1. International Journal of Hospitality
Management
“An examination of executive compensation
in the restaurant industry”
Presented by: M. Shafiq
Rashid Khan
Faiza Manzoor
Qandeel Khattak

2. Abstract
The purpose of this empirical study is to examine executive
compensation in the restaurant industry. The effects of a set of
accounting-based performance measures, market-based
performance measures, and executive-related factors on the
compensations of firm CEOs, other senior executive managers, and
board members were examined.
Drawn from 16 consecutive years of data and a sample of over 2200
observations from restaurant companies, the findings revealed that
determinants of equity based compensation vary by different types
of executives. In addition, this study supports the notion that
executive compensation in the restaurant industry is determined not
only by firm performance measures but also by executive-related
characteristics such as tenure.

3. Introduction
 It has been widely recognized that top executives play a significant
role in any organization’s success.
As an area of both research and practice, executive compensation
regarded as an important motivating factor in the successful
management of an organization.
The literature on corporate governance and agency theory suggests
that when appropriately designed, compensation packages can be
effective tools in inspiring senior executives to seek to maximize
shareholders’ value rather than their personal benefits.
Different performance measures have been adopted in different
studies, and consequently, without an established set of “best”
performance measures, different results have been produced (e.g.,
Baysinger and Butler, 1985; Core et al., 1999; Finkelstein and
Hambrick, 1989; Hermalin and Weisbach, 1991; Morck et al., 1988)..

4. Continu………..
In addition, executive compensation has been reported to be
associated with firm size and leverage.
According to the upper echelons theory, top executives act on the
basis of their personal biases, experiences, values, and executive
characteristic variables may serve as useful, although imprecise,
proxies for the executives’ cognitions and values.
There has been little research conducted on executive
compensation in the restaurant industry, of which the characteristics
differ from those of other industries in many ways.
First, it was widely recognized that firms in the hospitality industry
tend to have agency related problems stemming from ownership
styles. Property ownership as well as management is a practice in
the hospitality industry

5. Continu………..
Second, the real estate component of the hospitality industry
increases the capital intensity of the hospitality firms. High capital
intensity and relatively low level of operating inventories (De Franco
and Lattin, 2006) stimulate the business risk and financial inflexibility
Reich (1994) suggested that because of the high ratio of short-run
decisions compared to long-run, the hospitality managers are under
pressure in that short term production output can only be modified
by changing the variable inputs such as payroll and relate expenses
and rent or mortgage payments, while more modification can be
done in the long-run.
Restaurant industry is considered to be highly labor intensive while
less capital intensive compared to the lodging sector, and
consequently restaurant managers tend to focus more on short-run
decisions compared to the hotel executives (Reich, 1994).

6. Continu………..
The objective of this research, therefore, is to complement existing
research by studying executive compensation in the restaurant
industry from a more comprehensive approach than have any
previous studies.
 This study address three research questions:
 What are the primary factors that affect executive compensation
in the restaurant industry?
 Are the compensations of different types of executives, such as
CEOs, other senior management team members, and board
members, influenced by different factors?
In addition to financial variables, is an executive’s compensation
related to his or her personal characteristics, such as age, gender,
and tenure

7. Literature review
Corporate governance and agency theory
Corporate governance is gaining more interest from governments,
international associations, and the business world.
The term refers to the allocation of structures, principles, and
processes used to direct and control companies (La Porta et al.,
2000; Shleifer and Vishny, 1997; Cadbury, 1992).
In general terms, corporate governance refers to a combination of
processes, customs, policies, laws, and institutions by which
companies are directed, administrated, and controlled (La Porta et
al., 2000; Shleifer and Vishny, 1997).
In the context of a company, corporate governance deals with
balancing the interests of all parties in order to reach the maximum
level of efficiency and profitability (Du Plessisetal.,2005)

8. Continu………..
According to agency theory, corporate agency problems occur
when goal incongruence exists between managers and stockholders
(Jensen, 1986; Jensen and Meckling, 1976).
When conflicts of interest exist, it is challenging to create a sus-
tainable and continuously profitable corporation if the interests of
owners and managers are not aligned (Hansmann, 1996)
Jensen and Meckling (1976) suggested that companies should
provide compensation packages that reflect managers’ performance,
resulting in an increase in shareholders’ wealth.
Another way to avoid agency problems is by rewarding managers
based on the financial returns to share- holders (Kerr and Bettis,
1987).
The literature suggests, therefore, that performance-based
compensation provides viable solutions to agency problems

9. Continu………..
Executive compensation
Executive compensation refers to all company benefits paid to
executives, including basic salary, short-term and long-term
incentives, bonuses, shares options, and other forms of
compensation.
According to Jensen and Meckling (1976), the best way to
minimize agency problems is to compensate executives for their
managerial performance.
It is argued in the literature that, ideally, the purpose of both the
management and the board is to maximize the economic value of
the shareholder’s interest, and consequently it is logical to expect
that shareholder returns are good indicators for executive
compensation decisions (i.e. Rappaport, 1981; Kerr and Bettis,
1987).

