2=0.055 and y=0.4323x+2.3024, R2=0.0544.
When other interest as well as options was factored in while analyzing the same 21
companies from Hong Kong, the relationship between CEO’s equity ownership and company
performance was generally negative apart from year 2006-07 (y=0.0069x+0.5257, R2=0.014).
for years 2003-04, 2004-05, 2005-06, 2003 through 2007 and 2004-2007 the findings were as
follows; y=0.1419x+0.3033, R2=0.0441, y=-0.1927x+0.2036, R2=0.0568, y=-0.9537x+0.6351,
R2=0.0916, y=-1.2278x+3.7531, R2=0.0831 and y=-0.5517x+2.6848 R2=0.0568 in that order.
33. Pay-for Performance Sensitivity on Executive Equity Ownership 33
From the analysis to fulfill the need to meet objective one, it is evident that the pay form
performance from 2004 through 2007 for the U.S companies, 29 in number and 17 for Hong
Kong, the relationship between the variables is negative (CEO’s equity ownership and corporate
performance). This finding is not consistent with existing and previous research work. However,
when the Hong Kong companies were raised to 21 for analysis, the relatrionship was positive
although somewhat weak through the period 2004 to 2007. This finding is consistent with what
other researchers found out for instance Jensen and Murphy.
Objective two
In order to find out whether the CEO wealth will increase as the stock price increases, I
analyzed the relation between companies listed in U.S. and H.K. using the % change in CEO
wealth as a result of the change in stock price (Table 8). I further analyzed the H.K. companies
data by dividing them into 2 groups by reference to their level of CEO ownership to find whether
the level of CEO ownership will have an effect on the pay and firm performance relation (refer
34. Pay-for Performance Sensitivity on Executive Equity Ownership 34
Table 8a).
Table 1. % Change of CEO's Wealth, Other Interest and Options Arising from % Change of Stock
Price^^
COLUMN 8.1 COLUMN 8.2 COLUMN 8.3
29 US Companies 17 HK Companies 21 HK Companies# 21 HK Companies#
CEO's Weath Only (excl. CEO's Wealth Only (excl. CEO's Wealth and Other CEO's Wealth, Other
Other Interest & Options) Other Interest & Options) Interest (i.e. excl. Options) Interest and Options
Year 2003-04 y = 3E+06x - 215951 y = 0.06x + 0.1042 y = 0.0527x + 0.1343 y = 0.8768x + 0.1155
R² = 0.8489 R² = 0.0009 R² = 0.0006 R² = 0.1931
Year 2004-05 y = 1.8284x + 0.3313 y = -0.1008x + 0.1252 y = -0.0566x + 0.0758 y = 0.9235x + 0.1062
R² = 0.2908 R² = 0.0362 R² = 0.0349 R² = 0.2802
Year 2005-06 y = -4.8106x + 2.0105 y = -0.6313x + 13.586 y = 1.8566x - 0.2227 y = 0.8169x + 0.0849
R² = 0.0292 R² = 6E-05 R² = 0.1568 R² = 0.6571
Year 2006-07 y = 1.6758x + 0.2001 y = 0.409x + 0.2229 y = 0.4001x + 0.1832 y = 4.3116x + 0.8637
R² = 0.214 R² = 0.0468 R² = 0.0439 R² = 0.0196
Year 2003-07 y = 1E+06x - 602448 y = -2.9289x + 73.077 y = 0.5546x + 3.3944 y = 0.5844x + 2.5424
R² = 0.9447 R² = 0.0027 R² = 0.0162 R² = 0.0891
Year 2004-07 y = 0.6683x + 1.8936 y = -3.3891x + 50.083 y = 0.6933x + 2.0875 y = 0.267x + 2.1398
R² = 0.0229 R² = 0.0057 R² = 0.0294 R² = 0.0306
35. Pay-for Performance Sensitivity on Executive Equity Ownership 35
From table 1, it is evident that there are some relationship either way between percentage
change of CEO’s wealth, other uinterests and options that arise from percentage change in stock
prices. Thus, the results makes one to conclude that equity ownerships by CEO are insensitive to
company’s stock performance
Objective three
The third objective of the study was to find out whether the performance relationships
weaken when equity ownership by CEO goes beyond 35%. This was attained by carrying out a
regression analysis of two major variables from five major Hong Kong companies that had
CEO’s owning slightly above 35% of equity. The variables studied and analyzed were CEO’s
personal interest and other interest exceeding 35% of total equity and percentage changes in
stock prices. As shown in table 2, for year 2003-04, 2006-07 and 2003 through 2007 the
relationship was positive; y=2.5238x+0.1822, R2=0.0932, y=33.263x+0.644, R2=0.8134,
y=0.0651x+1.4374, R2=0.0002. The relationship was negative for years 2004-05, 2005-06 and
year 2004 through 2007, y=-24.671x+-0.0156, R2=0.6224, y=-3.6222x+0.192, R2=0.1661 and
y=-5.5647x+0.8775, R2=0.2931 in that order.
