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Determinants and Performance Effects of Executive Pay Multiples

64 Pages Posted: 10 Apr 2012 Last revised: 14 Aug 2012

Jeong-Hoon Hyun

Neoma Business School

Sung-Choon Kang

Seoul National University

Bum-Joon Kim

Seoul National University - College of Business Administration

Jae Yong Shin

Seoul National University - College of Business Administration

Date Written: April 10, 2012

Abstract

Disclosure rules for the Korean Stock Exchange require Korean firms to disclose average executive and employee pay. These disclosures provide a unique opportunity to examine factors influencing the executive pay multiple (executive-employee pay disparity) and its effects on performance. We find that a substantial portion of cross-sectional variation in the executive pay multiple is explained by the firm’s economic, governance, executive, and workforce-related characteristics. Consistent with the behavioral theory of pay disparity, our results also indicate that the executive pay multiple has a statistically significant negative relation with subsequent operating and stock return performance, suggesting that a higher (lower) pay multiple is associated with poorer (better) future performance. These results are robust to corrections for endogeneity. When we adopt a two-stage approach, however, we find strong evidence that deviations from the expected executive pay multiple, estimated using the first-stage determinant model, are associated with poorer subsequent performance. Additional tests provide some evidence that CEO (employee) turnover is positively related to executive pay multiples that are lower (higher) than expected, suggesting that deviations from the expected executive pay multiple negatively affect subsequent performance in part through their impact on subsequent executive and employee turnover.

Keywords: executive pay multiple, Korean firms, pay disparity, performance, turnover

JEL Classification: J33, J44, M41, M52

Suggested Citation

Hyun, Jeong-Hoon and Kang, Sung-Choon and Kim, Bum-Joon and Shin, Jae Yong, Determinants and Performance Effects of Executive Pay Multiples (April 10, 2012). AAA 2013 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2037744 or http://dx.doi.org/10.2139/ssrn.2037744

Jeong-Hoon Hyun

Neoma Business School ( email )

59, rue Pierre Taittinger
Reims, 51100
France

Sung-Choon Kang

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Bum-Joon Kim

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

Jae Yong Shin (Contact Author)

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

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