CEO-COMPENSATION AND FIRM PERFORMANCE

A Proposal submitted

By

Muhammad Abdul Kabeer Ahmed Siddiqui (37174)

To

Department of Business Administration

In partial fulfillment of

The requirement for the

Degree of

MASTER OF BUSINESS ADMINISTRATION

In

Finance

This Project has been

Accepted by the faculty

FACULTY OF BUSINESS ADMINISTRATION

___________________________________
Mr. Asad Ali Rind
Advisor

____________________________________
Research Facilitation Centre – RFU,
Iqra University

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 Table of Contents

S.NO. DESCRIPTION PAGE

NO.
1. List of Tables…………………………………………………… ii
2. Chapter 1: Introduction……………………………………… 3
1.1 Statement of the problem………………………….
1.2 Research purpose …………………………………………
1.3 Research Question………………………………………
1.4 Research Significance…………………………………..
1.5 Outline of the Study…………………………………….

3. Chapter 2: Literature Review…………………………… 5

2.1 Introduction…………………………………………
2.2 Theories…………………………………………….
2.3 Hypothesis……………………………………….
2.4 Conceptual Framework …………………………………………..
4. Chapter 3: Research Method…………………………… 9
3.1 Research Approach…………………………………………
3.2 Research Design…………………………………………….
3.3 Sampling Data and Technique……………………………………….
3.4 Statistical Technique …………………………………………..
3.5 Ethical Consideration…………………………………………..

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 Acknowledgment

Thanks to Almighty Allah for being my strength and guide in the writing of this thesis.

Without Him, I Would not had the wisdom or the physical ability to do so.

I also would like to thank my advisor, Dr. Asad Ali Rind of Finance Department at Iqra

University. He always accommodating and have a helping hand if I had question about my

research or writing. He shows support in everything I do and teach me the right direction for

my thesis writing.

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 CHAPTER-ONE

1.1. INTRODUCTION

Executive compensation and company performance relationship between researchers of different

ideas has studied extensively. The analysis confirms a positive relationship between firm size
and executive remuneration because of the impact of the firm's performance on executive pay
(Irish potato, 1985; and Yermack, 1995).

Murphy (2000) suggests that the majority of firms use a number of measures to benefit their top
executives. The main fashion types of prizes include money and company stock. The majority of
public companies provide stock options or limited stock to ensure harmony in the manager's
well-being and therefore the owners can achieve maximum goals from wealth. Executives have
two main components in compensation, fixed wages and bonuses. Bonuses are usually included
in certain performance measures that indicate alignment of social control decisions with specific
organizational goals. Throughout this study, we have a tendency to consider stock options and
bonus concession plans.

1.2. Problem Statement

Previous research, for the most part, has been limited to cash compensation testing. We
analyze the impact of compensation structures and performance both during the study and
total cash compensation. The size of the initial studies, reviewed the relationship between
performance and executive pay, where compensation is presented in the form of cash
compensation. Unlike previous studies, by analyzing both cash and total compensation,
we note that money compensation affects each market and performance accounting
measures while aggregate compensation is significantly affected by market-based
performance. Further analysis after distributing information on the idea of the existence
of bonus and stock option plans indicates that the size of the firm, as measured by sales,

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 is not as important if the corporate has a bonus or stock there is no option plan. Our
analyzes revealed a profit based on market for those companies that do not supply option
incentives.

1.3. Research purpose

The main purpose of this study is to influence the actions of government compensation
and performance incentive contracts. In the face of stock-based incentives, our tendency
is for corporate executives to assess the sensitivity of salary incentives.

1.4. Research Significance

An important part of the internal control system is the motivating mechanism and psychological
nature of the compensation agreements. A well-designed incentive systems that will deal
effectively with every adverse selection problems and financial losses in the agreement. Most
aim of this study is to influence the actions of government compensation and performance
incentive contracts. We have a tendency to overestimate the sensitivity of the CEO to the
payment of concessions over stock-based concessions.

1.5. Outline of the report

After introduction this report has four section each section explain about this topic in
its particular manner, first section is problem statement which includes the previous gaps
about our topic which we are trying to fill, second section is the research purpose which includes
the purpose of our study that this study will firms in which manner, third section includes
the research question which are the base of our study which we are finding in our study and last
is research significance it tells about that how it will help our countries firms to develop
its Compensation Module.

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 2.1.

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 CHAPTER-TWO

2.1. Literature Review

For the next half, government compensation analysis has increased regular payments and
bonuses because there is a proxy for full compensation (Abowd, 1990). The amount of
compensation has been used in several studies as a company's performance and variable in their
efforts to clarify the relationship between the government salaries. Others have pointed to the
importance of stock bases in the analysis of government compensation (Verrecchia, 2003).

The use of money compensation in early studies, because the compensation model is
completely variable, was considered acceptable and even on the idea of facilitating information
and hence the proportion of money in compensation contracts at large scale. However, a major
increase in the range of corporations that provide stock choices to their executives and staff, the
severity of stock-based compensation in matching aggregate compensation, and therefore the
SEC disclosure requirements for executives regarding election grants. Affected yesterday's
selection. Compensation in additional recent studies (Bertrand and Mullainathan, 2000). Healy
(1985), Mehran (1995) and Ryan and Wiggins (2001, 2002), Among others, an immediate
relationship between firm size and government compensation has been confirmed. CEO
compensation packages are large as a result of the required talent set and social control talent of
large corporations, and thanks to the quality and variety of activities in such organizations. In the
literature, stable proxies are used for aggregate assets, total sales, firm value, and staffing
limits(Conyon et al., 2000; Carpenter and Sanders, 2002; Cordeiro and Veliyath, 2003;
Indjejikian and Nanda, 2002; Yermack, 1995). We have a tendency to use the exponent as proxy
for firm size.

