The Project Report In Executives Salaries Commerce Essay

The Project Report In Executives Salaries Commerce EssayAre chief executive officers over salaried? Many mass think so and many potential ca engagements contact water been identified such as too much power, inattentive boards of directors, conflicts of interest by compensation consultants, the use of melodic line options and the list goes on. Some studies show that the sightly chief operating officer was paid $10 million to $15 million in cc5. This includes their remuneration, bonus, stock option gains, stock grants and various executive benefits and prerequisites (news.cnet.com).We now look at the highest 10 paid jobs in UK and find not surprisingly that Company chief executive officers are right on that plosive at the top of the list by a huge pay difference when compared with opposite(a)s high in the list.10 Highest paid UK jobs June 2009Company chief executive officer/Directors171,509Doctors81,744Brokers80,233 monetary Managers Chartered Secretaries79,545Civil Serva nts (Senior)71,824Aircraft Pilots Flight Engineers61,585Management Consultants/Economists52,505Lawyers, Judges Coroners51,579Police Officers (Inspector and above)51,487Managers (Marketing and sales)50,575( Source careerbuilder.co.uk )Research QuestionWhat factors affect chief executive officer salaries?The files chief operating officerSAL1.RAW and chief executive officerSAL2.RAW are selective information grooms that have various firm exertion measures as well as information such as tenure and education. Compared with chief executive officerSAL1.RAW, the indorsement information set contains to a greater extent information about the CEO, rather than about the company is included (Wooldridge, 2008). In the selective informationset, Wooldridge took a random sample of data reported in the May 6, 1991 electrical outlet of Businessweek.Literature ReviewIn context of current pecuniary crisis, CEO compensation has been a major subject of discussion among businessmen and academic s since early mid-twenties (McKnight et al., 2000). How high should be the compensation, what is the relationship between CEO pay and his abilities, what is the correlation between CEO compensation and companys performance? We have chosen the topic imputable to its obvious relevance with current financial situation.During the literary productions review we found a number of empirical articles, exploring various aspects of CEO compensation.McKnight et al (2000) in CEO age and Top Executive Pay A UK Empirical Study examines the implication of CEO age on managerial pay. They promote four hypothesesThe irrefutable relationship between CEO pay and ageThe positive relationship between company coat and CEO compensation, however it would weaken with the plus of CEO ageThe relationship between company performance and CEO salary would weaken with increasing age of CEOThe relationship between company performance and CEO incentive pay would be positive and would streng accordingly with inc rease of CEO ageThey have explored over 100 UK companies and not only considered CEO pay but have divided it into salary, performance bonuses and share options in order to obtain clearer results. McKnight et al (2000) have solved that relationship between CEO age and their bonuses appeared to be non-linear. The data did not support Hypothesis 3 and 4, although Hypothesis 1 and 2 were proved by the data. The practical implication of their explore suggests that board members considering CEO pay should take into account the age, family and financial circumstances of the CEO, especially if CEO age is about 53 years, as it is an inflection point on curvilinear association of the effect of CEO age on bonus.This conclusion highlights the different aspect of CEO pay, whereas in earlier research McKnight (1996) examined 200 UK firms and found that performance and firm size of it are the important predictors of executive remuneration. come up and Shepard (1997) in Firm diversification and CEO compensation managerial mightiness or executive entrenchment? explored empirical association between CEO pay and a number of different firm characteristics, such as size and performance. They have also considered CEO personal abilities and characteristics, however the major focus of their research was on correlation between CEO pay and company diversification. They conclude that firm diversification in most cases does not benefit stockholders by increasing company value, but might only benefit the decision makers. Rose and Shepard (1997) admit that such conclusion is controversial and required further empirical research. Rose and Shepard (1997) considered firm diversification as one important determinant of CEO compensation. Investigating the relationship between CEO compensation and firm diversification over 1985-1990, they found that the CEO of a firm with two lines of business averages 13% more in salary and bonus than the CEO of a similar-sized but undiversified firm, cete ris paribus. The term Ceteris Paribus means that all other relevant factors held fixed or constant (Morris, 2008).In the later paper of Van Putten and Bout (2008), the relationship between CEO compensation and company performance has been stressed and their research was do during financial crisis and on that pointfore might be more relevant in todays economic situation.Deckop (1988) analyse data from 120 firms in 1977-81 to show that CEOs were not accustomed an incentive through compensation to increase the size of the firm at the expense of profit which is contrary to the findings of some other