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Apa style dissertation pay for performance sensitivity on executive equity ownership, across studies between us and japan
Pay-for Performance Sensitivity on Executive Equity OwnershipPAY-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 andcorporate performance, similarly, it was of interest to establish sensitivity of the same whenequity ownership went beyond 35%. Companies from U.S and Japan were sampled; out of 50from each country only 29 and 21 in that order were suitable for analysis. The findings were thatCEO’s equity ownership was negatively related with company performance for U.S but positivefor Hong Kong companies. On the same note, the sensitivity between CEO’s equity exceeding35% and market prices was stronger as compared to low level CEO’s equity ownership. Thefindings 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 3Pay-for Performance Sensitivity on Executive Equity Ownership: Introduction The strongest pay-performance sensitivity has been seen as the main metric in thealignment of the divergent incentives of both the shareholders as well as the executives. Onthe other hand, a more skeptical view looks at compensation contract as a perverse greedinstrument other than a shareholder friendly incentive technique. One form of managerialopportunism, or private positives of control, is at the moment when the CEO and the topmanagement awards themselves stupendous pay-without performance to the detriment of thestakeholders. The ample empirical evidence has suggested that the compensation of the executive ismainly insensitive to the performance of the firm. “This low pay-for-performance sensitivityraises concern that executives’ pay arrangements do not provide sufficient incentives todeliver performance,” (Conyon, & He, 2004). On the other hand, they may also create agencycosts in the excess pay form. There have been many researches which have taken place in thename of unrevealing the ways in which the links for pay-for-performance can bestrengthened, to ensure that a promise of executive as a mechanism of aligning the interests ofstakeholders as well as executive is fulfilled. Most research on executive compensations has been conducted in the past enough forgeneral reviews but those on corporate governance like stock based compensation, optioncompensation as well as the equity incentives on the managerial level have remainedcontroversial and have yielded contradictory results especially by being controversial to theinstitutional activists, shareholders and to the government regulators. Therefore mostfundamental question like effects of possessing share capital; on the corporate performance
Pay-for Performance Sensitivity on Executive Equity Ownership 4among other have remained elusive in finding a straightforward solution. Studies have beenconducted on the influence of remuneration committee adoption in U.S and Hon Kongcompanies, and have concluded that, there are no significant impacts on the pay forperformance sensitivity. It has been shown that, the sensitivity of CEO compensation toaccounting performance is connected to governance quality of remuneration committee. In addition, ownership structure also plays some vital roles in the relation of pay toperformance. Studies have concluded that, CEOs pay to performance responsiveness is muchgreat in owner-controlled firms as compared to management controlled firm in the UnitedStates manufacturing sector. It has been concluded that, it is the size not the performance hasbeen the predictor of the CEO pay in management controlled organization, whileperformance-related pay is much prevalent in owner-controlled organizations. Other evidenceon the significance of ownership structure in the pay-for-performance linkage for nations, ontheir side, studies have shown that in Hong Kong, the pay for performance connection ismuch weaker or insignificance in listed companies that are owned by state bureaucracy. It has been suggested that the interrelationship found between executive compensationand the corporate governance technique has remained fruitful research area in the wholeworld. It has been said that, country level institution need to be factored in when analyzing theexecutive pay. It has been shown that, when focusing on different views that exist forexecutive compensation alternatives concerning the observed arraignments of contracts as itaffects the organizations and their executives. It is much true that, most corporate executiveofficers have alternatives with which they are in a position of manipulating issues in financialstatements, in trying to boost their corporate performance much better in a given period oftime.
Pay-for Performance Sensitivity on Executive Equity Ownership 5 Across studies between U.S. & Japan Corporate performance is considered by many academicians to be a set of complimentarymechanisms that are utilized to align both the choices and the actions that managers make withthe 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 boardof 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 thestructure of governance which is the compensation contracts that are selected for provision ofthe remuneration to its managers for instance the choice made on performance measures or onthe levels of remuneration. Most research on executive compensations has been conducted in the past enough forgeneral reviews but those on corporate governance like stock based compensation, optioncompensation as well as the equity incentives on the managerial level have remainedcontroversial and have yielded contradictory results especially by being controversial to theinstitutional activists, shareholders and to the government regulators. Therefore mostfundamental question like effects of possessing share capital; on the corporate performanceamong other have remained elusive in finding a straightforward solution. In the context of corporate governance especially when focusing on executivecompensations alternatives views exist regarding efficiencies of the observed arraignments ofcontracts as it concerns to firms and their executives therefore as it regards to this dissertationthe traditional framework and agency theory is utilized and it hence defines an efficient contractas one that is able to maximize net expected economic value to the shareholders after other
Pay-for Performance Sensitivity on Executive Equity Ownership 6transaction costs for instance the contracting costs as well as the payments made to employeesthus the contracts can be summed that as those that minimize agency costs. Such costs cantherefore be found to be efficient in certain periods and within specific sectors of economy as afunctions of diverse cost f transactions therefore contracts described as efficient in Japan adecade ago can as well b described as inefficient in modern times and the varying definitions canbe attributed to decline in informational costs or even to evolution of contracting arrangements asa result of changed technological contracting environments in the organization (Cheung, &Wong, 2005). Most corporate executives officers have the option of manipulating several items in atypical financial statement to try and boost their efforts in making their corporate performancesbetter in a specific or a given fiscal periods. Most executives are often getting compensationswith incentive contracts that feature relationships that are non-linear in nature between the payand the revenues generated. Agency and other related theories have in the past proffer usefullyespecially as theoretical frameworks for conduction of an examination of relationships that existbetween principals as well as their agents in diverse disciplines. The agency theories focus ondetermining the most efficient contracts that can be used to govern particular relationships thatare given certain parties involved considering the environmental uncertainties. And costsincurred in obtaining information required for the study. Many theories have arisen in an effortof explaining the prevalence of these non linear contracts but none has been completelysatisfactory. In studying the effects of possessing share capital has on the corporate performanceof the pooled regression model can be utilized to critically discuss the effects of CEO ownershipand the corporate governance on the CEO compensation.