36. Pay-for Performance Sensitivity on Executive Equity Ownership 36
Table 2. CEO’s personal interest and other interest exceeding and below 35% of total equity and % changes in stock prices.
37. Pay-for Performance Sensitivity on Executive Equity Ownership 37
% Change of CEO's Wealth, Other Interest and Options Arising from % Change of Stock Price^^ TABLE 8
(HK Companies divided into 2 groups according to CEO's ownership of company shares)
COLUMN 8a.1 COLUMN 8a.2
CEO's Personal CEO's Pesonal CEO's Personal CEO's Personal CEO's Personal CEO's Perso
Interest more than Interest less than Interest and Other Interest and Other Interest, Other Interest, Oth
35% of total equity 35% of total equity Interest more than Interest less than Interest and Options Interest and Op
35% of total equity 35% of total equity more than 35% of lower than 35
total equity total equit
[5 HK Companies#] [16 HK Companies] [5 HK Companies#] [16 HK Companies] [5 HK Companies#] [16 HK Compa
2003-0 y = 0.1919x + 0.0111 y = 0.0414x + 0.1959 y = 1.0308x + 0.0038 y = -0.0797x + y = 0.8768x + 0.1155 y = 0.7588x +
4 0.2764
R² = 0.0576 R² = 0.0002 R² = 0.9797 R² = 0.0008 R² = 0.1931 R² = 0.126
2004-0 y = 0.7164x + 0.0289 y = 0.274x + 0.1381 y = 1.0044x + 0.0004 y = 0.3178x + 0.0997 y = 0.9235x + 0.1062 y = 0.8684x + 0
5
R² = 0.8113 R² = 0.062 R² = 1 R² = 0.0924 R² = 0.2802 R² = 0.239
2005-0 y = 1.4889x - 0.1809 y = -2.3062x + 16.485 y = 1.2996x - 0.054 y = 4.0651x - 1.1563 y = 0.8169x + 0.0849 y = 0.801x + 0
6
R² = 0.9488 R² = 0.001 R² = 0.9999 R² = 0.423 R² = 0.6571 R² = 0.620
2006-0 y = -0.351x + 0.4548 y = 0.3829x + 0.1644 y = 1.009x - 0.0037 y = 0.4535x + 0.2117 y = 4.3116x + 0.8637 y = 4.7857x + 1
7
R² = 0.0605 R² = 0.0386 R² = 0.9999 R² = 0.0543 R² = 0.0196 R² = 0.023
2003-0 y = 0.5502x - 0.2195 y = -4.0773x + 88.235 y = 1.203x - 0.2162 y = 1.911x + 3.0124 y = 0.5844x + 2.5424 y = 0.4998x + 3
7
R² = 0.02 R² = 0.006 R² = 0.8384 R² = 0.1135 R² = 0.0891 R² = 0.062
Jul-04 y = 1.1539x - 0.5689 y = -4.4202x + 59.072 y = 1.3265x - 0.2888 y = 1.2375x + 2.8126 y = 1.334x - 0.2955 y = 0.2021x + 2
R² = 0.3696 R² = 0.0107 R² = 0.9936 R² = 0.0791 R² = 0.9933 R² = 0.017
39. Pay-for Performance Sensitivity on Executive Equity Ownership 39
From 2003 to 2007 there is positive relations are found regardless of the level of CEO
equity ownership, which is not consistent with previous studies that there exists a negative
relation when CEOs level of equity is high and positive relation when CEOs level of equity is
low. The sensitivity of relation for high level CEO equity ownership is stronger than for low
level CEO equity ownership.
