CEO Pay and Company Performance in the Food and Tobacco Industry
Downloads
Chief executive officers for companies in competitive industries are motivated to maximize shareholder wealth and not shirk job responsibility since lack of effort could result in firm bankruptcy or a takeover from a competing firm. On the other hand, CEOs of firms, enjoying large market share and product differentiation from competitors, may not be as motivated. For these types of firm shareholders may be best served linking executive pay to firm performance to insure the convergence of management and owner interests. This paper tests the link between CEO total compensation for a sample of large firms in the food and tobacco industry, an industry dominated by large companies. The results support the principle-agent theory that lack of competition in an industry may encourage firms to tie the pay of their top executive to the performance of the company. The coefficient for the performance variable, return on equity, is significant in explaining the variation in total compensation for the chief executive officers in the 15 food and tobacco companies in the sample.
Aggarwal, R.K. and Samwick, A.A. (2003).
“Performance Incentives within Firms: The Effect
of Managerial Responsibility”, Journal of
Finance, Vol. 58 No. 4, pp. 1613-1650.
Bernasek, A., & Shwiff, S. (2001). Gender, risk
and retirement. Journal of Economic Issues, 35,
–356.
Elston, J. & Goldberg, L. (2003) “Executive
compensation and agency costs in Germany,”
Journal of Banking & Finance, 27(7): 1391–1410
Fama, E. F. 1980. Agency Problems and the
Theory of the Firm. Journal of Political Economy
: 288-307.
Fama, E. and Jensen, M., 1983. Agency problems
and residual claims. Journal of Labor and
Economics, 26: 326-334.
Hart, Oliver D. “The Market Mechanism as an
Incentive Scheme.” The Bell Journal of
Economics 14.2 (1983): 366-382.
Hill, C.W.L. and Phan, P. ( 1991). “CEO Tenure
As a Determinant of CEO Pay”. Academy of
Management Journal, Vol. 34 No. 3, pp. 707–717.
Ittner, C., Lambert, R. & Larker, D. (2003) “The
structure and performance consequences of equity
grants to employees of new economy
companies,”Journal of Accounting and
Economics, 34: 89–127.
Karuna, Christo. “Industry Product Market
Competition and Managerial Incentives.” The
Journal of Accounting and Economics 43. 2-3
(2007): 275-297.
Leonard J. (1990). ”Executive Pay and Firm
Performance”. Industrial and Labor Relations
Review, Vol. 43, pp. 13-29.
Murphy, K.J. (2003) “Stock-based pay in new
economy companies,” Journal of Accounting and
Economics, 34(1): 129–147.
Nalebuff, Barry J. and Joseph E. Stiglitz.
“Information, Competition, and Markets.” TheAmerican Economic Review 73. 2 (1983): 278-
Palia, D., 2001. The endogeniety of managerial
compensation in firm valueation: A solution. Rev.
Finance Stud., 14: 735-764.
Scharfstein, D. (1988), Product Market
Competition and Managerial Slack", Rand Journal
of Economics 19, 147-155.
Schmidt, K. (1997) Managerial incentives and
product market competition, Review of Economic
Studies, 64 pp. 191-213.
Stathopoulos, K., Espenlaub, S. & Walker, M.
(2004) “UK executive compensation practices:
New economy versus old economy,” Journal of
Management Accounting Research, 16(1): 57–92.
