The Remuneration of the Chief Executive - Essay Example

The Remuneration of the Chief Executive Executive Summary This report describes the analysis of the remuneration of the Chief Executive of a company and explores the impact of various factors that may affect the remuneration. The analysis was conducted using the data of 300 companies consisting of the CEO’s remuneration (£'s), number of directors on the board, number of executive directors on the board, measure of the firm size (£m), proportion of executive directors on the board, proportionate sales growth of the company and proportion of shareholder wealth. Based on the statistical analysis made the following conclusions are made on the factors affecting the remuneration of the CEO: 1. The analysis showed that being a CEO and Chairman of a company was a significant influence on the remuneration received. 2. The proportion of executive directors on the board did not affect the CEO’s remuneration. 3. Sales growth, shareholder wealth and the size of the company did not decide the remuneration of the CEO. 1. Introduction In recent days, the economic depression has lead to cost cutting in several companies. This has forced several people to lose jobs or accept pay reduction to secure jobs. This has aroused the discussion on the CEO’s remuneration which appears to be unaffected by any economic crisis. Although target remuneration levels are aligned to the market, excellent performance by both the company and by the individual executive director is rewarded with higher bonus levels and share awards, taking potential total remuneration to the upper quartile or higher of the company’s key international competitors. Base salaries of employees are determined in a similar way to those of executive directors. The company’s approach is to ensure that target total compensation is benchmarked to the relevant market in which the individual is employed. The objective of this study is to analyze whether the CEO’s remuneration is in some way related to the performance of the firm or results from the position and power of the chief executive. Most of studies conducted earlier consider whether CEO pay is determined by the performance of the company they manage or whether it simply relates to the influence which the CEO has over the board of directors. Several other factors such as size of the company, number of executive directors on the board, sales growth of the company have also been considered in this study to understand the significant factor that decides the remuneration of the CEO. Some studies conducted indicate that if the CEO is also the Chairman of the company, this person has an undeniable influence on the decisions of the board. Hence the influence of the position of the executive director is also studied in this analysis. 2. Methodology 2.1 Univariate Analysis of Chief Executive’s remuneration: The remuneration of 300 CEOs given in £’s was studied statistically to identify patterns among various CEOs. Box plot was employed to get a clear picture of the variable with respect to the position of the CEO in the company. The remuneration of the CEO of the company was compared to the remuneration of the CEO when he was also the Chairman of the company. The box plot would present the values of the variable in three quartiles and exhibiting the extreme values as outliers. The shape of the box plot would explain the range of the salary of the CEOs. To avoid the effect of outliers (extreme values), transformation of data is considered, i.e. natural logarithm of the salary of the CEOs is used to get a clear picture of the distribution of the salary of the CEOs. The result of the analysis is presented in section 3.1. 2.2 Statistical Analysis of factors affecting Chief Executive’s remuneration: Correlation analysis has been used to study the relationship between the CEO’s remuneration and the different factors of study: Sales growth, size of the company, proportion of executive directors on the board and additional position of the CEO as Chairman of the company. The correlation analysis can be performed only between two variables at a time. A high correlation coefficient indicates a high relationship between two variables. A positive correlation means the growth of one variable also indicates the growth of the other variable. A negative correlation means the growth of one variable indicates the decline of the other variable. In addition, a p-value is considered to measure the level of statistical significance in the relationship. If the p-value is less than 0.05, the correlation is considered to be statistically significant. Scatter diagram is used to study the pattern of data between two interval variables (values having decimal places). Interval variables in this study are sales growth, size of the company, proportion of executive directors and the salary of the CEOs. Bar charts and line charts are used to compare the two groups consisting of CEOs only and CEO-cum-Chairmen. The comparison is based on sales growth, size of the company, proportion of executive directors and salary of the CEOs. The result of the analysis is presented in section 3.2. 