During 2004 – 2007, the relation for U.S. companies, as shown in Column 8.1, is positive
whereas the relation for H.K. companies, as shown in Column 8.2, is negative. It is puzzled that
the increase in stock price does not give rise to an increase in CEOs wealth.
In comparing the relations amongst Column 8.2, and Column 8.3, it is found that Column
8.3 (which represents the CEO equity ownership, measured in term of direct and indirect
interests), in general, provides a positive relation which is consistent with U.S. companies.
Table [8a] interprets Column 8.3 further by dividing the HK companies into 2 groups by
the level of ownership, one with the equity ownership of more than 35% and another, less than
35% (see Column 8a.1 and 8a.2. The columns present the relation of the percentage change in
CEO wealth as a result of the percentage change in stock price. It is evident that there is a
positive relation, i.e. CEOs wealth increase as the stock price increases and in R2 in Column 8a.1
is very strong in the group between 2003 and 2007 where CEOs ownership is more than 35%
Discussion
Leadership a process whereby an individual has the ability to influence thoughts, ideas
and actions of others in achieving a set of preset goals, tasks, duties and responsibilities (Paglis
& Green, 2002) has been thought to be one major attribute that help organization perform
excellently even in the wake of uncertainty. With the introduction of managerial concepts it was
largely viewed that to ensure that the managers are in top shape and ready to go extra miles in
40. Pay-for Performance Sensitivity on Executive Equity Ownership 40
making the organization which they are heading to perform better and meet the needs and
aspiration of shareholders, there was need to motivate them. Initially, the introduction of
managers and CEO’s was thought to help the organization in question to successfully adopt
business decisions that would maximize shareholders value, however, it was also realized that
there are chances that these managers and CEO’s bestowed with such responsibilities can engage
in activities that are not on line with the company’s objective (Perry & Zenner, 2001). To counter
this and motivate them, pay system was introduced. The rationale behind this was that they will
be in better positions to protect their personal wealth by taking minimal risks, even at the
expense of shareholders (Wiseman & Gomez-Mejia, 1998).
Additionally, this is also echoed from agency theory which holds that by giving
executives a shared ownership of the company they serve, through equity compensation,
incentive alignment will be achieved and executives will take actions in the best interest of the
company. Similarly, study by Holmstrom (1979) also advocated the use of firm stock price
performance as a means to gauge CEO performance. The ‘Informative Principle’ was introduced,
which suggests that executive payouts are to be based on equity-related measures. Although the
justification here was not because shareholders desired high share prices as proposed by Jensen
& Murphy (1990), it was argued that the use of equity-related measures provided better
information for assessing whether the CEOs took appropriate actions to create shareholder value,
which is reflected in firm share price.
From the analysis to, it is evident that the pay performance from 2004 through 2007 for
the U.S companies, 29 in number and 17 for Hong Kong, the relationship between the variables
is negative (CEO’s equity ownership and corporate performance). This finding is not consistent
with existing and previous research work especially United Staes of America based. The agency
41. Pay-for Performance Sensitivity on Executive Equity Ownership 41
theory assumes that compensation has a universal incentive effect on executive’s behavior and
performance, and there is a perceived relationship between effort, performance and rewards.
