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CEO pay rates puzzle

Helen Roberts

CEO pay rates puzzle

You’d expect that chief executive officers who have a say in how much their pay increases each year would receive more than those who don’t, but research by Dr Helen Roberts (Department of Accountancy and Finance) curiously shows that the opposite is the case.

Roberts looked at the compensation of CEOs of 447 publicly listed New Zealand companies from 1998 to 2005 and was puzzled by the results.

“The managerial power view of executive compensation suggests that CEO membership of the compensation committee is an open invitation to rent extraction by self-serving executives,” says Roberts.

Instead, she found that annual pay increases for CEOs who sit on compensation committees were on average four per cent less than those who were kept at arms’ length from the process.

After ruling out various other solutions to the puzzle, Roberts suggests that “highly visible arrangements which, on the surface, appear an open invitation to CEOs to behave opportunistically may, in fact, induce them to exercise greater restraint.”

She adds that, in New Zealand at least, it follows that any seemingly excessive CEO compensation is unlikely to be due to the presence of CEOs on compensation committees.

Roberts notes that New Zealand is unusual in allowing CEOs to sit on compensation committees and influence their own pay increases, either directly or by negotiating a favourable pay package for their executive team, which then needs to be passed on to the CEO to maintain relativity.

Roberts’ findings have been published in the Journal of Economics and Business, in an article co-written with Professor Glenn Boyle (University of Canterbury).

Photo: Graham Warman