Pay-for Performance Sensitivity on Executive Equity Ownership 7 When it comes to the background of the institution the equity incentives as well as thestock-based compensation features forms take a very important level when it comes to thecontracting environments between the executives and the shareholders which are represented bythe board of directors. According to Liebman & Hall(1998) from the samples derived fromUnited Sates firms deduced that the CEO stock as well as the option ownership constituted theoverall sensitivity of the CEO stock based and the vast majority of sensitivity and the changes inthe stock prices. In addition to that they also found out that median values that standard and poorindustrial CEOs were 30 million and fifty five million dollars respectively and that such valuesand sensitivities were larger relative tot the annual flow pay. In modern times executive remuneration has gained prominence as one of the topic incontemporary corporate governance with the mainstream point of view acquiring on the principalagent framework that a compensation contract that is well designed is very critical in helping toincentive executives hence enhancing the value of the shareholder. Generally a strong pay forperformance is often viewed as a key metric when it comes to alignment of the divergentincentives 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 aperverse instrument that fosters greed rather than a mechanism that is shareholder friendly andthis is evident by the managerial opportunism or equally same the benefits that are derived fromprivate control that are seen when the CEOs and other top management awards themselvesstupendous pays that are done without performance to the detriment of the corporateshareholders. This idea of the board of directors to set compensations that deviate from the armslength of contracting results to the negative coverage of the grossly overpaid members f staff
Pay-for Performance Sensitivity on Executive Equity Ownership 8constituting 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 mostincentive compensations made are largely insensitive to the firms performance and that thesensitivity of the low performance raises a concern that most of such executive pay arrangementsdo not in most case serve well in providing sufficient incentives in delivering performance andfail to create agency’s costs that are inform of excess pays. as a result of the decoupling of thepay performance various studies have been undertaken in attempting to unravel the ways inwhich the links of pay for performance can be strengthened to foster fulfillment of the executivecompensations to be used as a mechanism of aligning the interests of both the shareholders andthe executives in the cooperate world. In 1997 Conyon examined the influences that adoption ofremuneration by companies and he deduced that in some circumstances ,its adoption serve tolower the growth rates especially in the top director compensation and as also that in theremuneration committee decisions, the outside directors enhances the pay for performancesensitivity. More studies conducted in the United States in (2003) by Anderson, Bizjak andVafeas reported that there were no significant results when it comes to the influences of theremuneration committee independences on the levels of CEO pays. In amore recent studyconducted by Cahan &Sun (2009) on United States companies with full independent committeesshowed that sensitivity of CEO compensation to accounting is also is relates to the governancequality of its remuneration committees. The study focuses on a broader and richer measure of theremuneration committees rather than solely having a focus on independence. In 2009 Mei-Lun studies with respect to the various variables of board of directors cameup with results that were consistent with those of Core et al (1999). He found out that CEO
Pay-for Performance Sensitivity on Executive Equity Ownership 9compensations were higher when the CEO was also the board chair, a director and the boardswere also larger. In addition to that he also found out that the CEO compensations was adecreasing function of the ownership of the director as well the existence of block holder who isa owner of at least ten percent of the equity therefore the suggestion that CEOs who are fromfirms characterized with weaker structures of governance often have greater compensations. Conyon (2006) challenged researchers in this field to lay an emphasis in distinguishingbetween the two competing theories used in executive compensation namely the managerialpower and the principal agent or optimal contracting which hold the idea that well designedincentive contracts help to align the managers and the shareholders interests while on the otherhand Bebchuk (2003) hold that the promise of the managerial contract yielding a partial solutionto the problem presented by the agency theory still remains void. In addition to that they alsoargue that the executive compensation does nothing less that exuberating on the problem of theagency through promotion of rent-extracting especially on the part of the executives, thus tothem powerful CEOs have a greater sway regarding their own pay through their advantages ofcapturing the board leading to the rent extraction in the form of increased CEO pay or evenpayments s without performance to the detriments of the shareholders. Based on the results from the study by Mei-Lun & Chung (2003-2005), its evident thatcompanies whose rewards systems are related to performances often ‘do what they say’ whilethose companies characterized with strong remuneration committees seem to design theirpackages for executive pay such that it rewards their executives for the act of creating ashareholder value. Therefore its appears that the investors of such institutions are closelyassociated with a higher pay-for performance relationships and that the performancerelationships appears to weaken especially when the managerial ownership goes beyond 35%