By this study, we investigate the relationship between compensation of CEO and overall

performance using logarithmic transformation of the prevalent model to limit the trouble of

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 heteroscedasticity in error terms. We use two measures of executive compensation the money
and complete compensations. As cited above, while formerly research used solely the cash
compensation as the measure of the CEO pay, adjustments that have passed off in the remaining
decade in relation to the phrases of compensation contracts, such as the considerable expansion
of non-cash-compensation, and the full-size growth in the number of companies imparting
inventory alternatives to their executives and employees, collectively with the SEC mandated
disclosure related to inventory option offers issued to executives,1 have resulted in increased
attention to the applicability of non-cash compensation in pay-performance-research

Healy (1985), Mehran-(1995) and Ryan and-Wiggins (2001, 2002), amongst others, have
proven a direct relation between size of the fim and executive compensation. CEO
compensation packages tend to be large for big agencies because of the required skill set and
managerial brain due to the difficult and twisted scenario and range of activities inside such
organizations. Relevant representative used in the literature for firm size include complete assets,
whole sales, market value of the firm, and range of personnel (Conyon et al., 2000; Carpenter-
and Sanders, 2002; Cordeiro and Veliyath, 2003; Indjejikian and Nanda, 2002; Yermack, 1995).
We use-logarithm of sales as the proxy for the firm size.Hypothesis Development

Adithipyangkul, Alon, and Zhang (2011) address the motivational factor of perks (non-
cash compensation) in China and document that perks are positively associated to both modern
and future company performance as measured with the aid of return on assets, showing that
perkssare used to reward the overall performance as well as to motivate the executives for
profitability. Buck, Liu, and Skovoroda (2008) additionally verify in China that executive
compensation and company performance have mutual effects on each different through each
reward and motivation.

Option can provide are encouraged to be an tool to minimize moral hazard problems and
align the mutual pastimes of retailers and principals however, in accordance to hire extraction
view, option provides can be used to compensate executive extremely if executives are in
manipulate of the pay setting technique (see, Bebchuk & Fried, 2003). Compatible with former,
Hanlon, Rajgopal, and Shevlin (2003) exhibit that inventory choice can provide to top
management team (TMT) positively affect the future firm. Kato, Lemmon, Luo, and Schallheim
(2005) exhibit that assumption of stock options, following a regulatory trade in 1997, has large

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 impact on working overall performance in Japan. Relatedly, Fich and Shivdasani (2005) exhibit
that presence of inventory choice plans for backyard directors have high-quality have an impact
on on market to book ratios.

In Pakistan, Sheikh et al. (2018) locate that CEOs are rewarded against past and modern
association performance. On the other hand, Shah et al. (2009) may want to no longer locate any
effective association between association performance and CEO compensation. However, these
research focus on pay as reward for previous and present-day firm overall performance and do
not consider pay towards unobserved company performance and as a motivation to perform in
future. Thus, our study is distinctive from existing research in Pakistan and concern on the
relationship between present day immoderate CEO compensation and future company
performance.

Under organization theory, if boards compensate CEOs in Pakistan for each observable
and unobservable overall performance measures and unobservable overall performance measures
correlate with future observable overall performance measures then current compensation that is
impenetrable via contemporary observable performance measures is likely to correlate with
future observable overall performance measures (see, Balafas & Florackis, 2014; Carter, Li,
Marcus, & HassanTehranian, 2016; Cooper et al., 2013; Hayes & Schaefer, 2000).

Hypothesis Development

Executive Compensations have an positive effect on firm performance

Executive Compensations have negative effect on firm performance

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 2.2. Theoretical framework

CEO Cash
CEO Bonus Compensation CEO Stocks

FIRM
PERFORMANCE

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 CHAPTER-THREE

3.1. Research Approach

This section deals with the choice, validity and outline of the analysis style utilized in the testing
method. Study Review, information extraction techniques and information assortment resources
also are lined during this portion. Ultimately, numerous testing approaches and procedures used
for in-depth study square measure processed and supported. this thesis opts for a selected
quantitative technique.

3.2. Research Design

Throughout our study, we concentrated on ROA and ROE as a contingent variable and the ratio
of CEO compensation to overall assets as an independent variable. Therefore we have modified
the concept as follows;

Firm Performance = α + β1BPAY + β2BNS+ β3STK+ β4LBT + e

Where BPAY reflects the Basic Salary of CEO, BNS reflects Bonuses Given to CEO and STK
reflects the numbers of Shares own by CEO and LBT is the liabilities to the assets of the
company at the moment. Firm Performance reflects the return-on assets (ROA) and the return on
equity (ROE) which are contingent variables of firm results.

3.3. Sampling Data and Technique

The survey analysis contains of classified companies within the PSE-100 List. the info sample
springs from the monetary reports and websites of listed companies on PSX-100. the strategy to
gathering panel knowledge is compatible with the previous study work of Murphy (2000).

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 3.4. Statistical Technique

Our statistical technique for this report will be descriptive statistic and regression, this are the
techniques which we are going to use to test our hypothesis.

3.5. Ethical Consideration

As we are conducting our research as explanatory approach so the data which we are going to
use is the secondary data which is already available data so there is no restriction and ethical
requirement which we have to consider.

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