CEO pay: the role of performance, governance and political connection

CEO pay has attracted substantial public attention since its introduction as one of the remedies to the agency conflict. This is driven by the extensive and sustained rise in executive pay in most of the developed countries. Two questions arise from increased executive pay. First, does rising executive pay reflect top management contribution to firm performance or it is just following patterns from past years? Second, what is the role that is played by corporate governance practices to control this rising pattern in CEO pay? This thesis has two main objectives, first to investigate whether CEO pay contributes to enhanced corporate performance by differentiating between the impacts of short- and longterm compensation on short- and long-term performance indicators respectively. Second, the study further investigates the role of corporate governance and political connections on the CEO pay. The thesis uses the System GMM method to analyse a sample of 777 nonfinancial UK firms during the period 2000-2012. This method allows counting for endogeneity and unobserved heterogeneity that are likely to emerge in the models. The findings show that CEO bonuses are positively associated with short-term performance measures, while they have a negative impact on the total shareholder return. Evidence also suggests that long-term compensation has a positive impact on long-term performance, supporting the main claim of the Agency Theory. The results also show that the required role of corporate governance practices is passive in UK companies, reflecting a source of managerial power for the executive officers. The thesis is the first to show that politically connected CEOs are paid higher compensation compared to their peers. However, evidence suggests that those highly powerful managers are well governed as a way to hedge against future uncertainty comes from being politically connected.