Pay-for Performance Sensitivity on Executive Equity Ownership 10and this is most probably attributed tot the dark side that is associated with the managerialpower. Therefore the situation where managerial power is most destructive is when thecompanies involved have very high levels of managerial ownership while at same time fail tosubscribe to the performance related pay schemes thus resulting to high likelihood of rentextraction by the company executives in form of making of excessive payments (Conyon, 2006). By exploiting the an enhanced disclosures especially on the activities regarding directorspay and the remuneration of committees it doesn’t matter whether a company is observing theprinciple of cooperative governance through the linking of its executive pay to the payperformance or not ,it highly expected that such companies are to be subjected tot the effects thatresult from the dark side of the managerial power especially when considering that suchcompanies have not subscribed to the performance related pay schemes. The scenario isparticular for the companies that are a higher level of managerial ownership and that their levelof 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 (boardcharacteristics and ownership structures) form important mechanisms of corporate governanceespecially when it comes to the roles they play in aligning the interests of the executives and theshareholders. The theory presumes that considering the authority bestowed upon the board ofdirectors by the shareholders into looking into the matters of executive remuneration they aretherefore able to greatly affect on the exercise of executive enumeration of the organization. Thisis of particular concern as according to Jensen& Murphy (2004), the board of directors can exertits effects especially through its enumeration committee which is involved in the role ofdesigning the executive’s desirable enumeration package in accordance with the governing
Pay-for Performance Sensitivity on Executive Equity Ownership 11objectives 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 relateand thus bad governance may easily result to value-destroying practices of payment. Thereforeleading to their recommendations of curbing the problem especially as regards to the roles aswell 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 theremuneration process, practices and the policies. Also the remuneration committee should becapable of employing their own contract agents when it comes to the process of hiring of newtop level mangers an finally they should be in a position to giving careful considerations whenissuing the stock options with exercise prices especially those that increase with the cost ofcapital of the company. Studies have revealed that in order to ensure that remuneration committee is effective intheir delivering their duties it should be independent especially from the influence thatexecutives 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 compensationcommittee that constitute of two or more directors which Bebchuk & Fried (2003) cautions thatare in most cases proposed and nominated by the influential executive directors into the boardsthus the legitimacy of being described as a truly independent executive committee. Some of thechallenges that limits the attainment of a truly independent remuneration committee include: thefact that the non executive directors often need good relationships with the executive directors ifto deliver in their duties, they also must rely on the executives regarding information theyreceive, the process of their nomination by the CEO and finally the fact that most non executives
Pay-for Performance Sensitivity on Executive Equity Ownership 12often share background with the CEOs as some of the are even CEOs in other companies thusthe challenge in separating the two hence the idea of true independency of the non executivesremains to be a open question to debate. One of the famous scholars in the same issue Vaefas (2003) also examined on thepossible relations that exist between the remuneration committee and insider membership in theremuneration committee and came up with the results that their exist a steady decline when itcome to the number of remuneration comities with the opportunistic behaviors in the setting ofthe pay as well as the insider participation (Palmon, & Wald, 2006). Generally study findingsreveal that a committee that consist of insiders or even CEO often don’t award excessiveremuneration nor lower overall incentives and finally that there is no evidence that totalincentives increase or pay decrease when the CEOs are removed from the remunerationcommittee. Finally mixed evidence derived from past research and studies clearly indicates that anassociation exists between the pay performance and the ownership structure thus the increasingspeculation that both variable play a crucial relevance when it comes to the managerial powerand the principal agent CEO compensation views, the us the challenge for current and futurestudied is to disentangle the two variables and yield result of differentiating the effects of the twoin the corporate performance . 2.5 Pay-For Performance Sensitivity The performance of a firm has been mainly linked to the effectiveness and efficiency ofthe C.E.O. The actions of the executive will determine much of the direction the company is totake; in view of the fact that the policies developed will impact on the profitability of the firm.
Pay-for Performance Sensitivity on Executive Equity Ownership 13According to Jensen and Murphy (1990) in the article “Performance Pay and Top ManagementIncentives” there is an average change of CEO wealth by $3.25 per $1000 of the shareholdervalue. This translates to $8.05 for the small firms and as much as $1.85 for large firms. Much ofthe stakes described above is mainly owned through stocks. In the article managerial ownershipcontinues 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 affectsthe shareholders returns since the compensation may be very large. This means that it will alsoaffect the profits the company is to get. This issue therefore becomes a sensitive issue in thatanything that affects the profits in a significant manner will cause alarm. The changes of theCEO pay with respect to the shareholders value or a return is the source of sensitivity since lesspay for the CEO may increase the shareholder value. This may be a positive impact on theshareholders return but may result to poor performance of the firm in the future. This is due tothe fact that the CEO may not be properly motivated to implement the best policies. In additionhe or she may be intimidated since they are not recognized by the shareholders. They may alsoopt to move if the payments are not in line with his or her requirements and experience in thecompany. Jensen and Murphy (1990) finds out that in every $1000 increase of the shareholder valuethe 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 stockownership of $2.50 then the total rises to $3.25. In the study 2,213 CEOs were involved thatheaded 1295 companies from 1974 – 1986 that were in the Forbes list. The salary and bonusesare calculated as the present value of the change that is related to the enhanced performance. Forthis reason the CEO will be subject to receiving the high pay till he retires at a very late age.
