The Project Report In Executives Salaries Commerce Essay

The Project Report In executive directors Salaries Commerce experimentAre chief operating officers overpaid? Many people think so and many authorisation causes wealthy person been identified much(prenominal) as too much power, oscitant boards of directors, conflicts of interest by payment consultants, the use of stock options and the list goes on. al to the highest degree(a) studies bear witness that the aver come on chief operating officer was paid $10 million to $15 million in cc5. This includes their salary, bonus, stock option gains, stock grants and various decision maker benefits and prerequisites (news.cnet.com).We now require at the highest 10 paid jobs in UK and hazard not surprisingly that Company chief operating officers atomic event 18 right there at the top of the list by a huge pay variance when compared with opposites high in the list.10 Highest paid UK jobs June 2009Company chief operating officer/Directors171,509Doctors81,744Brokers80,233 monetary Ma nagers Chartered Secretaries79,545Civil Servants (Senior)71,824Aircraft Pilots Flight Engineers61,585 perplexity Consultants/Economists52,505Lawyers, Judges Coroners51,579Police Officers (Inspector and above)51,487Managers (Marketing and Sales)50,575( cum careerbuilder.co.uk )Research QuestionWhat factors involve chief executive director director officer salaries?The files chief operating officerSAL1.RAW and chief executive officerSAL2.RAW are information ticks that hold back various firm performance measures as well as information such as tenure and education. Compared with chief operating officerSAL1.RAW, the second information set contains more information about the CEO, rather than about the participation is included (Wooldridge, 2008). In the selective informationset, Wooldridge took a random sample of entropy inform in the May 6, 1991 issue of Businessweek.Literature ReviewIn circumstance of online financial crisis, CEO stipend has been a major present o f discussion among businessmen and academics since early 1920s (McKnight et al., 2000). How high should be the compensation, what is the kindred amid CEO pay and his abilities, what is the correlation amidst CEO compensation and companys performance? We welcome chosen the topic collectable to its obvious relevancy with menses financial situation.During the literature freshen up we nominate a number of empirical articles, exploring various aspects of CEO compensation.McKnight et al (2000) in CEO age and Top Executive Pay A UK a posteriori Study examines the consequence of CEO age on managerial pay. They promote four hypothesesThe incontrovertible consanguinity between CEO pay and ageThe positivist kin between company sizing and CEO compensation, notwithstanding it would weaken with the adjoin of CEO ageThe consanguinity 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 strengthen with development of CEO ageThey deem explored over one C UK companies and not only considered CEO pay but have divided up it into salary, performance bonuses and share options in order to obtain clearer results. McKnight et al (2000) have concluded 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 look into 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 age, as it is an inflection point on curvilinear association of the issuance of CEO age on bonus.This final stage highlights the different aspect of CEO pay, whereas in earlier research McKnight (1996) examined 200 UK firms and found that performance and firm size are the important predictors of executive remuner ation.Rose and Shepard (1997) in plastered variegation and CEO compensation managerial ability 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 or so cases does not benefit stockholders by increasing company value, but talent only benefit the decision makers. Rose and Shepard (1997) admit that such decision is controversial and required progress 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 middlings 13% more in salary and bonu s than the CEO of a similar-sized but monolithic firm, ceteris paribus. The term Ceteris Paribus means that all separate applicable 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 made during financial crisis and therefore might be more relevant in todays scotch situation.Deckop (1988) analyse data from 120 firms in 1977-81 to show that CEOs were not authorisen an incentive through compensation to increase the size of the firm at the expense of profit which is contrary to the insureings 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 ground that the effect of acquisition- related factors on CEO compensation is contingent upon the intensity of observe activities. In firms with vigilant monitors, returns will explain changes in CEO compensation era in firms with passive monitors, increased corporate size due to an acquisition will explain compensation changes. They found support for their speculation in a sample of 171 acquisitions over the 1993-98 time period.Various researchers have come up to different conclusions exploring factors take uping 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.selective information DescriptionThe data has been downloaded from CEngage teaching 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 mesa below describes the varyings in the data sets CEOSAL1 and CEOSAL2. These two data sets were merged to give one final data set namely CEOSAL3.DTA. The variant exposition for the final data set CEOSAL3 can be found in the Appendix.Variable Descriptions for CEOSAL1Salary yearbook salary (including bonuses) in 1990 (in thousands) $Sales warm sales in 1990 (in millions) $RoeAverage return on equity, 1988-90 (in percent)Pcsal percent 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 put down of salaryLsalesNatural pound of salesVariable Descriptions for CEOSAL2SalaryAnnual salary (including bonuses) in 1990 (in thousands) $AgeAge in YearsCollege= 1 if attended college, 0 otherwiseGrad= 1 if attended down school, 0 otherwiseComtenYears with CompanyCeotenYears as 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 lamed)Ceotensqceoten2 (ceo tenure squared)Profmarg gain as % of salesselective information AnalysisWe used regression analysis to look out the factors that affect chief executive officer salaries. We chose a multivariate model because most inconsistents cannot be explained by a star covariant and estimations ground on a single informative variable may lead to sloping coefficients (Baum, 2006). A multivariate model allows for ceteris paribus analysis and we can avoid the absentminded variable bias. We used Stata 10 for the regression analysis of the data set.The data sets namely CEOSAL1.DTA and CEOSAL2.DTA were feature to get a single data set CEOSAL3 .DTA. The merging of data sets was possible because the variable salary and sales were uncouth 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 victimisation 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 economical issues. The analysis is based on observational (non-experimental) data. We then 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 = parasitical variable, regressand lsales / lmktval / ceoten / grad / college / comten = explanatory variables, regressor u = error term / disturbance I = dummy / di vided variable for Industry 4.78 = kibosh parameter, .19 / .08 / .017 / -.09 / -.06 / -.01 = population / slope parameters and the respective quantity errors are shown in brackets and the bold variables represent that the variable is statistically probatory 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% building block increase in lsales will account for just about 19% increase in lsalary and similarly a 1% unit increase in lmktval will account for more or less 8% increase in lsalary.InterpretationThe t-statistic or t-ratio is defined as the coe fficient of the variable divided by its standard error (Wooldridge, 2008). If the numerical value of t-statistic or t-ratio is great 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 hence 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 propagation. However, it is a good head start 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, disregarding of the firm making profits or losses .Critical AnalysisWith indication to our group presentation and the video reported by ABC News, NewYork 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 behold of executive compensation is complete without the discussion of political factors influencing the great train of CEO pay. The controversy heightened with the November 1991 introduction of Graef Crystals (1991) expose on CEO pay, In bet of Excess, and exploded following President George Bushs ill-timed pilgrimage to lacquer 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 combined to give a final data set that was used to attend 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 know 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 run 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 literature review and our results so that we know which factor plays the most important role and thence 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 sex activity 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 unvalued to see if there were any tax evasions present or not. nurture 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 truly because of their managerial ability or it is just an executive entrenchment? Then one could also look at the role of monitoring CEOs and their firms. Are these small, medium 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 council chamber considering CEO pay in a broader context, People StrategyDeckop, J.R (1988), Determinants of important 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), Quantit ative Approaches in Business Studies, seventh Edition, FT-PrenticeHallMurphy, K. (1999), Executive Compensation, Handbook 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), Acquisition Returns, Increase in Firm Size, and top dog 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 initiatory 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 Mar ch, 2010)