10. Continu………..
Compared to executives in other industries, those in the
hospitality industry have relatively low income levels (Sturman,
2001). Moreover, in the hospitality industry, executives working in
the restaurant and hotel industries are paid less than are their peers
in the casino industry (Kefgen and Mahoney, 2009).
According to Kim and Gu (2005), pay-for-performance
compensation is only partially practiced in the restaurant industry.
They suggested that the restaurant industry should consider
profitability and stock performance in order to enhance company
value and to minimize agency problems.
The results showed that a positive relationship exists among CEO
compensation, gross revenue, net income, and stock price. They also
found that stock price is a significant predictor of CEO compensation.

11. Continu………..
Factors that affect executive compensation
Firm size: Executives may prefer compensation linked to firm size
rather than performance-based benefits because firm size is less
unpredictable than is firm performance, and thus executive benefits
are more secure (McKnight and Tomkins, 2004). Kim and Gu (2005)
found that firm size is the dominant factor in restaurant CEO cash
compensation and that CEOs of large restaurant firms receive higher
cash compensation than do CEOs of small ones

12. Continu………..
Leverage (Debt): Jensen (1986) argued that leverage in a firm’s
capital structure helps minimize agency costs related to free cash
flow. Two perspectives exist regarding the relationship between
leverage and executive compensation.
The first perspective suggests that an increase in financial leverage
may cause agency problems, therefore lowering pay-for-
performance compensation. Firm swith higher leverage ratios may
decrease their levels of executive cash compensation (Gu and Choi,
2004).
 The second perspective suggests that leverage can help align the
objectives of executive management with those of owners,
motivating management to improve firm performance in order to
meet creditors’ payments, which are required to be made in cash.

13. Continu………..
Firm performance: Literature on the relationship between
executive compensation and firm performance has produced mixed
results, many studies (Carr, 1997; Elston and Goldberg, 2003;
Finkelstein and Hambrick, 1989; Jensen and Murphy, 1990; Baber et
al., 1996; Kren and Kerr, 1997) have reported a positive relationship
between firm performance and executive compensation.
In previous research, firm performance has been measured by
accounting-based mea- sures such as profitability ratios, return on
equity, and return on assets (Kim and Gu, 2005; Nourayi, 2006) and
by market-based measures such as stock-price, stock return, and
total shareholder return (Nourayi, 2006). Tobin’sQis an alternate
market-based mea- sure of business performance (Chen and Lee,
1995). Tobin’s Q ratio, defined as a firm’s market value divided by
the book value of its total assets .

14. Continu………..
According to several previous studies (Coughlan and Schmidt, 1985;
Rich and Larson, 1984; Murphy, 1985; Conyon et al., 2000), executive
compensation is related more to market-based performance
measures than to accounting-based ones. Alternatively, several
researchers (Lewellen and Huntsman, 1970; Sloan, 1993; Carpenter
and Sanders, 2002; Kerr and Bettis, 1987) have found some strong
relationships between accounting-based measures and executive
compensation.

15. Continu………..
Executive characteristics
a) Gender: Agarwal (1981), Finkelstein and Hambrick (1989), and
Santerre and Thomas (1993) reported that male executives are
paid significantly more than are female executives. Bertrand and
Hallock (2001) found that female executives are paid 45% less
than male executives. According to a study (Adams et al., 2007)
on gender differences in CEO compensation, women are not as
highly compensated as men before being promoted to CEO posi-
tions.
b) Age: An executive’s human capital – measured by expe- rience,
knowledge, or other characteristics – should make a difference in
compensation (Gray and Benson, 2003), but the liter- ature has
not revealed the presence of such an impact (Finkelstein and
Hambrick, 1996)