2.3 Regression Analysis of effect of factors on Chief Executive’s remuneration Regression Analysis was performed on the data to study the exact effect of the various on the CEO’s remuneration. A linear equation is developed with the salary as the dependent variable and all the factors, sales growth, size of the company and proportion of executive directors on the board as independent variables. The p-value is considered to measure the significance of the effect of each of the variables on the dependent variable. A positive beta coefficient indicates that the independent variable has a positive effect on the dependent variable. A negative beta coefficient indicates that for every unit increase in the independent variable the dependent variable decreases by beta units. The result of the analysis is presented in section 3.3. Results 3.1 Univariate Analysis of Chief Executive’s remuneration This part of the analysis is to study if being a CEO has a significant effect on the salary given to the directors. When the CEO is also the chairman, the least salary is 309,113 and highest salary is 3,017,921. When only CEO is present, the least salary is 339,450 and highest salary is 2,402,245. The Box plot given below shows that the salary of a CEO of a company, who is also the chairman (Dummy =1), is much higher than that of the CEO who is not the chairman of the company (Dummy = 0). To avoid the impact of outliers, natural logarithm of the salary of the CEOs is considered. The bar graph given below shows that the mean salary of the CEO-cum-chairman group (Dummy =1) is slightly higher than the only CEO group (Dummy =0). Thus it is evident that being a CEO-cum-chairman of a company has an effect on the Salary of the CEOs. 3.2 Statistical Analysis of factors affecting Chief Executive’s remuneration The second part of the analysis is to study the performance of the companies between the CEO and CEO-cum-Chairman groups. The factors determining the performance of a company are shareholder wealth and sales growth. Other factors that could affect the CEO remuneration are size of the company and proportion of executive directors on the board. Impact of the various factors on CEO remuneration: The correlation analysis (Table 1) between the salary of a company’s CEO and the corresponding shareholder wealth shows that the salary of the CEO is not affected by the shareholder wealth of the company (correlation = -0.04). As salary increases, the shareholder wealth of the company decreases. However, the amount of increase is negligible. A correlation of 0.638 is obtained between the salary and sales growth which is significant at 1% level. This shows a strong relationship between the salary and sales growth. Similarly positive correlation exists between size of the company and proportion of executive directors with salary of the CEO. Table 1: Correlations Lsalary Lassets Sgrow Exret Exec1 Lsalary Pearson Correlation 1 .169** .638** -.040 .145* Sig. (2-tailed) .003 .000 .490 .012 N 300 300 300 300 300 Lassets Pearson Correlation .169** 1 -.079 .058 .043 Sig. (2-tailed) .003 .170 .314 .457 N 300 300 300 300 300 Sgrow Pearson Correlation .638** -.079 1 -.042 -.056 Sig. (2-tailed) .000 .170 .472 .329 N 300 300 300 300 300 Exret Pearson Correlation -.040 .058 -.042 1 .024 Sig. (2-tailed) .490 .314 .472 .684 N 300 300 300 300 300 Exec1 Pearson Correlation .145* .043 -.056 .024 1 Sig. (2-tailed) .012 .457 .329 .684 N 300 300 300 300 300 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Impact of Shareholder wealth on CEO remuneration: Consider the box plot given below. The mean shareholder wealth of the CEO-cum-chairman group is lesser than the only CEO group. That is, the performance of the company does not improve if the CEO is also the chairman of the company. This shows that the decisions of the company are interrupted by the CEO-cum-chairman. The regression analysis given below (Table 2) shows that the shareholder wealth does not have any significant effect on the salary of a CEO (p = 0.629). Table 2: Coefficientsa Model Unstandardized Coefficients Standardized Coefficients T Sig. B Std. Error Beta 1 (Constant) 1162769.657 69093.962 16.829 .000 Exret -132011.373 272906.160 -.028 -.484 .629 a. Dependent Variable: Salary Impact of sales growth on CEO remuneration: Consider the line chart given below. There is a decline in the mean sales growth of the CEO-cum-Chairman group compared to the CEO group. That is, being the CEO-cum-Chairman of the company, the sales growth does not improve. On the contrary, the sales growth of the company is better if only the CEO is present in the board. However, the scatter plot given below shows that as the sales increases, the salary of the CEO also increases. The relationship is higher if the CEO is also the Chairman (correlation = 0.657). That is, despite the reduced sales growth, the hike in salary of the CEO-cum-Chairman is higher than that of the CEO. Impact of size of the company on CEO remuneration: Consider the line chart given below. There is a decline in the mean size of the company of the CEO-cum-Chairman group compared to the CEO group. That is, being the CEO-cum-Chairman of the company does not mean that the size of the company is huge. The CEO also manages a company as huge as that run by a CEO-cum-Chairman. However, the scatter plot given below shows that as the size of the increases, the salary of the CEO also increases. 3.3 Regression Analysis of effect of factors on Chief Executive’s remuneration The following equation relates the factors to the remuneration: Salary = 11.944 + 0.666 (Sales growth) + 0.215 (Assets) + 0.165 (Proportion of executive directors) + 0.13 (Being CEO-cum-Chairman). A low p-value (Table 3) shows that all factors have significant effect on the determination of the salary of the CEO. The model identified above has an R2 value of 0.502 and adjusted R2 of 0.495 which means that approximately 50% of the variation in the salary of the CEO can be explained by these factors. Table 3: Coefficientsa Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) 11.944 .235 50.786 .000 Sgrow 1.341 .083 .666 16.128 .000 Lassets .123 .024 .215 5.221 .000 Exec1 .522 .130 .165 4.004 .000 Dummy .148 .047 .130 3.160 .002 a. Dependent Variable: Lsalary 4. Conclusion From the above analysis, it is concluded that the salary of the CEO is much higher when he is the Chairman of the company. The position and power of the CEO plays a significant role in determining the salary despite poor performance of the company. The higher the proportion of executive directors in the board, the higher is the salary of the CEO. Read More