The relationship between executive remuneration and corporate Literature review

The relationship between executive remuneration and corporate performance - Literature review Example At a normative level, the managers are expected to align their personal goals with that of the shareholders and aim toward maximising their values (Chaubey and Kulkarni, 1988). Many of the studies have identified that managerial compensation is linked with the firm’s performance, which is a critical factor in the maximization of shareholders value. The managerial compensation includes base salary, deferred compensation, perquisites and cash bonus. This paper deals with the literature review related to the relationship between compensation of the executives and the performance of the firm. Executive Compensation and Firm performance The advent of the â€Å"new economy† industries is a recent phenomenon and not much literature is available which concerns the relationship between performance and pay. Anderson, Banker and Ravindran (2000) have used simultaneous equation model for estimating the performance of the firm and compensation of the executives in the information te chnology industry and has found evidences that suggest that the share of both pay and bonus increases with the performance. Along with this, the study also suggested that the extent of incentive pay and the level of pay are responsible for positively affecting the performance of the firm. ... The performance of the firm and its size serves as determinants of the pay, which has been suggested by a standard empirical model based on CEO compensation. The firm size is the component that measures the managerial discretion. The compatibility of managerial incentive is indicated by the performance of the firm. The literature related to the compensation of the CEO lacks consensus with respect to the appropriate functional specification. The research scholars like, Coughlan and Schmidt (1985), Hall and Liebman (1998), and Gibbons and Murphy (1992), prefer elasticity specification where the change in or level of the log of executive compensation is linked to the change in or level of log of the firm performance. A different approach has been taken by Jensen and Murphy (1990). They had used sensitivity approach that had linked the change in the compensation level with the change in the performance of the firm. These specifications imply that the relationship between the firm’ s performance and the compensation of the employees is contemporaneous only. This signifies that one-time increase in the performance leads to an increase in the compensation of the executives within that period of time. These specifications help to remove the fixed effects related to the firm. In other words, it omits the consistent effect of the time invariant factors such as, the diverse personal characteristics of the CEO, which otherwise might have diverted the estimation of the pay related to performance relationship. A wide spread interest and media attention had thrown light on the pay packages of CEOs in United Kingdom (UK). Eruption of public indignation was seen for the first time in 1995