However, various researchers have argued that the vast empirical studies on compensation are
conducted amongst US firms and hence are distinctive to the US origin and may reflect values
and norms which vary from those of other societies.
A classic study conducted by Hofstede (1983) questions whether American theories
apply to other countries, this then confirms that even in U.S soils, the notion might not be true. It
was explained that the agency theory, although diffused to other countries, has an American
attribution which can be seen to be reflecting American views and thus may have limited validity
and applicability in cultures. Additionally, the finding can be explained by the fact that when
CEO’s hold substantial amount of equity as well as other interest, they become less aggressive in
adopting more risky venture that might propel the organization to greater heights.
However, when the Hong Kong companies were raised to 21 for analysis, the
relatrionship was positive although somewhat weak through the period 2004 to 2007. This
finding is consistent with what other researchers found out for instance Jensen and Murphy who
supported the view that CEO should own substantial amounts of company equity on the premise
that the most powerful link between shareholder wealth and executive wealth is the direct
ownership of company shares by the CEO (Perry & Zenner, 2001). In situations where CEOs are
substantial owners of a company and possesses a meaningful percentage of the total outstanding
shares, it was explained that any changes in the market value of company equity would pose a
strong and direct ‘feedback effect’ on CEO’s performance to deliver shareholder value which is
seen in Hong Kong companies.
42. Pay-for Performance Sensitivity on Executive Equity Ownership 42
When considering the sensitivty for CEO equity ownership and to companies’ stock
performance, the study established that the sensitivity is stronger in the case where CEO equity is
above 35% as compared to their counterpart holding less than 35% of equity. With a clear
understanding that pay-performance sensitivity is a measure of extend to which the performance
of an organization improves as the amount of executive pay increases, there is no doubt that the
finding here in is in line with the [previous studies on the same particularly by Larcker, Miller &
Tayan, 2011. As CEO’s receive a significant portion of their compensation in the form of equity
awards, either in the form of stock options or restricted stock (Larcker, Miller, & Tayan, 2011), a
significant portion of CEO’s compensation is directly tied to company share price. The agency
theory suggests that equity-based incentives motivate executives towards risk-taking behavior
and to invest in projects creates a positive effect on shareholder wealth since doing so will also
increase executive’s own wealth (Sanders, 2001).
A highly sensitive pay-performance system would attract high quality risk taking
executives to join the company. The pay for performance sensitivity is higher for CEOs who are
prepared to take more risks for greater company profit margins in the short term, as opposed to
those risk adverse CEOs with lower pay-performance sensitivity. It was explained that due to
public pressures, boards are reluctant neither to provide substantial financial rewards for superior
performance nor are they willing to impose meaningful financial for poor performance, and the
resulting effect of this risk-averse orientation is the weak link between executive pay and firm
performance. When considering the same relationship with CEO’s having less than 35% of
equity shares, there was a negative relationship. This implies that the company performance was
declining when the percentage change of CEO equity ownership declined. Thus sensitivity does
43. Pay-for Performance Sensitivity on Executive Equity Ownership 43
not weaken when CEO’s equity goes beyond 35% (the R2 in Column 8a.1 is very strong in the
group between 2003 to 2007)
According to the analysis of the results and findings, I believe there is a different
corporate governance issue regarding the disclosure requirements between U.S and Hong Kong.
it seems that when we consider the CEO equity ownership in H.K. their Other Interests in equity
(that includes equity held by spouse, corporation, family trust) need to be taken into account as
this amount usually represent quite an amount in their CEO wealth (you may see the % holding
in Other Interest is quite large according to the 5 companies that holds more than 35% of issued
shares). According to the HK listing rules, the CEO personal interest, other interest and option
are required to be filed with the Hong Kong stock Exchange within 3 days. It is a usual practice
that the substantial shareholders of listed companies in HK uses corporation as a vehicle to hold
shares.
