The purpose of this study to understand whether there is a correlation between the operating performance of a firm and its CEO’s compensation. Various scholars and journalists studied and reported in this area over the years with mixed results. Popular notion among general public is that regardless of the performance of the company, CEO’s pay and perks either remain same or increase. Another accusation is most of the mergers and acquisitions taken place to boost the pay of CEO’s rather than to increase the value of shareholder. Study will look in to the validity of these claims to determine whether there is a correlation between the firm performances and the CEO pay

1. A Study to Investigate Operating Performances of Firms and CEO Compensation 1
Study to Investigate the Correlation between the Operating Performances of Firms and CEO
Compensation
Charm Rammandala
California Intercontinental University

2. A Study to Investigate Operating Performances of Firms and CEO Compensation 2
Abstract
The purpose of this study to understand whether there is a correlation between the operating
performance of a firm and its CEO’s compensation. Various scholars and journalists studied and
reported in this area over the years with mixed results. Popular notion among general public is
that regardless of the performance of the company, CEO’s pay and perks either remain same or
increase. Another accusation is most of the mergers and acquisitions taken place to boost the pay
of CEO’s rather than to increase the value of shareholder. Study will look in to the validity of
these claims to determine whether there is a correlation between the firm performances and the
CEO pay

3. A Study to Investigate Operating Performances of Firms and CEO Compensation 3
A Detailed Study to Investigate the Correlation between the Operating Performances of Firms
and CEO Compensation
Over the years there were number of scholars, researches and journalists looked in to how
the management and the executives are paid for the managing and steering the firm. Since 2007
this topic has become a mainstream discussion point as many reputed companies collapse and
millions of people lost their pension funds and savings yet executives still received huge sums of
money as bonuses. This prompt the debate that CEO’s and other executives are disproportionally
compensated regardless of the performance of the firm (Sarkar 2014)
Theoretical Framework
In order to discuss all variables related firm performance and CEO pay, following theoretical
framework was designed.
According to Robert Danes (2014) the average CEO of Standard & Poor 500 firm received
$2.7 million per annum as the compensation package in 2002. Just over a decade this amount has
increased by 400% to reach $14 million per annum in 2012. Compared to a blue collar
employee’s salary of same firm, this is 300 times higher. Interestingly these companies were
under performing by 10% compared to similar companies in the sector (Jenter 2011). These
factors attributes to the deep distrust among the commentators. Graph 1 demonstrate the salary

4. A Study to Investigate Operating Performances of Firms and CEO Compensation 4
increase over the last 20 years. However, it doesn’t highlight the money value depreciation over
the same period.
Graph 1 (Economic Policy Institute)
In order to understand the larger picture, it is important to look at the historical factors and
how the CEO’s were compensated in the past. In 1934 to 1938 period average salary of a CEO of
a company in New York Stock Exchange was US$12 million (inflation adjusted). For the period
of 2010 to 2015 average compensation of similar company was US$12.5 million. More
importantly 50 years’ ago large portion of the compensation were paid in cash and present day
bigger share of the compensation is paid through stock options. This reflect the popular notion of
CEO’s are paid disproportionately somewhat inaccurate as they were always being paid higher
than the average employee (Bliss 2013)

5. A Study to Investigate Operating Performances of Firms and CEO Compensation 5
Graph 2 (Institute for governance of private & public organizations)
Firm characteristics related to CEO pay
When discussing CEO pay and performance, it is important to determine the criteria which
looked at to validate and verify the results. Firm characterization will help to group similar
companies together and draw a clearer picture (Avery 2015). Some of the firm characters’ need
to look at are given below
 Firm risk
 Firm size
 Ownership structure
Firm risk looks at the whether there is any correlation between a CEO pay and the firm risk.
The higher the risk, the compensation is higher. It is noted that many researches did not find any
evidence to suggest firm risk has increased the compensation package or prospective payment
system of a CEO (Bliss 2013). However, others disagree and suggest risk has a positive
relationship on the pay (Sarkar 2014)

6. A Study to Investigate Operating Performances of Firms and CEO Compensation 6
Firm size is another factor to looked at when discussing CEO pay and the performance of
the firm. Many research supports the theory that form size has a positive influence on the higher
pay of the CEO (Avery 2015). This is one of the reason why more CEO’s prefer mergers and
acquisitions. Through the M&A firm size is increased and as a result value of the firm also rise.
This in return have a positive implication on the CEO compensation package (Jenter 2011).
Ownership structure is another aspect need to explore when discussing the CEO pay and the
firm performance. It is found that companies with larger outside shareholders are less inclined to
approve higher pay package for the CEO’s compared to the larger shareholders within the
organization and part of the operation. Outside shareholders takes closer look at the firm
performances and stricter approach to increased bonus and stock options (Sarkar 2014).
Types of CEO pay structures
When discussing CEO pay and the firm performance, it is important to look at the different
tools use to structure the pay. Some of the methods used as compensation tools are,
 Cash compensation
 Stock compensation
 Fringe benefits
Avery (2015) noted that cash compensation and firm performance have a positive
correlation. However, where CEO pay was a fixed salary & not directly linked to firm
performance, the performance of the organization was below average. This was explained as lack
of motivation from the CEO as no direct benefit to him over the results (Bliss 2013)

7. A Study to Investigate Operating Performances of Firms and CEO Compensation 7
Stock compensation helps to keep CEO’s motivated and encourage to grow the value of the
company. as this has a direct benefit to the CEO’s personally, it is a widely used in the
companies. Pay for performance is now a major share of the compensation package.
Graph 3 highlights how the performance have a positive impact on the CEO compensation.
Companies who showed positive improvements, CEO’s got a noticeable increase on their pay
and companies who did not perform well saw CEO pay reducing significantly (Sarkar 2014)
Graph 3 (Economic Policy Institute)
It is noted that apart from the areas discussed above, there are certain traits of CEO’s also
have an impact on the compensation package. Those are the demographic details such as age,
race, the number of years being on the position & education level (Wuebker 2012)
Summery
The study looked at the correlation between the form performance and the CEO
compensation. During the study it was found that there are number of variables to looked at in
order to determine the relationship between the two elements. Depending on the size of the firm

8. A Study to Investigate Operating Performances of Firms and CEO Compensation 8
and the amount of risk, increase the compensation package of the CEO. Further, CEO
demographic as well as the experience and education have an impact on the pay. However, major
finding was the contrary to popular notion that regardless of the firm performance, CEO pay is
higher was not accurate. Evidence suggest that firm performance has a direct correlation to CEO
compensation.

9. A Study to Investigate Operating Performances of Firms and CEO Compensation 9
References
Avery, C (2015). Why do Managers undertake Acquisitions: An Analysis of Internal & External
Rewards? Journal of Management. Retrieved from gala virtual reference library http:/gale.
Galegroup.com (09/14/2016)
Bliss, R (2013). CEO Compensation and Bank Mergers. Journal of Banking & Finance.
Retrieved from gala virtual reference library http:/gale. Galegroup.com (09/13/2016)
Sarkar, J (2014). Relationship between executive pay and firm performance. Journal of Business
Management. Retrieved from gala virtual reference library http:/gale. Galegroup.com
(09/12/2016)
Wuebker, J (2012). What’s Driving Acquisitions? An investigation in to CEO compensation.
Journal of Management. Retrieved from gala virtual reference library http:/gale. Galegroup.com
(09/14/2016)
Jenter, D (2011). CEO preferences and Acquisitions. Journal of International Management.
Retrieved from gala virtual reference library http:/gale. Galegroup.com (09/13/2016)