Pay-for Performance Sensitivity on Executive Equity Ownership 14Also pay performance sensitivity in the payment for CEOs dismissals presume that the CEO willhave no other potential job. In this presumption may be incorrect and thus cause the firm to payhigher pay to young executives in view of the fact that they will not find work for a longer periodthan the older executives. This however is not the case since CEOs are rarely dismissed whenthey are appointed because the management believes that they will need time to perform even ifthe firm is making losses. This is the same case when the make profits and the shareholders wantto retain the executives to continue enjoying the profits and dividends that are brought by thepolicies of the CEO. According to Jensen and Murphy (1990) the percentage ownership for the small firmswas higher; while the investment is greater in large firms. This means that small firms havehigher pay performance sensitivity in view of the fact that there are more options and moreownership which was measured at $8.05 in every $1000. On the contrary, large companies havelower pay performance sensitivity due to closer alignment of interests among the shareholdersand CEO. The low pay sensitivity is explained as maybe that CEO is not very important in thefirm or they are easily monitored at all times. In addition, there may be political influences in thecontracting of the CEO which may cause the low pay. There will always be a conflict of interest among the CEO and the shareholders since theshareholders want an increase of share value while the CEO wants the maximum salary andbonuses and therefore this will always be an agent of the problem. In this regard, when theshareholders are properly informed they will be able to design a contract that will specify andenforce the managerial plans to be carried out by everyone. The plans on the other hand will notalways be welcomed by the CEO and this may include the pay given. However, this will be abasis for negotiations that will reduce the conflicts and ensure a memorandum of understanding.
Pay-for Performance Sensitivity on Executive Equity Ownership 15 Baek & Pagán (2006) in the article ‘Pay-Performance Sensitivity and High PerformingFirms’ give the benefits that are associated with a performance based compensation to CEO. Inthe study the relationship involving pay performance sensitivity and firm performance areexplored especially on the higher performing managers. In the study the author hypothesize theneed to have a higher pay for the managers so as to improve performance of a firm. The authorsare quick to point the mixed results that have been reflected in previous studies done on theimpacts of equity based compensation strategies on the performance of the firm. In the mixed results the equity based compensation relation to performance is seen tohave been caused by deficiency in positive relations. The authors quote “When CEOs of publicU.S. firms possess a larger set of firm-specific information than outside shareholders; a potentialselection bias could arise. CEOs with private information on good prospects of their own firmswould be more likely to accumulate shares and/or influence compensation committees toincrease equity-based compensation” (Baek, & Pagán, 2006 p.88). The study indicates that theCEOs from higher performing firms may accumulate more shares of the company than the firmsthat are performing ones. This means that the firms that have the CEO with a larger equity willbe able to perform better that where the CEO has fewer stakes. This can be as a result of trying toprotect what is his stake in the company and thus better management. In addition, when he isbetter paid then the performance is likely to increase since the managers see it as a good sourceof equity to them. According to Perry, & Zennerb, 2001 in the article “Pay for performance? Governmentregulation and the structure of compensation contracts” they find out the sensitivity of the CEOsequity is affected by the changes in the shareholders wealth. This is deduced after data from1993 – 1996 in companies that have approximately a million dollar compensation plan. in
Pay-for Performance Sensitivity on Executive Equity Ownership 16addition, the pay performance sensitivity is calculated by the total yearly compensation and theCEOs 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 NewTool 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 risktaking or it contributes to the performance of the firm. The debate ranges on and some argue thatthe compensation may be justified based on the annual targets that the executive is able toachieve each year. In addition, some firms are able to award bonuses of stock options orrestricted 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 performanceand hence must be able to perform to get the awards. On the contrary there are hefty paymentsthat are not linked to performance. For instance, Robert Nardelli was given a salary of $210million in 2007 but was later forced out by pressure from shareholder due inconsistentnonperformance of the Home Depot firm in his six year tenure (Larcker, et al. 2010). Anotherexample is Richard Fuld the CEO of Lehman Brothers and Angelo Mozilo the CEO ofCountrywide in 2008 who sold stocks worth $200 million and $500 awarded by the firms theywere CEOs after collapse Angelo Mozilo (CEO of Countrywide). These are few cases thatreflect pay performance sensitivity and performance of the CEOs. To be able to elaborate pay performance for the executives there is no need to look atannual payments. This is because it may involve payouts of compensation that are accrued inyears and also it is not structured in terms of the shareholders value that has been created duringthe tenure of the CEO. It is therefore good to scrutinize the CEO wealth i.e. the equity ownership
Pay-for Performance Sensitivity on Executive Equity Ownership 17and the performance of the firm in the stock markets. This can be done through the “measure thedollar change in CEO wealth over small percentage changes in the stock price. Based on asample of 4,000 publicly traded U.S. companies, the average (median) CEO stands to gainroughly $58,000 in wealth for every 1 percent increase in stock price. Among the largest 100companies, this figure approaches $640,000” (Larcker, et al. 2010). Another method that can be used would be to judge the executive wealth change over thestock price change. To assist in this method then one may “plot the percentage change in theexpected value of the CEO’s equity portfolio against percentage changes in stock price rangingfrom -100% to 100%” (Larcker, et al. 2010). The 0 percent mark will be the price that they CEOfind 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 willhelp in establishing the risks involved and the rewards involved. The prominent note to take isthe convexity of the payout curve which might either be high or low. Low convexity means thatthe 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 shareholderswealth with respect to the CEO’s wealth. The payout curves that are at the high convexitypossibly 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 CorporateGovernance” finds that the ownership of firms is positively connected to the pay performancesensitivity of the compensation of the CEO; in addition, it is negatively related to the CEO levelof compensation which is not affected by firm size, industry, corporate governancecharacteristics performance and investment opportunities. Whats more, is that many non