There is need to carry further research that might explain why the relationship between
CEO’s equity ownership and corporate performance for U.S companies was negative contrary to
previous studies. This might give further insights and probably support other finding that the
relationship opts not to be always positive amidst other unstudied factors Zhou, X. (2000).
Limitation of the study
One of the major limitations of the study was to do with arriving at the desired number of
companies from both countries from which analysis was to be done. It is worth noting that out of
50 companies selected from United States; only 29 companies were best suited to proceed with
analysis. On the other hand, only 17 companies from Hong Kong out of 50 were suitable to be
studied. The reasons for exclusion of the companies ranged from lack of certain information such
44. Pay-for Performance Sensitivity on Executive Equity Ownership 44
as CEO ownership of equity, as well as the selected company not having a CEO or even MD and
the CEO not being present in the entire period of sampling. This probably could jeopardize the
conclusion and generalization arrived at. Accessing information was a problem as some of the
companies did not post all their information especially with regards to CEO equity ownership,
profit among others.
It is worth to note that the aim of the study was to establish various factors such as the
relationship between equity ownership by CEO (in HK & US) with corporate performance,
performance relationships strength and equity ownership by CEO beyond 35% and equity
ownerships by CEO being or not insensitive to companies stock performance. There such
limitation left very minimal room for detailed explanation. It is worth mentioning that the study
selected years that were not characterized with financial crisis, for this reason, the desired
relationships studied do not represent cases when the companies were under financial crisis.
There is thus reason for another research to be done to unveil such a scenario.
Similarly time constraints; I had to work under pressure especially in collecting data,
analysis as well as discussion of the findings. More time was spent in selecting the desired
companies, sought the relevant literatures among other relevant information. Lastly, the kind of
methodology used especially in soliciting for data might have yielded outdated information. As
compared to primary data sources, the degree of authenticity is lower.
On the same note it is worth to note that the research did not give any consideration to the
general or particular economic factors that might have affected the stock prices. It is no doubt
that such factors could have profound effect on the results obtained herein. Considerably, there
are a lot of differences between United States and Hong Kong in terms of economic region and
trying to draw a comparison between the two can be very difficult if not possible. Differences
45. Pay-for Performance Sensitivity on Executive Equity Ownership 45
exist in terms of taxation, interest rates and as well as differences in factors that affect these
countries’ economic performances. For instance, Hong Kong economy is largely impacted by
what happens in mainland china while U.S economy is affected by such factors as terrorism.
Additionally, differences in corporate governance exhibited in these two countries posed
a limitation to the study. It is worth noting that equity disclosure as well as governance require
that there is threshold amount to be considered to be disclosed, how personal interests are
defined and timing of filling were not considered in this study. Lastly and more importantly,
there is a large difference in the sample of companies used in this analysis. Out of 50 selected
companies to be used in analysis only 29 for U.S and 17 for Hong Kong were fit to be
incorporated. This resulted to a mean of market gap of USD 127.562m and USD 16,266m U.S
and H.K respectively.
Conclusion
The present study sought to find out the relationship between CEO equity ownership and
corporate performance, sensitivity of equity ownership by CEO to stock prices and whether the
later weakens when equity ownership by CEO goes beyond 35%. It is worth noting that
comparison of companies from the two countries, United States of America and Hong Kong
brought forth a mixed result with regards to the relationship between CEO’s equity ownership
and firm performance. The relationship was found to be negative for U.S companies’ contrary to
existing data while it was positive for Hong Kong companies which is consistent with previous
studies.
The study also established that there was a positive sensitivity between CEO equity
ownership and company performance, this means that as the equity ownership increases
performance increases, this is supported by Hong Kong companies. It was interesting to establish
46. Pay-for Performance Sensitivity on Executive Equity Ownership 46
that sensitivity between CEO’s equity exceeding 35% and market prices was stronger as
compared to low level CEO’s equity ownership. Thus when equity ownership by CEO exceeds
35%, the relationship does not weaken as I thought.
47. Pay-for Performance Sensitivity on Executive Equity Ownership 47
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