Agency Problem II and Convergence in CEO Pay

Abstract

Convergence in CEO pay occurs when pay differentials narrow over time. We analyze and compare differences in the rate of convergence in CEO pay of Australian listed firms with high shareholding concentration (HSC) and without, for the period 1992 to 2009. We find zero and negative pay-for-performance and pay-for-firm size associations in HSC firms, indicating entrenchment and suboptimal CEO contract design. In contrast, positive pay-for-performance effects exist in non-HSC firms. The rate of convergence in CEO pay is higher in HSC firms. While there is relatively strong investor protection, our findings indicate that Australian HSC firms face high private benefits of control and one avenue for extracting these benefits is through a higher rate of convergence in CEO pay.

Keywords: Agency Problem II, CEO Pay, Convergence, Shareholding Concentration

JEL Classification: G30, J33, M52