Analysis of Executive Directors Compensation

Determinants of Compensation of Executive and Non-Executive (Independent) Directors in Australian Firms.

Recent literature provides evidence on how certain firm-specific, industry-wide, and market-wide factors are related to a firm’s choice between going public and getting acquired. However, the question remains that how directors’ compensation in firms is related to the employee education or demographic details, or level of responsibility in the firm.  In this paper, the relationship between directors’ compensation and the type of responsibility in the present firm was analyzed. It was also shown that how the other independent impact factors were related to the compensation.

Moreover, it is not obvious whether the relation between compensation and the involvement in board sub committees in a firm is negative or positive. On the one hand, directors of firms may be paid more due to their involvement in the firms’ decision making (Cheng, Hong, and Scheinkman, 2015; Sun, Cahan, and Emanuel, 2009). On the other hand, they may be paid less as higher compensation reflects payment for conflict of interest, and aligns interests with those of the shareholders. Hence, in this paper the hypotheses were tested where it was assumed that there was no linear relationship between the total compensation amount and independent influence factors for the executive as well as independent non-executive directors of the firms (Irani, and Gerayeli, 2017). Univariate analysis was used to assess the bivariate relationships and multivariate regression analysis was utilized to construct the final model with significant predictors of compensation at the top level of the management.

The data of the research was collected from an affiliate of Australian stock exchange, which had firms’ compensation data with details of geographical code, demographic details and education qualification level of the management employees along with their involvement in different board sub committees. The scholar first identified a sample of firms during 2015 that have detailed data for executive and independent non-executive directors and their involvement with sub-committees, available in the sample of 12,933 employees, and director committee compensation data available for 9,067 management level employees in firms. Next, the article categorized the management employees of firms into two distinct samples: 1) Executive directors of the companies, 2) non-executive directors those were independently in-charge of companies. The scholar identified a sample of 493 observations with executive director of firms, and 1,030 independent non-executive director observations from the master data files.

Overall, the sample of executive directors had 444 males and 27 female executive level employees. Average age of male directors (M = 58.84, SD = 9.73) was noted to be considerably greater than that of the female executive directors (M = 52.44, SD = 7.07). Education qualification details were scrutinized, and 306 employees were identified to have completed their bachelor degrees. Among the 306 executive level directors, 49 were found to have masters and within them 18 were also identified to have doctoral level of knowledge. There were 19 employees who have obtained some or other certificates related to industrial knowledge, and 56 executives have obtained professional degree in market or industry oriented courses. Responsibility level of the executive directors was primarily oriented around “CEO” (N = 169), whereas, 23 “Chairman of Board”, 44 “Company Secretary” and 30 “CFO” profiles were identified. Among the major components of total compensation, base salary (M = $ 355055.78, SD = $ 419064.32), and cash bonus (M = $ 106805.37, SD = $ 297504.45) were observed as the two top contributors with presence of noticeable outliers.  

Analysis of Independent Non-Executive Directors Compensation

Other than the 35 missing details, the sample of non-executive directors had 832 males and 163 female non-executive level employees. Average age of male independent non-executive directors (M = 61.33, SD = 9.61) was noted to be almost equal to that of the female non-executive directors (M = 61.09, SD = 7.28). Education qualification details were scrutinized, and among the available data, 472 employees were identified to have completed their bachelor degrees. Among the above 472 independent level directors, 57 were found to have masters and within them 40 were also identified to have doctoral level of knowledge. There were 27 employees who have obtained some or other certificates related to industrial knowledge, and 24 executives have obtained professional degrees. Responsibility level of the independent directors was primarily oriented around “Chairman of the Board” (N = 192), whereas, mere three “Alternative Director” and ten “Company Secretary” profiles were identified. Among the major components of total compensation, directors fess (M = $ 1526765.69, SD = $ 31899484.00), superannuation benefits (M = $ 77176.33, SD = 2181661.20) and other compensation (M = $ 69921.44, SD =  $ 2181892.70) were noted as the three top contributors with presence of noticeable outliers.  

