Essays on executive compensation and managerial incentives

by Zhou, Xianming.

The first chapter of this dissertation examines the regdatory impact of executive compensation disclosure on managerial pay schemes. Analysing a three-level agency mode1 arnong the shareholders, directors, and manager of a firm, this chapter shows that before disclosure, the directors may underinvest in monitoring the manager's activities because of asymmetric information on the penomance of the directors and a divergence of interests between them and other shareholders. Compensation disclosure rules mitigate this ineficiency and increase the pay-performance linkage. Empincaily, this chapter examines the impact of compensation disclosure by comparing the sensitivity of CE0 pay to finn performance, before and after the new Ontario disclosure regulation (1993),between groups of firms that were differentidly afEected by the legislation. It is found that after introducing the Ontario regulation, the pay-performance sensitivity increased much more in the firms that were affected by the regulation than in those that were unaffected by the regulation. In contrast to previous studies, these findings suggest that disclosure of executive compensation strengthens the pay-performance . . 11 relationship. The second chapter provides the first systernatic examination of the relationship between CE0 compensation. fimi size, and corporate performance for Canadian fm. Consistent with previous studies, this chapter fmds that CE0 pay rises with fm size and that compensation is tied to Company performance. Some novel fmdings are also documented. First, options and stock ownership tend to play a relatively more important role for CE0 incentives in small firms. And second, while CE0 turnover probability is generally negatively related to the firm's stock performance, the threat of dismissal is less pronounced in small firms. The third chapter compares executive pay-performance sensitivities between Canadian firms and US firms. Examining the data for 365 Canadian h s and 678 US fms over the years 199 1 - 1994, it is found that the pay-performance sensitivity associated with direct pay and stock ownership is smailer in Canadian fimis than in US firms but that the difference diminishesas firm size increases. This finding, together with poorer corporate performance and lower CE0 pay of Canadian firms, is consistent with the hypothesis that managerial incentives affect firm