CEO REMUNERATION, BOARD COMPOSITION AND FIRM PERFORMANCE: EMPIRICAL EVIDENCE FROM AUSTRALIAN LISTED COMPANIES

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Gilbert Ndayisaba, Abdullahi D. Ahmed

DOI:10.22495/cocv13i1c5p2

Abstract

Classical economic theories establishing a relationship between CEO remuneration and firm performance has paid particular attention to solve conflict of interest between managerial team and firm shareholders, by designing an optimum CEO remuneration that motivate executives to work in the best interest of shareholders. Many international and less Australian empirical researches suggest that there is overwhelming evidence that firm performance is strongly linked with CEO remuneration. In this paper, we reassess the association of firm performance and CEO remuneration variables using dynamic econometric models and comprehensive data from Australian Stock Exchange (ASX). We find a positive and strong association between CEO pay of top 200 Australian public listed companies and company performance. Obtained findings are similar to USA, UK and Canada studies results. We further test the effect of board and ownership features on CEO remuneration–performance sensitivity in the top 200 Australian public companies listed on ASX. Specifically, for the period of 2003-2007, our results highlight the importance of ownership structure in influencing remuneration–performance relationship. Monitoring block holders boost the responsiveness of long term incentives (LTI) remuneration to performance, thus straightening shareholder and manager welfares. However, based on a short term investment horizon strategy, insider block holders increase (decrease) the sensitivity of short-term incentives remuneration (long term incentives pay). Surprisingly, for the period 2008-2013, our findings suggest that ownership and board features did not influence significantly CEO pay-performance sensitivities. Finally, we find that larger boards increase (decrease) the responsiveness of CEO’s known remuneration (long term incentives) to performance.

Keyword: CEO, Remuneration, Board of Directors, Australia

How to cite this paper: Ndayisaba, G., Ahmed, A.D. (2015). CEO remuneration, board composition and firm performance: empirical evidence from Australian listed companies. Corporate Ownership & Control, 13(1-5), 534-552. http://dx.doi.org/10.22495/cocv13i1c5p2