With respect to the compensation structure of the directors, the study analyzed total compensation as well as its components. Specifically, information on basic salary, cash bonus, superannuation benefits, directors’ fees and the values of compensations were collected. Total compensation included base salary, cash bonus, committee fees, superannuation benefits, director fees, non-pecuniary benefits, short term and other compensations. The long term compensation was excluded from the scope of this article. The descriptive details have been presented in Table 1. Average of base salary, and cash bonus were two significant contributors in the total compensation. Average as well as total short and other compensations had almost equal in impact in total compensation. Committee fees had no contribution whatsoever in compensation of executive directors.

Table 1: Descriptive Statistics of Components of Compensation of Executive Directors

Parallel analysis was conducted with independent non-executive directors with respect to the compensation structure; the study analyzed total compensation as well as its components. The long term compensation was also excluded from the total compensation calculation. The descriptive details have been presented in Table 2. The major impact factors of total compensation excluding long term compensation components were director fees, superannuation benefits and other compensations. Base salary as well as cash bonus was two comparatively less significant influencing factors in total compensation to the independent directors.

Multivariate Analysis Model for Compensation

Table 2: Descriptive Statistics of Components of Compensation of Independent Non-Executive Directors

The multivariate analysis model was constructed by estimating an ordinary least square regression model with the dependent variable as the total compensation without the long term compensation part (Pereira, Basto, and Silva, 2016). In the model, the firm size was not considered since no particular information was available for that. A number of earlier empirical studies have examined the likelihood of decreasing or increasing profitability of a firm with differing results. As discussed previously, the study used age, gender, and educational qualification as parameters of employees’ demographics as possible influence factors to control for payout of the employees. Highly leveraged payout due to responsibility level also was assessed in the investigation. The control for the tenure of the responsibility also was out of the scope of the research. The educational qualification was coded for bachelor, master, PhD, professional, and certificate levels. Dummy values as 0 and 1 were introduced for coding the two categorical state for the variables male, female, and five qualification levels. The impact of these factors on total compensation was identified for the dummy value = 1, for each of the independent variables. Backward regression approach was adopted, and the co-linearity diagnostics as well as homoscedasticity assumptions were cross checked in the multivariate approach (Darlington, and Hayes, 2016).

Validity of the components was checked with bivariate correlation analysis. Committee fees and director fees were found to be two statistically non-significant correlated variables. Hence, these two sub components of total compensation were excluded from the regression modeling. No multi co-linearity was found from the variance inflation factor (VIF), as the numerical values were close to 1. Similarly no homoscedasticity was identified from the standardized residual plots, as the spread of the residuals were within the limits of the standardized mean of zero. The ANOVA models at each step of backward regression were noted to be statistically significant (p < 0.05) at 5% level of significance (Vu, Muttaqi, and Agalgaonkar, 2015). But, the predicting factors which were found to have no significant impact were gradually removed from the model. The final OLS model was evaluated as. Responsibility as CEO was found to be statistically significant influence factor (t = 3.744, p < 0.05) at 5% level explaining mere 9.5% variation in total compensation for the executive directors, and the overall model was also statistically significant (F = 14.019, p < 0.05). The final model was obtained at the twelfth step of backward modeling.  

Results and Findings

Table 3: Backward Regression Models for Executive Directors

Base salary was the most significant part of the total compensation, and OLS regression model was also framed with the independent influence factors. The final model was evaluated to be where CEO responsibility was statistically significant (t = 3.466, p < 0.05) in explaining mere 8.3% variation of the total compensation.

Validity of the components was checked with bivariate correlation analysis, moreover, directors’ fees and superannuation benefit were found to have statistically significant correlation with total compensation (excluding long term compensation). Hence, only these two sub components of total compensation were considered as valid components of total compensation in the regression modeling (Burns, Bush, and Sinha, 2014). No multi co-linearity and no homoscedasticity were identified. The ANOVA model of stepwise regression was noted to be statistically significant (p < 0.05) at 5% level of significance. But, PhD qualification of the independent directors was the only predicting factor which was found to have significant impact in the model. The final OLS model was evaluated as. Educational qualification of doctoral level was found to be statistically significant influence factor (t = 3.575, p < 0.05) at 5% level explaining mere 2.4% variation in total compensation for the non-executive (independent) directors, and the overall model was also statistically significant (F = 12.78, p < 0.05).

