Apa style dissertation pay for performance sensitivity on executive equity ownership, across studies between us and japan

Pay-for Performance Sensitivity on Executive Equity Ownership

PAY-FOR PERFORMANCE SENSITIVITY ON EXECUTIVE EQUITY OWNERSHIP:

ACROSS STUDIES BETWEEN U.S. & JAPAN

Name:

Grade Course:

Tutor’s Name:

(22nd, February, 2011)

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.


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


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.


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


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.


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


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


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%


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


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


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.


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.


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.


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


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


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


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


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


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,


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


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


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).


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).


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


Fig.2

Fig 3


Fig. 4

Fig. 5


Fig. 6

Fig. 7


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.


Fig. 8


Fig. 9

Fig. 10

Fig. 11


Fig. 12

Fig. 13


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


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


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.


Table 2. CEO’s personal interest and other interest exceeding and below 35% of total equity and % changes in stock prices.


% 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


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


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


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.


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


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


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


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


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.


References

Anderson, R. & Bizjak, M. (2003). An empirical examination of the role of the CEO and the

compensation committee in structuring executive pay. Journal of Banking and Finance.

27, 1318-1348.

Baek, H. Y. & Pagán, J. A. (2006). Pay-Performance Sensitivity and High Performing Firms.

International Research Journal of Finance and Economics, Iss.5, p.78 -94. Retrieved

March 5, 2011, from http://www.eurojournals.com/IRJFE%206%20baek%205.pdf

Bebchuk, L. A. & Fried, J. (2006). Pay without performance: Overview of the issues. Academy

of Management. 1, 1-21.

Boyd, B. (1994). Board control and CEO compensation. Strategic Management Journal. 15,

336-344.

Chen, Q. & Jiang, W. (2006). Career Concerns and the Optimal Pay-for-Performance Sensitivity.

Online Journal. Retrieved March 5, 2011, from

http://faculty.fuqua.duke.edu/~qc2/bio/Research/career.pdf

Cheng, S. & Firth, M. (2005). Ownership, Corporate Governance And Top Management Pay In

Hong Kong. Corporate Governance: An International Review, 13(2): 291-302.

Cheung, Y. L. & Wong, A. W. ( 2005). Ownership concentration and executive compensation in

closely held firms: Evidence from Hong Kong. Journal of Empirical Finance. 12,

502-532.

Conyon, J. (2006). Executive compensation and incentives. Academy of Management

Perspectives. February, 25-45.


Conyon, M. (1997). Corporate governance and executive compensation. International Journal

of Industrial Organisation. 15, 483-504.

Conyon, M. J. & He, L. (2004). Compensation committee and CEO compensation incentives in

U.S. entrepreneurial firms. Journal of Management Accounting Research. 16, 37-50.

Conyon, M. J. & Peck, S. I. (1998). Board control, remuneration committees and top

management compensation. Academy of Management Journal. 41, 136-150.

Conyon, M. J. and He, L. (2004). Compensation committee and CEO compensation incentives in

U.S. entrepreneurial firms. Journal of Management Accounting Research. 16, 35-56.

Cordeiro, J.J. & Veliyath, R. (2003). Beyond pay for performance: A panel study of the

determinants of CEO compensation. American Business Review, 21, 55-67.

Jensen, & Murphy, (1990). Performance Pay and Top Management Incentives. Journal of

Political Economy, vol.98 2. Retrieved March 5, 2011, from

http://www.financeprofessor.com/summaries/JensenandMurphy1990.htm

Larcker, D., Miller, J. I. & Tayan, B. (2010).Sensitivity of CEO Wealth to Stock Price: A New

Tool for Assessing Pay for Performance. Stanford Business Magazine. Retrieved March

5, 2011, from http://www.stanford.edu/group/knowledgebase/cgi-

bin/2010/09/17/sensitivity-of-ceo-wealth-to-stock-price-a-new-tool-for-assessing-pay-

for-performance/

Mann, P. (1995) Introductory Statistics. (2nd Ed). New Jersey: Wiley.


Ozkan, N. (2007).CEO Pay-for-Performance Sensitivity and Corporate Governance: An

Empirical Investigation of UK Panel Data. JEL, Retrieved March 5, 2011, from

http://www.fma.org/Orlando/Papers/Neslihan.pdf

Palmon, O. & Wald, J.K. (2006). CEO compensation, director compensation and firm

performance: Evidence of cronyism. Journal of Corporate Finance. 12(3), 413-423.

Perry, T. & Zenner, M. (2001). Pay for performance? Government regulation and the structure of

compensation contracts. Journal of Financial Economics. Vol.62 (3), p.453-488

Zhou, X. (2000). CEO Pay, Firm Size, and Corporate Performance: Evidence from Canada.

Canadian Journal of Economics. 33(1), 213-251.

Apa style dissertation pay for performance sensitivity on executive equity ownership, across studies between us and japan

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (18)

Similar a Apa style dissertation pay for performance sensitivity on executive equity ownership, across studies between us and japan

Similar a Apa style dissertation pay for performance sensitivity on executive equity ownership, across studies between us and japan (20)

Más de CustomEssayOrder

Más de CustomEssayOrder (20)

Último

Último (20)

Apa style dissertation pay for performance sensitivity on executive equity ownership, across studies between us and japan