Executive compensation, ownership structure and firm performance: An empirical investigation

Abstract

This article aims at identifying the effect of executive compensation, mediated by the nature of the control, on the sustained performance of the company in a defined ownership context, in which a shareholder or group holds more than half of the voting shares. Despite the wide literature on the relationship between executive compensation and performance, there is little evidence of the lagged effect of compensation on future performance and sustainability. This is particularly significant in countries where concentrated ownership structures dominate, where the controller has incentives to control the behavior of executives and may use the negotiation of such remuneration in order to guide management for their interests or as an instrument of expropriation of minority shareholders. The present study advances along this path by including in the analysis the nature of the control and by considering the lagged effects of the vesting period on performance. Based on executive compensation data from a group of listed Brazilian companies, the effect of this remuneration on change in shareholders' wealth in the three-year period is analyzed by means of multiple regression. The results pointed out that the impact of the variable remuneration on future performance depend on the nature of the remuneration, and on the type of ownership control. Effectively, the weight of the bonus in the total remuneration does not show significant effect. However, the weight of the stock-based remuneration is negatively related with the future performance. Moreover, this result applies both to companies with a controller shareholder and to companies with control shared, but not to companies with dispersed ownership, for which there is evidence of a positive relationship between the importance of the stock-based remuneration and the future performance.