[UvT] Higher remuneration risk for CEOs goes hand-in-hand with better corporate performance

Those companies with a higher remuneration risk for their CEO, whereby pay is closely linked to the achievement of predefined performance targets, usually perform better. This is demonstrated by the PhD research conducted by Eric Engesaeth at Tilburg University in the Netherlands.

Engesaeth mapped out remuneration contracts for senior managers of large corporations in Western Europe. He also developed a Compensation Risk Index for measuring the risk incorporated in variable remuneration which he applied to the markets of the Netherlands and the United Kingdom.

The remuneration structure is partly determined by the market and partly by a remuneration committee, which may take various poor or sound decisions. Eric Engesaeth distinguishes between two features in remuneration:

The direction is determined by the targets which are set, such as an increase in earnings per share or the shareholder return compared to other companies.

The intensity is the extent to which the remuneration level deviates, if targets are not met.

Engesaeth developed a Compensation Risk Index for the latter. He subsequently investigated what this index corresponds to for both the Dutch and UK markets.

Higher risk pays
This research demonstrates that companies with a higher remuneration risk for their CEO are correlated to better corporate performance. In addition, the research shows that a higher remuneration risk goes hand-in-hand with a higher remuneration level. Furthermore, CEOs in the Netherlands and the UK who have held their jobs for a longer time are able to bring down remuneration risk in their pay package.

For Western Europe, Engesaeth also researched the remuneration for senior management just below the level of board of directors. Among other things, this shows that company loyalty is rewarded less: managers recruited from outside the company earn more. CEOs with a high media profile can negotiate a higher remuneration gap between themselves and the next level down, but this remuneration is not paid out if performances are worse than expected. Female CEOs are less likely to be subject to excessive bonuses.

In his thesis, Engesaeth also offers tips for stakeholders in mapping the process of the executive remuneration decision, i.e. how the remuneration level and structure are established.

Source: Tilburg University



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