studies. Rather, CEO compensation was positively related to profit as a percentage of sales. The market equity value of the firm and the CEOs age and years of service as a CEO had a little effect on compensation (Deckop, 1988).Wright, Kroll and Elenkov (2002) provide us with a theoretical argument that the effect of acquisition-related factors on CEO compensation is detail upon the intens ity of monitoring activities. In firms with vigilant monitors, outlets will explain changes in CEO compensation while in firms with passive monitors, increased corporate size due to an acquisition will explain compensation changes. They found support for their hypothesis in a sample of 171 acquisitions over the 1993-98 time period.Various researchers have come up to different conclusions exploring factors bear on CEO pay, therefore we have found this question interesting and we would consider the data from Cengage database and look for some other factors, affecting CEO compensation.Data DescriptionThe data has been downloaded from CEngage Learning which has online data sets for Wooldridges Introductory Econometrics A Modern Approach (cengage.com). It contains two data sets namely CEOSAL1.RAW and CEOSAL2.RAW. CEOSAL2.RAW, the second data set contains more information about the CEO, rather than about the company as in case of CEOSAL1.RAW. The Table below describes the versatiles in the data sets CEOSAL1 and CEOSAL2. These two data sets were merged to give one final data set namely CEOSAL3.DTA. The unsettled description for the final data set CEOSAL3 ignore be found in the Appendix.Variable Descriptions for CEOSAL1SalaryAnnual salary (including bonuses) in 1990 (in thousands) $SalesFirm sales in 1990 (in millions) $RoeAverage return on equity, 1988-90 (in percent)PcsalPercentage change in salary, 1988-90PcroePercentage change in roe, 1988-90Indust= 1 if an industrial company, 0 otherwiseFinance= 1 if a financial company, 0 otherwiseConsprod= 1 if a consumer products company, 0 otherwiseUtil= 1 if a utility company, 0 otherwiseRosReturn on firms stocks 1988-90LsalaryNatural logarithm of salaryLsalesNatural log of salesVariable Descriptions for CEOSAL2SalaryAnnual salary (including bonuses) in 1990 (in thousands) $AgeAge in YearsCollege= 1 if tended to(p) college, 0 otherwiseGrad= 1 if attended graduate school, 0 otherwiseComtenYears with CompanyCeotenYears a s CEO with CompanySalesFirm sales in 1990 (in millions) $ProfitsFirm Profits in 1990 (in millions) $MktvalMarket Value (in millions) $, end 1990LmktvalNatural log of mktvalLsalaryNatural log of salaryLsalesNatural log of salesComtensqcomten2 (company tenure squared)Ceotensqceoten2 (ceo tenure squared)Profmargprofits as % of salesData AnalysisWe used regression depth psychology to look out the factors that affect chief executive officer salaries. We chose a multivariate model because most varyings cannot be explained by a single inconstant and estimations based on a single explanatory variable may lead to biased coefficients (Baum, 2006). A multivariate model allows for ceteris paribus analysis and we can neutralise the missing variable bias. We used Stata 10 for the regression analysis of the data set.The data sets namely CEOSAL1.DTA and CEOSAL2.DTA were corporate trustd to get a single data set CEOSAL3.DTA. The merging of data sets was possible because the variable salary and sa les were common to both data sets and this was necessary to come up with a single equation. The data set CEOSAL1.DTA in memory was appended with CEOSAL2.DTA on disk using the append datasets option in Stata 10 by clicking on Data tab and selecting combine datasets option.Econometric MethodologyThe methodology is econometric as statistical tool (Stata 10) was used to address economic issues. The analysis is based on observational (non-experimental) data. We whence derive a relationship from economic theory or come up with an equation that serves us as an econometric model.lsalary = 4.78 (.51) + .191 (.04) lsales + .083 (.06) lmktval + .017 (.005) ceoten .094 (.079) grad .065 (.23) college .01 (.003) comten + I + uwhere lsalary = leechlike variable, regressand lsales / lmktval / ceoten / grad / college / comten = explanatory variables, regressor u = error term / disturbance I = dummy / dichotomous variable for Industry 4.78 = intercept parameter, .19 / .08 / .017 / -.09 / -.06 / -.01 = population / flip parameters and the respective standard errors are shown in brackets and the bold variables represent that the variable is statistically significant in the data.In the above equation as the dependent variable is also in natural logarithm, the natural log of the explanatory variable gives us elasticity. Elasticity is the percentage change in one variable given a 1% ceteris paribus increase in another variable (Wooldridge, 2008). So, the coefficients of lsales and lmktval give us the elasticity i.e the percentage increase in the dependent variable when the explanatory variable is increased by 1% ceteris paribus. For example, a 1% unit increase in lsales will account for approximately 19% increase in lsalary and similarly a 1% unit increase in lmktval will account for approximately 8% increase in lsalary.InterpretationThe t-statistic or t-ratio is defined as the coefficient of the variable divided by its standard error (Wooldridge, 2008). If the numerical val ue of t-statistic or t-ratio is greater than 2 i.e t 2, then the variable is statistically significant. In the data after running the regression analysis, we find the t-ratio of lsales, ceoten, comten and the constant ( y intercept parameter) to satisfy the above