Conclusion

The primary aim of the study was to scrutinize the level of influence of age, gender, level of qualification on the compensation towards the director level employees. Executive and independent non-executive level of employees was identified as the two target group of employees, whose total payout and its major components were studied (Goh, and Gupta, 2016).  The scholar identified base salary and cash bonus as two major components in the salary of executive directors. Directors’ fees and superannuation benefits were the two primary components in the payout of independent directors. Eventually, in the life of a management level employee in a business, the proprietors may think about an offer of the firm. The decisions accessible to the proprietors incorporate taking the organization open through pitching the organization to an intrigued acquirer. The scholar investigated the probable influence factors to investigate the job of a director and his/her remuneration on the choice of firms to offer.

article archive higher compensation based remuneration for the role in the company and positional responsibility in a private company (Irani, Gerayeli, and Valiyan, 2017). When contrasted with demographical and educational qualification level, the only significant factor was identified as the accountability of CEO in the firms. This outcome is steady with both the earlier literatures of remuneration for higher exertion because of the offer of the firm and adjusting their interests to those of the investors (Andreas, Rapp, and Wolff, 2012). The outcomes are conflicting with the view that compensation towards the CEO pay at firms mirrors the entrenchment of the CEO. It was likewise archived that for the independent non-executive directors, the pay structure for offering firms is decidedly identified with the highest level of qualification of the employees. By and large, the discoveries of the present article are conflicting with the perspectives of pay of the firms in Australia. Rather, it was also found that pay of directors reflects installment for exertion and serves to adjust interests of the employees with highest qualification as doctoral level (Boivie, Bednar, and Barker, 2015).

References

Andreas, J.M., Rapp, M.S. and Wolff, M., 2012. Determinants of director compensation in two-tier systems: evidence from German panel data. Review of managerial science, 6(1), pp.33-79.

Boivie, S., Bednar, M.K. and Barker, S.B., 2015. Social comparison and reciprocity in director compensation. Journal of Management, 41(6), pp.1578-1603.

Burns, A.C., Bush, R.F. and Sinha, N., 2014. Marketing research (Vol. 7). Harlow: Pearson.

Cheng, I.H., Hong, H. and Scheinkman, J.A., 2015. Yesterday’s heroes: compensation and risk at financial firms. The Journal of Finance, 70(2), pp.839-879.

Darlington, R.B. and Hayes, A.F., 2016. Regression analysis and linear models: Concepts, applications, and implementation. Guilford Publications.

Goh, L. and Gupta, A., 2016. Remuneration of non-executive directors: Evidence from the UK. The British Accounting Review, 48(3), pp.379-399.

Irani, M. and Gerayeli, M.S., 2017. Relationship between Corporate Governance and CEO Compensation among Listed Firms in Tehran Stock Exchange. International Journal of Economics and Financial Issues, 7(1), pp.285-292.

Irani, M., Safari Gerayeli, M. and Valiyan, H., 2017. Board of Director Characteristics and CEO compensation: Empirical Evidence from Iran. Australasian Accounting, Business and Finance Journal, 11(2), pp.105-117.

Pereira, J.M., Basto, M. and da Silva, A.F., 2016. The logistic lasso and ridge regression in predicting corporate failure. Procedia Economics and Finance, 39, pp.634-641.

Sun, J., Cahan, S.F. and Emanuel, D., 2009. Compensation committee governance quality, chief executive officer stock option grants, and future firm performance. Journal of Banking & Finance, 33(8), pp.1507-1519.

Vu, D.H., Muttaqi, K.M. and Agalgaonkar, A.P., 2015. A variance inflation factor and backward elimination based robust regression model for forecasting monthly electricity demand using climatic variables. Applied Energy, 140, pp.385-394.