Determinants of Managerial Pay: The Relative Contribution of Compensation Predictors

Abstract

Firm characteristics that determine CEO pays are closely interrelated with one another and make the partitioning of variances among correlated multiple predictors difficult. We decompose the interrelated predictors by orthogonalizing each predictor based on Tonidandel, LeBreton’s (2015) relative weight analysis on both normal and crisis period. In the process, we can rank the relative importance of each predictor and investigate its evolution over the economic crisis period. Firm size is the most dominant determinant, occupying over 60% relative weight. Wage discrimination against small company is obvious. ROA contributes 8.7% for the normal period and 10.8% for the crisis, which implies that CEOs’ ability to generate profits in crisis is particularly valued high and companies reward managers accordingly. The prolonged good performance is especially valued higher (13.9%) than the short-term performance. Risk and cash flow volatility occupy 3.6% and 1.8%, respectively, and the use of funds, such as capital expenditure and interest payment triggered by leverage occupy only marginal portions. This suggests that firms may lower CEO pays to reserve cash when they face risks or new investment opportunities, but the amount of extraction may not be high. In crisis, credit information can potentially outweigh the importance of many other typical predictors.