CEO Compensation Structure and Firm Performance : Evidence from the auto industry

Abstract: CEO pay-performance relationship is a topic that has been largely discussed and researched. Questions still remain on precisely how CEO remuneration is related to company performance. Recently, attention has shifted from how much executives are paid to how they are paid. The purpose of this paper is to find how CEO compensation structure relates to company performance in the auto industry. In order to achieve this aim, the CEO compensation is broken down into four components, namely: base salary, bonus, stocks and stock options, and pension. The company performance is measured by change in market value, since market information is forward looking, meaning future performance might be anticipated in advance by the markets. As such, decisions made whose positive or negative effects may occur later in the future are, if known by investors, priced into the market value. Each compensation component relative the total was tested for correlation with respective market capitalization change. However, the insignificant statistical results conclude that the compensation structure follows a relatively random pattern. Hence, no statistically significant relationship between CEO compensation structure and firm performance in the auto industry was found. The findings that there are no significant performance improvements for firms having a relatively bigger proportion of performance-based pay means that underlying theories, such as agency theory, may not be applicable in the industry.