1. 4 th BIENNIAL IMTERNATIONAL CONFERENCE ON BUSINESS, BANKING & FINANCE

2. EXECUTIVE COMPENSATION, FIRM PERFORMANCE AND RISK IN THE FINANCIAL CRISIS PERIOD 2006-2009 Mr. Quinn Trimm

3. Introduction  US CEO/worker pay gap stood at 301-1 in 2003, as compared to only 42-1 in 1982 (Matsumura & Shin, 2005).  Executive compensation has become synonymous with the ‘agency problem’ (Quinn, 1999), scholars have concluded that agency costs can be reduced by aligning the risk preferences of CEOs and shareholders, by awarding equity-based incentives i.e. stock options and restricted stock (Core et al. 2003). 23/06/2011 3

4. Introduction  The application of performance-linked remuneration has been viewed as a tool for aligning the interests of directors and shareholders (Dalton et al, 2007).  The uncertainty surrounding the Agency Theory, executive compensation, unsystematic risk, and firm accounting performance motivates this study and attempts to explore the underlying relationship between them, if any. 23/06/2011 4

5. Literature Review  The Agency Theory.  Jensen and Meckling (1976)  Smith (1776) 23/06/2011 5

6. Literature Review  The Managerial Power Theory.  Bebchuk and Fried, (2004); Grabke-Rundell and Gomez-Mejia, (2002).  Finkelstein (1992) 23/06/2011 6

7. Research Methodology  A cross sectional study was employed to examine the effect of firm performance and total risk on executive compensation.  Multiple regression analysis was used to analyze the relationship between the variables. The data was duly treated using the first difference transformation to achieve normality. 23/06/2011 7

8. Research Methodology  Hypothesis Development  Hypothesis One:  H o =  3 (ROA),  4 (ROE),  5 (EPS) and  6 (PE) = 0  Hypothesis Two:  H o :  1 (MKTR) and  2 (UNSYSR) = 0 23/06/2011 8

9. Research Methodology  Regression Models  Compensation= a +  1 (MKTR) +  2 (UNSYSR) +  3 (ROA) +  4 (ROE) +  5 (EPS) +  6 (PE) + ε i 23/06/2011 9

10. Research Methodology  Base Pay= a +  1 (MKTR) +  2 (UNSYSR) +  3 (ROA) +  4 (ROE) +  5 (EPS) +  6 (PE) + ε i  Annual Bonus= a +  1 (MKTR) +  2 (UNSYSR) +  3 (ROA) +  4 (ROE) +  5 (EPS) +  6 (PE) + ε i  Long term Compensation= a +  1 (MKTR) +  2 (UNSYSR) +  3 (ROA) +  4 (ROE) +  5 (EPS) +  6 (PE) + ε i  Stock Options= a +  1 (MKTR) +  2 (UNSYSR) +  3 (ROA) +  4 (ROE) +  5 (EPS) +  6 (PE) + ε i 23/06/2011 10

11. Research Methodology  The dependent variable total executive compensation, base pay, annual bonus, long-term compensation and equity based incentives/stock options) was analyzed (Murphy, 1999).  The first independent variable is firm performance. ROA, ROE, EPS & PE were used (Murphy, 1985).  The second independent variable is firm risk. Considering the Market Model as posed by Harry Markowitz, risk was represented by market risk (MKTR) and unsystematic risk (UNSYSR). 23/06/2011 11

12. Empirical Results 23/06/2011 12

13. Pre-financial crisis period January 03, 2006 to December 29, 2006 Model Standardized Coefficients tSig. Beta TOTAL COMPENSATION (Constant) 0.0380.97 EPS0.4034.0030.000 BASE PAY (Constant)0.1580.875 ROE-0.415-3.1390.002 EPS0.5366.0980.000 PE-0.242-2.8240.006 MKTR0.2753.3290.001 UNSYSR-0.192-2.410.018 BONUS PAY (Constant) 0.0030.997 EPS0.2542.5320.013 MKTR0.2162.2880.024 LONG TERM COMPENSATION (Constant) 0.0650.949 STOCK (Constant) 0.0060.995 EPS0.4544.4770.000 23/06/2011 13

14. 23/06/2011 14 The financial crisis period January 08, 2007 to December 28, 2007 Model Standardized Coefficients tSig. Beta TOTAL COMPENSATION (Constant) 0.030.976 EPS0.7394.9260.000 BASE PAY (Constant) 0.1070.915 ROE0.6992.020.046 EPS0.5464.1150.000 MKTR0.2633.3070.001 BONUS (Constant) -8.98E-040.999 ROA0.9752.5670.012 EPS0.8475.7618.12E-08 LONG TERM COMPENSATION (Constant) 0.0960.923 STOCK (Constant) 0.0050.996 EPS0.7124.6340.000

15. 23/06/2011 15 The financial crisis period January 08, 2008 to December 29, 2008 Model Standardized Coefficients tSig. Beta TOTAL COMPENSATION (Constant) 0.040.968 MKTR0.4054.6480.000 BASE PAY (Constant) 0.0780.938 MKTR0.2432.6670.009 BONUS (Constant) 0.0120.991 MKTR0.3363.7080.000 LONG TERM COMPENSATION (Constant) 0.0080.994 STOCK (Constant) 0.0260.98 MKTR0.3994.5670.000

16. 23/06/2011 16 The post-financial crisis period January 05, 2009 to December 27, 2009. Model Standardized Coefficients tSig. Beta TOTAL COMPENSATION (Constant) -8.74E-010.384 ROA0.7873.0590.003 MKTR0.3043.2620.002 BASE PAY (Constant) -1.3270.188 MKTR0.4184.5690.000 BONUS (Constant) -0.1090.914 ROA0.6462.310.023 ROE-0.537-2.2380.028 UNSYSR-0.269-2.1480.034 LONG TERM COMPENSATION (Constant) -0.2220.825 MKTR0.2962.8730.005 STOCK (Constant) -0.7870.433 ROA1.134.4890.000 ROE-0.968-4.4830.000 UNSYSR-0.31-2.7510.007

17. Conclusions  Managers were contracted based on the perceived value they can add to a company. This is reflected in their base salary – their worth at the face value. Upon evidence of additional efforts (increased firm accounting performance) they were endowed with bonuses, stock options and other long term benefits.  However, for the years 2006 and 2007 this study did not provide the evidence to fully support the dictum of the Agency Theory. 23/06/2011 17

18. Conclusions  Managers did nothing to overtly jeopardize that which mattered most – their base salary. With the bullish market of 2007 managers did not appear to be “risk- seeking” and their base salaries increased. In 2008 however, the financial crisis took full effect.  This caused the level of executive compensation to decline, and in 2009 managers tried to rebuild the market by taking more risk. 23/06/2011 18

19. Conclusions  The Agency Theory  The Managerial Power Thoery 23/06/2011 19

20. Conclusions  The Managerial Power Theory points the way for the apparent deviation from the Agency Theory during the period 2006 – 2009. 23/06/2011 20