16. Continu………..
Executive age can be expected to be positively related to
executive compensation because human capital is accumulated
through years of work, and older executives have more time to gain
trust and influence with the board of directors
c) Tenure: An executive’s tenure refers to the number of years he
or she has held the same position. Executive tenure has been
expected to be positively linked to compensation, but tenure’s
effect on compensation has differed in many studies.
d) Duality : Alongside these arguments, the compensation
literature suggests that equity-based compensation provides an
incentive for CEOs or boards of directors to pursue shareholders’
interests. According to Mehran (1995), firms with more outsiders
on their boards make greater use of equity-based compensation
for CEOs, and equity-based compensation for CEOs is positively

17. Continu………..
related to firm performance.
 Ryan and Wiggins (2004) found that firms with more outsiders
on their boards award both CEOs and directors more equity-
based compensation. In contrast, when a CEO’s power over a
board increases, compensation provides weaker incentive to
monitor.
 A CEO’s power over a board increases, usually as a result of the
combining of the roles of CEO and chairperson, which is called
CEO duality. CEO duality creates a dominant CEO (Daily and
Dalton, 1993; Jensen, 1993) that affects the independence of the
board (Finkelstein and D’Aveni, 1994) and provides a wider
power and locus of control (Hambrick and Finkelstein, 1987).

18. Continu………..
Contributions of the study
 Executive compensation is affected by many factors, and owners
and managers tend to act in their own interests, resulting in
conflicting goals (Levinthal, 1988).
As discussed, different performance measures are used to
determine organizational per- formance, which is also
multidimensional in nature (Chakravarthy, 1986). Therefore,
executive compensation is indeed a comprehen- sive topic to study.
Although the studies of Barber et al. (2006) and Kim and Gu (2005)
have made considerable contributions to the hospitality literature,
several issues potentially confound their findings.
 This study’s purpose is to reconcile and improve on previ- ous
studies of executive compensation in the restaurant industry

19. Continu………..
Data and methodology:
Compustat’s executive compensation (ExecuComp) database was
used to retrieve data on executives’ age, years of employment in
their company, gender, and position, in addition to the
compensation data. Executives included in this database are not
limited to CEOs’. ExecuComp collects data on up to nine executives
from each company in its dataset, though most companies only
report information on five. Compensation data was collected from
ExecuComp. Balance sheets and income-statement-related data
were retrieved from the Compustat database.
 Stock-price-related data for the restaurant firms were collected
from CRSP using a 10-digit central index key (CIK) for each company.
In this study, equity based compensation includes total value of
restricted stock grants, long-term incentive payouts, others, and
value of options exercised.

20. Continu………..
Findings:???????????????????????
Discussions:
The purpose of this article is to improve our understanding of
executive compensation in the restaurant industry by developing
four models using executive-related and market-based variables as
executive compensation determinants to capture the relationship
between these variables and executive compensation.
 Following the finance and hospitality literature, 7 variables were
selected to represent executive-related and market-based variables
that might influence executives’ equity based compensation in the
restaurant industry.

21. Continu………..
Conclusions and recommendations for future studies :
Kim and Gu (2005, p. 352) recommended that, in order “to make
the research in this area more comprehensive and thus more
powerful, non-finance dimensions such as age, gender, and
education of CEOs may be considered in future studies.”
 To our best knowledge, this is also the first study within the
restaurant industry that considers executive-related dimensions in
addition to performance indicators. This research provides new
evidence that executive compensation should be tied to market-
based performance measures.
An important empirical implication of this study is to suggest that
an approach built on market-based performance measures would be
appropriate to compensate the executives in the restaurant industry.

22. Continu………..
Limitation of the study
Some of the factors that were not captured in this research, such
as education level, leadership practice, past performance and
reputation, may also influence executive compensation.
Another limitation is related to the use of equity based
compensation in the study. By using equity based compensation,
this study does not include short- term incentive compensation in
the form of salary and bonuses. Future research can address this
limitation by examining the determinants of cash-based, equity-
based and total compensation.

23. Continu………..
In addition, this study focuses exclusively on the restaurant
industry, and consequently its results should not be applied to the
other sectors in the hospitality industry
An examination of the determinants of CEO, SEO, and board
member compensation in the hotel and casino industries is
recommended for future research in order to provide a even more
complete picture on the whole hospitality industry and to explore
whether determinants of cash based and equity based
compensation change for different types of executives in other
sectors of the hospitality industry .

24. Continu………..
THANKS FOR BEARING…….
:-p