Executive compensation and comprehensive income: evidence from Polish listed companies
Keywords:executive compensation, comprehensive income, profitability ratios, firm performance, corporate governance
Research background: The literature of Economics presents the agency problem, which can be mitigated through executive compensation, especially when it is connected with company profits. This relationship has been repeatedly analysed in the corporate governance literature, which shows both positive and negative correlations between these categories. Thus, another approach is presented with comprehensive income, which (in contrast to net income) is generally beyond the control of managers and hinders active earnings management.
Purpose of the article: This article presents the evaluation of three stages of the relationship between executive compensation and profitability ratios (RoS, RoA, RoE), which are based on comprehensive income and net income. The main research hypothesis states that in economic practice, it can be assumed that there is a stronger positive correlation between executive compensation and comprehensive income than net income.
Methods: The research covered companies listed on the WSE from the industry sector (between 2009 and 2017). The first part of the paper contains the results of correlations between profitability ratios and executive compensation (conducted by means of Pearson?s correlation coefficient). The second part presents the results of three regression models in two versions ? the influence that RoS, RoA and RoE have on companies? executive compensation, based on comprehensive income and net income.
Findings & Value added: The analysed companies were characterised by a diversity correlation between the executive compensation and profitability ratios calculated with net profit and comprehensive income. Nevertheless, it must be stressed that the results of the estimation show, in this case, the slightly greater role of comprehensive income than net profit. One can emphasise a certain advantage of comprehensive income over net profit, as the former can inhibit the effects of managers' intentional influence on the value of the reported earnings.
Bagnoli, M., Liu, H. T., & Watts, S. G. (2011). Family firms, debtholder – shareholder agency costs and the use of covenants in private debt. Annals of Finance, 7(4). doi: 10.1007/s10436-009-0127-9.
Baker, G. P., Jensen, M. C., & Murphy, K. J. (1988). Compensation and incentives: practice and theory. Journal of Finance, 43(3). doi: 10.1111/j.1540-6261.1988.tb04593.x.
Barton, J., Hansen, T. B., & Pownall, G. (2010). Which performance measures do investors around the world value the most – and why? Accounting Review, 85(3). doi: 10.2308/accr.2010.85.3.753.
Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3). doi: 10.1257/089533003769204 362.
Benito, A., & Conyon, M. (1999). The governance of directors’ pay from UK companies. Journal of Management and Governance, 3(2). doi: 10.1023/ A:1009995710541.
Biddle, G., & Choi, J. H. (2006). Is comprehensive income useful? Journal of Contemporary Accounting & Economics, 2(1). doi: 10.1016/S1815-5669(10) 70015-1.
Boschen, J. F., & Smith, K. J. (1995). You can pay me now and you can pay me later: the dynamic response of executive compensation to firm performance. Journal of Business, 68(4).
Bratten, B., Causholli, M., & Khan, U. (2016). Usefulness of fair values for predicting banks’ future earnings: evidence from other comprehensive income and its components. Review of Accounting Studies, 21(1). doi: 10.1007/s11142-015-9346-7.
Braumoeller, B. F. (2004). Hypothesis testing and multiplicative interaction terms. International Organization, 58(4). doi: 10.1017/S0020818304040251.
Brick, I. E., Palmon, O., & Wald, J. K. (2006). CEO compensation, director compensation and firm performance: Evidence of cronyism? Journal of Corporate Finance, 12(3). doi: 10.1016/j.jcorpfin.2005.08.005.
Chambers, D., Linsmeier, T., Shakespeare, C., & Sougiannis, T. (2007). An evaluation of SFAS No. 130 comprehensive income disclosure. Review of Accounting Studies, 12(4). doi: 10.1007/s11142-007-9043-2.
Choi, J. H., & Zang, Y. (2006). Implications of comprehensive income disclosure for future earning and analysts. Seoul Journal of Business, 12.
Core, J., Holthausen, R., & Larcker, D. (1999). Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics, 51(3). doi: 10.1016/S0304-405X(98)00058-0.
Dhaliwal, D., Subramanyam, K. R., & Trezevant, R. (1999). Is comprehensive income superior to net income as a measure of firm performance. Journal of Accounting and Economics, 26(1-3). doi: 10.1016/S0165-4101(98)00033-0.
Dogan, E., & Smyth, R. (2002). Board remuneration, company performance, and ownership concentration: evidence from publicly listed Malaysian companies. Asean Economic Bulletin, 19(2). doi: 10.1355/AE19-3F.
Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2). doi: 10.1016/j.jcorpfin.2012.01.005.