Pay-for Performance Sensitivity on Executive Equity Ownership 18executive 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 performancesensitivity of option grants; which is a view of the entrenchment of the executives. Theshareholders on the other hand have a larger say in the tenure of the executives since they havethe right to vote them out or retain them if they perform as expected. In this case any CEO thatdoes not perform will have a sensitive pay performance since they may be censured by theshareholders if they don’t increase their wealth. For the managers they are faced with a challenging situation which they must performfailure to which their career is largely dented (Chen, & Jiang, 2006). This is a major reason whythey make certain decisions some of which may be risky. They also have to fulfill thecompensation contract with the shareholders which will ensure they have optimal pay forperformance. One may conclude that where the wealth is the heart is and so with the CEO havingequity and stake in the company they are managing will have a greater impact on theresponsibilities of the manager. However, this may prevent him or her making increasing riskydecisions that may at times bring positive revolutionary change. The pay should also be veryattractive so that the best talent may be attracted to manage the firm especially when the firm isbeing 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
Pay-for Performance Sensitivity on Executive Equity Ownership 19that, the disclosures as it is much needed under the MCCG are much effective for annualreports after June 2001. By 2006 January, approximately over 1,000firms had been listed onthe 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 PN17companies. The process of excluding MESDEQ companies, is based on the fact that, theirissued as well as paid-up capital are considered as being much small, as compared to thecompanies on the second and the main board. Basing on their adverse financial conditions, thelist of eliminated companies included both PN4 as well as PN17. Out of the remaining 876 organizations or companies, there was a further eliminationof 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 twoconsecutive years. That is in 2004 along with 2005. On top of all stated reasons, there werealso some difficulties in the assessment of their annual reports online. Last but not least, thecompanies annual reports found on the net had some sort of anomalous data. The remaining476 sample companies, undergoes some sort of further elimination. This type of elimination isbased 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 ofdirectors ‘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 wereselected as samples in this study. This means that, in this study, around 100 companies arebeing used as a sampling frame. Due to the intensive, as well as time consuming nature ofhand collecting the executive remuneration as well as the corporate data used in governance, a
Pay-for Performance Sensitivity on Executive Equity Ownership 20total of 200 companies were chosen out of the 350 companies in the previous selection. Sincethere were no enough or adequate from the DataStream, or the conflicting data betweenDataStream and the available annual reports, the financial sample was again reduced to a totalof 100 companies, (Cheng, & Firth, 2005). The information that was extracted from the annual reports on the remunerationcommittee traits are just based on the standards, as well as poor’s Governance DisclosureScorecard 2004, (SPGDS), which gives the reflections of the global best practices of what isreferred 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 ofissues is not found from the statement of corporate governance disclosed in the annual reportsof Malaysian group of companies. Qualitative Research Methods This method has a very special value for the investigation of complex and issues thatare sensitive. It usually excels in the generation of detailed information. It also involves thecollection of numerical data. However in the detailed research, data themselves both shapedand this might limit the analysis. Documentary research This involves the use of texts, documents and internets as sources of data. This wasused due to its reliability as a source of evidence in the research. This was used in support ofviewpoint or argument. The process of documentary research involved some conceptualizing,
Pay-for Performance Sensitivity on Executive Equity Ownership 21assessing and using documents. The document analysis in documentary research wascombined qualitative quantitative analysis. (Prior, 2003) Validity of the Research Validity of the research ‘is concerned with the idea that the research design fullyaddresses the research questions and objectives’ that the researcher is trying to answer andachieve (White, B., 2000:25). As the literature review section revealed, the pay-forperformance sensitivity on executive equity ownership: across studies between U.S. & Japanwere all focused in the research. The internal validity of the sample was improved, as theselection procedure followed the appropriate sample selection criteria. Reliability of the ResearchWhite, B. (2000:25) suggests that ‘reliability is about consistency and research, and whetheranother researcher could use your design and obtain similar findings’, though theinterpretation 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 ofcompanies, and settled at a reasonable number, means that, the survey was from differentwalks of life within the researched demographic region, the U.S. and Japan, the results couldbe generalized to the U.S. and Japan pay-for performance sensitivity on executive equityownership companies. In the same manner the in formation search was too wide, it can besaid that, the analysis and results represents the United States as well as Japan Company’sPay-for Performance Sensitivity on Executive Equity Ownership. This study can bereproduced under a similar methodology with no difficulty and hence it is considered reliable. Modeling Pay-For-Performance
Pay-for Performance Sensitivity on Executive Equity Ownership 22 According to (Murphy 1999), pay for performance son the independent elasticity ismeasured by the regressing the dependent variable. Concerning the independent variables“log of (1 + contemporaneous return) and log (1 + lagged return).” (Zhou, 2000). With this inmind, 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 thedividend data are taken from the DataStream. In the process of testing Companies that discloses that they reward executive directorson the basis firm or individual performances have stronger pay-for-performance relationship,hypothesis, the sample is first partitioned into two subdivisions depending on the corporategovernance 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 quantifieddata collected. its aim was to give a summary of a data set quantitatively hence avoidingprobabilistic formulation, other using the data in making the inferences about the populationthat 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 todescribe the executive pay, as well as the return on stock for the sample companies for 2004to 2007. Descriptive statistics has been used to provide simple summaries about the sample aswell as measures. In conjunction with simple graphic analysis, they have been used in makingthe foundation of quantitative data analysis. Descriptive statistics summarizes data, like for
Pay-for Performance Sensitivity on Executive Equity Ownership 23instance, the shooting percentages of every year. In the process of comparing performances ofthe U.S companies and the Hong Kong samples, the tables have been used in showing whichhas lower averages executive pay, though it ends up generating better market performances,( Mann, 1995).
