As Murphy (1998) rightly points out, CEO compensation has become one of the most debated issues in the recent past. A lot of research in this field has been conducted to determine the relationship between CEO pay levels with the corporate performance, firm size, board vigilance, CEO’s human capital, tenure & age. But the results of these researches are not very hopeful and have yielded conflicting results. This review aims at understanding these relationships and also tries to provide an ethical perspective on CEO compensation. CEO Pay Structure
CEO compensation package comprises of four key components: base fixed salary, annual bonus, stock options & restricted stock grants, and long term incentive plan (Murphy, 1998). Matsumura and Shin (2005) in their research article have also mentioned a few other components of CEO compensation such as severance payments, tax reimbursements & signing bonuses. According to Matsumura and Shin (2005), base salaries for CEOs are most of the times determined by benchmarking the salaries of peer companies in the same industry. An annual bonus is paid on a specific year’s accounting performance, such as earnings per share or return on equity. In most of the companies CEOs are also provided a right to buy the firm’s shares at a pre specified exercise price for a pre specified term through stock options. Some firms also grant restricted shares which can be forfeited under some specific conditions. Many companies offer a long term incentive plan based on rolling-average three or five year cumulative performance. Determinants of CEO Pay
CEO compensation plays a key role in CEO motivation and can have a huge impact on firm’s activities and future direction (Hijazi & Bhatti, 2007). There are many factors that influence the CEO pay and a lot of research has been conducted in this regard. A few of the important factors that influence CEO Pay have been listed below along with the...
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