Essays on executive compensation and managerial incentives

grantor: University of TorontoThe first chapter of this dissertation examines the regulatory impact of executive compensation disclosure on managerial pay schemes. Analysing a three-level agency model among the shareholders, directors, and manager of a film, this chapter shows that before disclosure, the directors may underinvest in monitoring the manager's activities because of asymmetric information on the performance of the directors and a divergence of interests between them and other shareholders. Compensation disclosure rules mitigate this inefficiency and increase the pay-performance linkage. Empirically, this chapter examines the impact of compensation disclosure by comparing the sensitivity of CEO pay to firm performance, before and after the new Ontario disclosure regulation (1993), between groups of firms that were differentially affected 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 relationship. The second chapter provides the first systematic examination of the relationship between CEO compensation, firm size, and corporate performance for Canadian firms. Consistent with previous studies, this chapter finds that CEO pay rises with firm size and that compensation is tied to company performance. Some novel findings are also documented. First, options and stock ownership tend to play a relatively more important role for CEO incentives in small firms. And second, while CEO 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 firms and 678 US firms over the years 1991-1994, it is found that the pay-performance sensitivity associated with direct pay and stock ownership is smaller in Canadian firms than in US firms but that the difference diminishes as firm size increases. This finding, together with poorer corporate performance and lower CEO pay of Canadian firms, is consistent with the hypothesis that managerial incentives affect firm performance.Ph.D