1. Saule Dyussembina, KIMEP University
EXECUTIVES’ COMPENSATION DISCLOSURE, EARNINGS MANAGEMENT AND FIRM PERFORMANCE: EMPITICAL LITERATURE OVERVIEW AND RELEVANCE TO KAZAKHSTAN  
Saule Dyussembina,
KIMEP University

2. Theoretical background
Jensen and Meckling, 1976
Agency Theory
Information asymmetry
Arm’s-length contracting between executives and boards of directors
Optimal contracting theory
Bebchuk and Fried (2006)
Managerial power theory
Executives control over the process of design of their compensation packages
Proposed solution: increased transparency

3. Relevance for Kazakhstan
IFC Survey Corporate Governance Practices in Kazakhstan (2016):
high interest on corporate governance from companies
High concentration of ownership
No regulatory requirement to disclose the information on the size and the nature of executives’ or CEO’s remuneration publicly
IAS 24 on Related Party Disclosures:
total size of compensation,
without any specifications of the dollar values and the types of the benefits in the compensation packages of separate executives.

4. Executives compensation and firm performance
Bebchuk and Fried (2004, 2006): top managers exercise their power over the decisions of the boards of directors to assign their own compensation plans.
Brick et al. (2006): there is relationship between the compensation level of CEO and that of directors => rejection of the concept of arm’s length relationship.
Tosi et al. (2004) emphasize the role of CEO’s charisma in the process of their compensation arrangement.
Excessive compensation of managers is not related to firm performance, as reported by Brunello et al. (2001), Brick et al. (2006),

5. General framework Managers Shareholders Corporate governance
Company performance
Corporate governance
Managers
Shareholders
compensation

6. Emerging markets context
controlling shareholders (Firth et al, 2008)
Cheung et al. 2011
Controlling shareholders + + +
Executives compensation
Firm performance
Controlling shareholders
Quality of corporate governance
Firm’s market performance

7. Orazalin et al. , 2015; Orazalin et al
Orazalin et al., 2015; Orazalin et al. 2016: weak impact of board characteristics on firm performance in Russian banking and oil and gas sectors
in Asian region (Lin and Wu, 2014; Shen and Chih, 2007), in China (Chan, 2015), Jordan (Al-Fayoumi et al., 2010), India (Sarkar et al., 2008) : the role of strong corporate governance in ensuring good quality earnings reporting
Hypothesis: corporate governance mechanisms are characterized with weak abilities to exert control over executives’ compensation setting process
Hypothesis: top managers’ compensations are not tied to the performance of companies in Kazakhstan.

8. Possible substitution of firm performance by earnings management
Corporate governance
Managers
Shareholders
compensation

9. Literature overview
Baber et al. (1998), Sun (2014): managers’ increased propensity to manipulate earnings when their compensation is tied to reported performance of companies
Cornett et al. (2009): the positive relationship between ‘pay-for-performance’ sensitivity and earnings management in the largest U.S. banking corporations.
Adut et al. (2003): companies with high discretional accruals have weak association of compensation with future returns; a worse setting for the use of compensation-based contracts with managers.
Li et al. (2016) report about the existence of some tolerance level of ‘accepted’ earnings management: executives receive rewards for moderate-level earnings manipulations and are penalized for inordinate earnings management.

10. Firms’ characteristics
E.g. Kwon and Yin (2006):
high-tech vs. low-tech companies 
Managers
Shareholders
compensation
Earnings management
Corporate governance

11. Information manipulation
Baker et al. (2003), McAnally et al. (2008): news manipulation to decrease stock option exercise price.
Laux and Laux (2009): increase in CEO equity incentives does not necessarily increase earnings management under the presence of effective controlling mechanisms in corporate governance
Information manipulation
Managers
Shareholders
compensation
Earnings management
Corporate governance

12. Recent changes in the developed markets
Sarbanes-Oxley (2002).
Cohen et al. (2008) substitution of accruals-based earnings management by the real earnings management practices after introduction of Sarbanes-Oxley
Compensation recovery.
Chan et al. (2015): decline of manipulation with earnings in the financial reports after introduction of compensation recovery

13. Solutions proposed by academicians
Ibrahim and Lloyd (2011): inclusion of non-financial performance measurements to executives’ compensation
Bebchuk and Fried (2006): increased transparency over executives’ compensations

14. Executives’ compensation
Hypothesis
Earnings management
Executives’ compensation
Firm performance
Corporate governance