Pay-for Performance Sensitivity on Executive Equity Ownership 24 Results and findings Out of 50 companies sought after from each country for inferences to be made; only 29for U.S and 17 for Hong Kong were fit to be incorporated. This resulted to a mean of market gapof USD 127.562m and USD 16,266m U.S and H.K respectively. The reasons for exclusion of therest of the companies included in availability of data that were to be included as variables, CEOnot working in the entire period of sampling as well as not having a CEO since someorganization were ETF trust fund. The five companies from Hong Kong whose CEO equity ownership and other interestexceeded 35% of total shares include Cheung Kong Holdings Limited, Li & Fung Limited, SubHung Kai Properties Limited, Wheelock and Company Limited and Henderson LandDevelopment Holdings Ltd. It is also established that there is no single U.S company that hadCEO equity ownership and other interest exceeding 35% in all those years from 2003-2007. Itwas 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 therelationship between CEO’s equity ownership and company performance. This was attainable byusing percentage changes in stock prices as well as percentage changes in CEO’s equityownership. Dependent variable was percentage change in stock pricing while percentage changein 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 tofind whether the level of CEO ownership will have an effect on the pay and firm performancerelation (refer to Table 7).
Pay-for Performance Sensitivity on Executive Equity Ownership 25 The analysis was done for each year running from 2003-2007. It was interesting to findout that in U.S companies, there was a positive relationship between percentage change ofCEO’s equity ownership and percentage change of stock prices in the year 2003. The sameapplied to year 2006. The values for this years are y=0.126x+0.1471, R2=0.0017 andy=0.1019x+0.1742, R2=0.0522. In the years 2004, 2005 and 2007 the relationship between thetwo variables were negative, (y=-0.0795x+0.0829, R2=0.037, y=-0.0079x+0.1795, R2=0.0457y=-1.0722xx+1.0964, R2=0.0049). Figures 1 to 7 in that order clearly depicts the regressionanalysis. It is worth mentioning that there was a negative although very weak relationshipbetween CEO’S equity ownership only excluding other interests and options and corporateperformances 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 findingsFig. 1
Pay-for Performance Sensitivity on Executive Equity Ownership 26Fig.2Fig 3
Pay-for Performance Sensitivity on Executive Equity Ownership 29 When considering the relationship between CEO’s equity ownership only excluding otherinterests and option for the 17 Hong Kong companies, in the year 2003-04, 2004-05, 2005-06 therelationship 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 therelationship 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, therelationship was negative and weak, y=-0.004x+3.3501, R2=0.0025, similar relationship wasfound 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, therewere some changes in the relationship exhibited. In 2003-04 and 2006-07, the relationship wasnegative and weak (y=-0.2005x+0.2985, R2=0.1098 and y=-0.1843x+0.5301, R2=0.0275 in thatorder). For years 2004-05, 2005-06 the relationship was positive (y=0.4818x+0.1702, R2=0.031and y=0.3327x+0.5405, R2=0.3413 respectively). It was interesting when analysis for years 2003through 2007 and 2004 through 2007 were done. The relationship between CEO’s equityownership 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 21companies from Hong Kong, the relationship between CEO’s equity ownership and companyperformance 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 asfollows; 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.
Pay-for Performance Sensitivity on Executive Equity Ownership 30Fig. 8
Pay-for Performance Sensitivity on Executive Equity Ownership 33 From the analysis to fulfill the need to meet objective one, it is evident that the pay formperformance from 2004 through 2007 for the U.S companies, 29 in number and 17 for HongKong, the relationship between the variables is negative (CEO’s equity ownership and corporateperformance). 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 positivealthough somewhat weak through the period 2004 to 2007. This finding is consistent with whatother 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, Ianalyzed the relation between companies listed in U.S. and H.K. using the % change in CEOwealth as a result of the change in stock price (Table 8). I further analyzed the H.K. companiesdata by dividing them into 2 groups by reference to their level of CEO ownership to find whetherthe level of CEO ownership will have an effect on the pay and firm performance relation (refer
Pay-for Performance Sensitivity on Executive Equity Ownership 34Table 8a).Table 1. % Change of CEOs Wealth, Other Interest and Options Arising from % Change of StockPrice^^ COLUMN 8.1 COLUMN 8.2 COLUMN 8.3 29 US Companies 17 HK Companies 21 HK Companies# 21 HK Companies# CEOs Weath Only (excl. CEOs Wealth Only (excl. CEOs Wealth and Other CEOs Wealth, Other Other Interest & Options) Other Interest & Options) Interest (i.e. excl. Options) Interest and OptionsYear 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 = 0.1931Year 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 = 0.2802Year 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 = 0.6571Year 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 = 0.0196Year 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 = 0.0891Year 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
Pay-for Performance Sensitivity on Executive Equity Ownership 35 From table 1, it is evident that there are some relationship either way between percentagechange of CEO’s wealth, other uinterests and options that arise from percentage change in stockprices. Thus, the results makes one to conclude that equity ownerships by CEO are insensitive tocompany’s stock performance Objective three The third objective of the study was to find out whether the performance relationshipsweaken when equity ownership by CEO goes beyond 35%. This was attained by carrying out aregression analysis of two major variables from five major Hong Kong companies that hadCEO’s owning slightly above 35% of equity. The variables studied and analyzed were CEO’spersonal interest and other interest exceeding 35% of total equity and percentage changes instock prices. As shown in table 2, for year 2003-04, 2006-07 and 2003 through 2007 therelationship 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 andyear 2004 through 2007, y=-24.671x+-0.0156, R2=0.6224, y=-3.6222x+0.192, R2=0.1661 andy=-5.5647x+0.8775, R2=0.2931 in that order.