inequality t 2 and indeed these variables can be declared as statistically significant. The R square for the model is 0.355 ( approximately 36% ) which is moderate as a high R square does not necessarily imply a better model as the coefficient can be misleading at times. However, it is a good offset point and generally bigger R square is good. We get the constant ( y intercept ) to be statistically significant as this would allows us to make an idea of the basic salary of CEO even when sales, profits and market value is down because the CEO gets paid his basic salary, regardless of the firm qualification profits or losses.Critical AnalysisWith reference to our group presentation and the video reported by ABC News, New York which showed that CEOs average annual bailout is $ 13.7 million and average wage earner earns $ 31, 589. This is almost 436 times the salary of an average wage earner which seems to raise few questions and a debate over whether CEOs are overpaid ( youtube.com ). This then raises the point that no survey of executive compensation is complete without the discussion of political factors influencing the great level of CEO pay. The controversy heightened with the November 1991 introduction of Graef Crystals (1991) expose on CEO pay, In look for of Excess, and exploded following President George Bushs ill-timed pilgrimage to Japan in January 1992, accompanied by an entourage of highly paid US executives (Murphy, 1999).ConclusionThe research aimed to find out the factors that affect chief executive officer salaries and why CEOs are compensated greatly. The data sets namely CEOSAL1.DTA and CEOSAL2.DTA were combine to give a final data set that was used to answer the research question and draw the conclusion that sales, market value ceotenure have a positive effect on CEO salary while company tenure and college / graduation have a negative effect. In our research and data analysis, the most significant factor comes out to be sales.LimitationsThe data Wooldridge took is from an issue of Busineesweek in 1991 which is quite old. The files need to be updated and it could be very interesting to have a go at it the current trend in CEO Compensation and whether the current economic recession had any effects. Due to the current prevalent economic crisis, the findings can be really interesting which could further add some value to the research that has been already done and leave some space for more research to be carried out in this particular topic. An interesting comparison could be made between the factors e.g sales, ros (return on stocks), roe (return on equity), CEOs age, CEO tenure, profits, market value, comten (years with company), etc highlighted in our liter ature review and our results so that we know which factor plays the most important role and consequently affects chief executive officer salaries when contrasted in relative terms with other studies. The sample size in the data is approximately 200 observations which is not great. The data shows no evidence for the location of firms and the gender of the CEO. It would be a more contemporary question to pose that is there any gender discrimination in CEO Compensation. The policies of the government are also unknown to see if there were any tax evasions present or not.Further ResearchA further deep research could use the current data to find the factors affecting CEO salaries. Then, the effects of current economic recession could be looked into and a further study could try to find whether CEOs are overpaid and if so what are the reasons for it? Is it rightfully because of their managerial ability or it is just an executive entrenchment? Then one could also look at the role of monito ring CEOs and their firms. Are these small, strong suit or family operated firms and what factors affect their growth and output? Is there sex discrimination in CEO compensation?BibliographyBaum, C.F (2006), An Introduction to Modern Econometrics Using Stata, Stata PressBout, A. and Van, P.S. (2008), beyond the boardroom considering CEO pay in a broader context, People StrategyDeckop, J.R (1988), Determinants of Chief Executive Officer Compensation, Industrial and Labor Relations Review, 41(2), pp. 215-226Crystal, G. (1991), In Search of Excess The Overcompensation of American Executives, W.W. Norton Company New YorkMcKnight, P. (1998), An Explanation of Top Executive Pay A UK Study, British Journal of Industrial Relations, 344McKnight P., Tomkins C. and Weir C. (2000), CEO Age and Top Executive Pay A UK Empirical study, Journal of Management and Governance, 42000Morris, C. (2008), Quantitative Approaches in Business Studies, 7th Edition, FT-PrenticeHallMurphy, K. (1999), Executi ve Compensation, enchiridion of Labour Economics, 3(2), pp. 2485-2563Rose, N.L and Shepard, A. (1997), Firm diversification and CEO compensation managerial ability or executive entrenchment, Journal of Economics, 28(3), pp. 489-514Wooldridge, J.M (2008), Introductory Econometrics A Modern Approach, 4th Edition, South-WesternWright, P. ,Kroll M. And Elenkov,D. (2002), accomplishment Returns, Increase in Firm Size, and Chief Executive Officer Compensation The Moderating Role of Monitoring, The Academy of Management Journal, 45(3), pp. 599-608http//login.cengage.com/sso/logouthome.do (Accessed on 10th February, 2010)http//news.cnet.com/The-great-overpaid-CEO-debate/2010-1014_3-6078739.html (Accessed on maiden March, 2010)http//www.careerbuilder.co.uk/Article/CB-27-Job-Search-Britains-Best-Paid-Jobs/ (Accessed on 1st March, 2010)http//www.youtube.com/watch?v=vcG-_LlKN14 (Accessed on 19th March, 2010)