Frye, M. B. (2004). Equity-based compensation for employees: firm performance and determinants. Journal of Financial Research, 27(1). doi: 10.1111/j.1475-6803.2004.00076.x.
Goncharov, I., & Hodgson, A. (2011). Measuring and reporting income in Europe. Journal of International Accounting Research, 10(1). doi: 10.2308/jiar.2011. 10.1.27.
Hall, B., & Liebman, J. (1998). Are CEOs really paid like bureaucrats? Quarterly Journal of Economics, 113(3). doi: 10.1162/003355398555702.
Hendriksen, E. A., & van Breda, M. F. (2002). Accounting theory. Warszawa: WN PWN.
Hirst, D. E., & Hopkins, P. E. (2007). Comprehensive income disclosure and analysts’ valuation judgements. Journal of Accounting Research, 36. doi: 10.2139/ ssrn.63588.
Iwu-Egwuonwu, R. Ch. (2010). Some empirical literature evidence on the effects of independent directors on firm performance. Journal of Economics and International Finance, 2(9). doi: 10.2139/ssrn.1654524.
Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top management incentives. Journal of Political Economy, 98(2). doi: 10.1086/261677.
Joe Ueng, C., Wells, D. W., & Lilly, J. D. (2000). CEO influences and executive compensation: large firms vs. small firms. Managerial Finance, 26(8). doi: 10.1108/03074350010766800.
Kanagaretman, K., Mathieu, R., & Shehata, M. (2009). Usefulness of comprehensive income reporting in Canada. Journal of Accounting and Public Policy, 28(4). doi: 10.1016/j.jaccpubpol.2009.06.004.
Kato, T., & Kubo, K. (2006). CEO compensation and firm performance in Japan: evidence from new panel data on individual CEO pay. Journal of Japanese and International Economies, 20(1). doi: 10.1016/j.jjie.2004.05.003.
Lewellen, W., & Huntsman, B. (1970). Managerial pay and corporate performance. The American Economic Review, 60(4).
Liu, J., & Thomas, J. (2000). Stock returns and accounting earnings. Journal of Accounting Research, 38(1). doi: 10.2307/2672923.
Louis, H. (2003). The value relevance of the foreign translation adjustment. Accounting Review, 78(4). doi: 10.2308/accr.2003.78.4.1027.
Mäkinen, M. (2007). CEO compensation, firm size and firm performance: evidence from Finnish panel data. Research Institute of the Finnish Economy, Discussion Papers, 1084.
Merhebi, R., Pattenden, K., Swan, P. L., & Zhou, X. (2006). Australian chief executive officer remuneration: pay and performance. Accounting and Finance, 46(3). doi: 10.1111/j.1467-629X.2006.00178.x.
Nulla, Y. (2012). Is accounting net profit margin a valid measure of CEO cash compensation?: a comparative analysis on NYSE and TSX/S&P Indexes companies. International Journal of Scientific & Engineering Research, 3(9). doi: 10.2139/ssrn.2284299.
Ozkan, N. (2007). Do corporate governance mechanism influence CEO compensation? An empirical investigation of UK companies. Journal of Multinational Financial Management, 17(5). doi: 10.1016/j.mulfin.2006.08.002.
Rees, L. L., & Shane, P. B. (2012). Academic research and standard-setting: the case of other comprehensive income. Accounting Horizons, 26(4). doi: 10.2308/acch-50237.
Rudolf, S., Janusz, Т., Stos, D., & Urbanek, P. (2002). Effective corporate governance. Warszawa: PWE.
Ryan, H., & Wiggins, R. (2001). The influence of firm- and manager-specific characteristics on the structure of executive compensation. Journal of Corporate Finance, 7(2). doi: 10.1016/S0929-1199(00)00021-3.
Sajnóg, A. (2017). The role of comprehensive income in predicting banks’ future earnings based on the practice of banks listed on the Warsaw Stock Exchange. Equilibrium. Quarterly Journal of Economics and Economic Policy, 12(3). doi: 10.24136/eq.v12i3.26.
Schroeder, R., Clark, M., & Cathey, J. (2011). Financial accounting theory and analysis. United States: John Wiley and Sons Ltd.
Sigler, J. (2011). CEO compensation and company performance. Business and Economics Journal, 11(1-8).
Urbanek, P. (2006). Executive compensation in capital companies. Warszawa: PWE.
Yatim, P. (2012). Boardroom pay, performance and corporate governance in Malaysia. Business & Management Review, 2(2).
Zhou, X. (2000). CEO pay, firm size, and corporate performance: evidence from Canada. Canadian Journal of Economics, 33(1). doi: 10.1111/0008-4085.00013.