Pay-for Performance Sensitivity on Executive Equity Ownership 36Table 2. CEO’s personal interest and other interest exceeding and below 35% of total equity and % changes in stock prices.
Pay-for Performance Sensitivity on Executive Equity Ownership 37% Change of CEOs Wealth, Other Interest and Options Arising from % Change of Stock Price^^ TABLE 8(HK Companies divided into 2 groups according to CEOs ownership of company shares) COLUMN 8a.1 COLUMN 8a.2 CEOs Personal CEOs Pesonal CEOs Personal CEOs Personal CEOs Personal CEOs 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 Compa2003-0 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 = 0.1262004-0 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 + 05 R² = 0.8113 R² = 0.062 R² = 1 R² = 0.0924 R² = 0.2802 R² = 0.2392005-0 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 + 06 R² = 0.9488 R² = 0.001 R² = 0.9999 R² = 0.423 R² = 0.6571 R² = 0.6202006-0 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 + 17 R² = 0.0605 R² = 0.0386 R² = 0.9999 R² = 0.0543 R² = 0.0196 R² = 0.0232003-0 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 + 37 R² = 0.02 R² = 0.006 R² = 0.8384 R² = 0.1135 R² = 0.0891 R² = 0.062Jul-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
Pay-for Performance Sensitivity on Executive Equity Ownership 38
Pay-for Performance Sensitivity on Executive Equity Ownership 39 From 2003 to 2007 there is positive relations are found regardless of the level of CEOequity ownership, which is not consistent with previous studies that there exists a negativerelation when CEOs level of equity is high and positive relation when CEOs level of equity islow. The sensitivity of relation for high level CEO equity ownership is stronger than for lowlevel CEO equity ownership. During 2004 – 2007, the relation for U.S. companies, as shown in Column 8.1, is positivewhereas the relation for H.K. companies, as shown in Column 8.2, is negative. It is puzzled thatthe 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 Column8.3 (which represents the CEO equity ownership, measured in term of direct and indirectinterests), 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 bythe level of ownership, one with the equity ownership of more than 35% and another, less than35% (see Column 8a.1 and 8a.2. The columns present the relation of the percentage change inCEO wealth as a result of the percentage change in stock price. It is evident that there is apositive relation, i.e. CEOs wealth increase as the stock price increases and in R2 in Column 8a.1is 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, ideasand 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 performexcellently even in the wake of uncertainty. With the introduction of managerial concepts it waslargely viewed that to ensure that the managers are in top shape and ready to go extra miles in
Pay-for Performance Sensitivity on Executive Equity Ownership 40making the organization which they are heading to perform better and meet the needs andaspiration of shareholders, there was need to motivate them. Initially, the introduction ofmanagers and CEO’s was thought to help the organization in question to successfully adoptbusiness decisions that would maximize shareholders value, however, it was also realized thatthere are chances that these managers and CEO’s bestowed with such responsibilities can engagein activities that are not on line with the company’s objective (Perry & Zenner, 2001). To counterthis and motivate them, pay system was introduced. The rationale behind this was that they willbe in better positions to protect their personal wealth by taking minimal risks, even at theexpense of shareholders (Wiseman & Gomez-Mejia, 1998). Additionally, this is also echoed from agency theory which holds that by givingexecutives 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 thecompany. Similarly, study by Holmstrom (1979) also advocated the use of firm stock priceperformance 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 thejustification 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 betterinformation 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 forthe U.S companies, 29 in number and 17 for Hong Kong, the relationship between the variablesis negative (CEO’s equity ownership and corporate performance). This finding is not consistentwith existing and previous research work especially United Staes of America based. The agency
Pay-for Performance Sensitivity on Executive Equity Ownership 41theory assumes that compensation has a universal incentive effect on executive’s behavior andperformance, and there is a perceived relationship between effort, performance and rewards.However, various researchers have argued that the vast empirical studies on compensation areconducted amongst US firms and hence are distinctive to the US origin and may reflect valuesand norms which vary from those of other societies. A classic study conducted by Hofstede (1983) questions whether American theoriesapply to other countries, this then confirms that even in U.S soils, the notion might not be true. Itwas explained that the agency theory, although diffused to other countries, has an Americanattribution which can be seen to be reflecting American views and thus may have limited validityand applicability in cultures. Additionally, the finding can be explained by the fact that whenCEO’s hold substantial amount of equity as well as other interest, they become less aggressive inadopting more risky venture that might propel the organization to greater heights. However, when the Hong Kong companies were raised to 21 for analysis, therelatrionship was positive although somewhat weak through the period 2004 to 2007. Thisfinding is consistent with what other researchers found out for instance Jensen and Murphy whosupported the view that CEO should own substantial amounts of company equity on the premisethat the most powerful link between shareholder wealth and executive wealth is the directownership of company shares by the CEO (Perry & Zenner, 2001). In situations where CEOs aresubstantial owners of a company and possesses a meaningful percentage of the total outstandingshares, it was explained that any changes in the market value of company equity would pose astrong and direct ‘feedback effect’ on CEO’s performance to deliver shareholder value which isseen in Hong Kong companies.
Pay-for Performance Sensitivity on Executive Equity Ownership 42 When considering the sensitivty for CEO equity ownership and to companies’ stockperformance, the study established that the sensitivity is stronger in the case where CEO equity isabove 35% as compared to their counterpart holding less than 35% of equity. With a clearunderstanding that pay-performance sensitivity is a measure of extend to which the performanceof an organization improves as the amount of executive pay increases, there is no doubt that thefinding 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 equityawards, either in the form of stock options or restricted stock (Larcker, Miller, & Tayan, 2011), asignificant portion of CEO’s compensation is directly tied to company share price. The agencytheory suggests that equity-based incentives motivate executives towards risk-taking behaviorand to invest in projects creates a positive effect on shareholder wealth since doing so will alsoincrease executive’s own wealth (Sanders, 2001). A highly sensitive pay-performance system would attract high quality risk takingexecutives to join the company. The pay for performance sensitivity is higher for CEOs who areprepared to take more risks for greater company profit margins in the short term, as opposed tothose risk adverse CEOs with lower pay-performance sensitivity. It was explained that due topublic pressures, boards are reluctant neither to provide substantial financial rewards for superiorperformance nor are they willing to impose meaningful financial for poor performance, and theresulting effect of this risk-averse orientation is the weak link between executive pay and firmperformance. When considering the same relationship with CEO’s having less than 35% ofequity shares, there was a negative relationship. This implies that the company performance wasdeclining when the percentage change of CEO equity ownership declined. Thus sensitivity does
Pay-for Performance Sensitivity on Executive Equity Ownership 43not weaken when CEO’s equity goes beyond 35% (the R2 in Column 8a.1 is very strong in thegroup between 2003 to 2007) According to the analysis of the results and findings, I believe there is a differentcorporate 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 asthis amount usually represent quite an amount in their CEO wealth (you may see the % holdingin Other Interest is quite large according to the 5 companies that holds more than 35% of issuedshares). According to the HK listing rules, the CEO personal interest, other interest and optionare required to be filed with the Hong Kong stock Exchange within 3 days. It is a usual practicethat the substantial shareholders of listed companies in HK uses corporation as a vehicle to holdshares. There is need to carry further research that might explain why the relationship betweenCEO’s equity ownership and corporate performance for U.S companies was negative contrary toprevious studies. This might give further insights and probably support other finding that therelationship 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 ofcompanies from both countries from which analysis was to be done. It is worth noting that out of50 companies selected from United States; only 29 companies were best suited to proceed withanalysis. On the other hand, only 17 companies from Hong Kong out of 50 were suitable to bestudied. The reasons for exclusion of the companies ranged from lack of certain information such
Pay-for Performance Sensitivity on Executive Equity Ownership 44as CEO ownership of equity, as well as the selected company not having a CEO or even MD andthe CEO not being present in the entire period of sampling. This probably could jeopardize theconclusion and generalization arrived at. Accessing information was a problem as some of thecompanies 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 therelationship between equity ownership by CEO (in HK & US) with corporate performance,performance relationships strength and equity ownership by CEO beyond 35% and equityownerships by CEO being or not insensitive to companies stock performance. There suchlimitation left very minimal room for detailed explanation. It is worth mentioning that the studyselected years that were not characterized with financial crisis, for this reason, the desiredrelationships 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 desiredcompanies, sought the relevant literatures among other relevant information. Lastly, the kind ofmethodology used especially in soliciting for data might have yielded outdated information. Ascompared 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 thegeneral or particular economic factors that might have affected the stock prices. It is no doubtthat such factors could have profound effect on the results obtained herein. Considerably, thereare a lot of differences between United States and Hong Kong in terms of economic region andtrying to draw a comparison between the two can be very difficult if not possible. Differences
Pay-for Performance Sensitivity on Executive Equity Ownership 45exist in terms of taxation, interest rates and as well as differences in factors that affect thesecountries’ economic performances. For instance, Hong Kong economy is largely impacted bywhat 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 poseda limitation to the study. It is worth noting that equity disclosure as well as governance requirethat there is threshold amount to be considered to be disclosed, how personal interests aredefined 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 selectedcompanies to be used in analysis only 29 for U.S and 17 for Hong Kong were fit to beincorporated. This resulted to a mean of market gap of USD 127.562m and USD 16,266m U.Sand H.K respectively. Conclusion The present study sought to find out the relationship between CEO equity ownership andcorporate performance, sensitivity of equity ownership by CEO to stock prices and whether thelater weakens when equity ownership by CEO goes beyond 35%. It is worth noting thatcomparison of companies from the two countries, United States of America and Hong Kongbrought forth a mixed result with regards to the relationship between CEO’s equity ownershipand firm performance. The relationship was found to be negative for U.S companies’ contrary toexisting data while it was positive for Hong Kong companies which is consistent with previousstudies. The study also established that there was a positive sensitivity between CEO equityownership and company performance, this means that as the equity ownership increasesperformance increases, this is supported by Hong Kong companies. It was interesting to establish
Pay-for Performance Sensitivity on Executive Equity Ownership 46that sensitivity between CEO’s equity exceeding 35% and market prices was stronger ascompared to low level CEO’s equity ownership. Thus when equity ownership by CEO exceeds35%, the relationship does not weaken as I thought.
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