CEO pay ratio versus financial performance in Polish public companies

Authors

DOI:

https://doi.org/10.18559/ebr.2024.3.1480

Keywords:

executive compensation, financial performance, corporate governance, pay disparities

Abstract

In this paper, we aim to investigate the relationship between CEO pay ratio and corporate financial performance in Polish public companies. Using a sample of 259 companies listed on the Warsaw Stock Exchange, we demonstrate that links between the pay gap and accounting measures of performance differ from market ones. Our findings indicate a negative correlation between CEO pay ratio and return on sales. This implies that companies pay executives less during periods of high profitability, possibly to avoid the negative impact of excessive pay on firm performance. We also discover that the pay gap, measured by CEO pay ratio, is positively linked with Tobin’s Q and annual stock returns. A high CEO pay ratio signals strong incentives for top executives to perform, potentially leading to better strategic decisions and, consequently, higher Tobin’s Q ratios and annual stock returns.

Downloads

Download data is not yet available.

References

1. Act. (2010, July). Dodd–Frank Wall Street Reform and Consumer Protection Act. https://www.congress.gov/111/plaws/publ203/PLAW­111publ203.pdf
View in Google Scholar

2. Adams, J. S. (1963). Towards an understanding of inequity. The Journal of Abnormal and Social Psychology, 67(5), 422–436. https://doi.org/10.1037/h0040968 DOI: https://doi.org/10.1037/h0040968
View in Google Scholar

3. Admati, A. R., DeMarzo, P. M., Hellwig, M. F., & Pfleiderer, P. (2018). The leverage ratchet effect. The Journal of Finance, 73(1), 145–198. https://onlinelibrary.wiley.com/doi/full/10.1111/jofi.12588 DOI: https://doi.org/10.1111/jofi.12588
View in Google Scholar

4. Akerlof, G. A., & Yellen, J. L. (1988). Fairness and unemployment. The American Economic Review, 78(2), 44–49.
View in Google Scholar

5. Alvaredo, F., Chancel, L., Piketty, T., Saez, E., & Zucman, G. (2018, May). The elephant curve of global inequality and growth. AEA Papers and Proceedings, 108. Nashville, TN: American Economic Association. https://doi.org/10.1257/pandp.20181073 DOI: https://doi.org/10.1257/pandp.20181073
View in Google Scholar

6. Andrés, P. de, & Arranz­Aperte, L. (2019). Are European CEOs paid equally? A study of the UK­continental Europe pay gap. Finance Research Letters, 29, 169–177. https://doi.org/10.1016/j.frl.2018.07.006 DOI: https://doi.org/10.1016/j.frl.2018.07.006
View in Google Scholar

7. Bao, M. X., Cheng, X., & Smith, D. (2020). A path analysis investigation of the rela‑ tionships between CEO pay ratios and firm performance mediated by employee satisfaction. Advances in Accounting, 48, 100457. https://doi.org/10.1016/j.adiac.2020.100457 DOI: https://doi.org/10.1016/j.adiac.2020.100457
View in Google Scholar

8. Bivens, J., & Kandra, J. (2020). CEO pay has skyrocketed 1,460% since 1978 CEOs were paid 399 times as much as a typical worker in 2021. Economic Policy Institute. https://www.epi.org/publication/ceo­pay­in­2021/
View in Google Scholar

9. Castellanos, J. D., & George, B. (2020). Boardroom leadership: The board of directors as a source of strategic leadership. Economics and Business Review, 6(1), 103–119. https://doi.org/10.18559/ebr.2020.1.5 DOI: https://doi.org/10.18559/ebr.2020.1.5
View in Google Scholar

10. Chan, H. L., Kawada, B., Shin, T., & Wang, J. (2020). CEO-employee pay gap and firm R&D efficiency. Review of Accounting and Finance, 19(2), 271287. https://doi.org/10.1108/RAF-10-2018-0207 DOI: https://doi.org/10.1108/RAF-10-2018-0207
View in Google Scholar

11. Cheng, M., & Zhang, Y. (2023, August 29). Corporate stakeholders and CEO­worker pay gap: Evidence from CEO pay ratio disclosure. Review of Accounting Studies, 1–39. https://doi.org/10.1007/s11142­023­09803­7 DOI: https://doi.org/10.1007/s11142-023-09803-7
View in Google Scholar

12. Cheng, Q., Ranasinghe, T., & Zhao, S. (2017). Do high CEO pay ratios destroy firm value? Robert H. Smith School Research Paper, 2861680. https://doi.org/10.2139/ssrn.2861680 DOI: https://doi.org/10.2139/ssrn.2861680
View in Google Scholar

13. Chi, W., Liao, H., Wang, L., Zhao, R., & Ye, Q. (2019). Incentives to move up: Effects of pay gaps between levels on employee performance. Human Resource Management Journal, 29(2), 238–253. https://doi.org/10.1111/1748­8583.12221 DOI: https://doi.org/10.1111/1748-8583.12221
View in Google Scholar

14. Dittmann, I., Montone, M., & Zhu, Y. (2023). Wage gap and stock returns: Do inves‑ tors dislike pay inequality? Journal of Corporate Finance, 78, 102322. https://doi. org/10.1016/j.jcorpfin.2022.102322 DOI: https://doi.org/10.1016/j.jcorpfin.2022.102322
View in Google Scholar

15. D’Mello, R., Kwon, S., & Toscano, F. (2024). Corporate Social Responsibility and the executive­employee pay disparity. Journal of Banking & Finance, 162, 107154. https://doi.org/10.1016/j.jbankfin.2024.107154 DOI: https://doi.org/10.1016/j.jbankfin.2024.107154
View in Google Scholar

16. Duffhues, P., & Kabir, R. (2008). Is the pay–performance relationship always positive?: Evidence from the Netherlands. Journal of Multinational Financial Management, 18(1), 45–60. https://doi.org/10.1016/j.mulfin.2007.02.004 DOI: https://doi.org/10.1016/j.mulfin.2007.02.004
View in Google Scholar

17. Edmans, A., Gosling, T., & Jenter, D. (2023). CEO compensation: Evidence from the field. Journal of Financial Economics, 150(3), 103718. https://doi.org/10.1016/j.jfineco.2023.103718 DOI: https://doi.org/10.1016/j.jfineco.2023.103718
View in Google Scholar

18. Fan, H., Song, X., & Zhou, L. (2019). Executive-employee pay gap and academic directors—a Chinese study. https://ssrn.com/abstract=3318236
View in Google Scholar

19. Farooq, M., Khan, M. I., & Noor, A. (2023). Do financial constraints moderate the relationship between CEO compensation and firm performance: an emerging mar‑ ket evidence. Managerial Finance, 49(8), 1355–1376. https://doi.org/10.1108/MF­10­2022­0474 DOI: https://doi.org/10.1108/MF-10-2022-0474
View in Google Scholar

20. Firth, M., Fung, P. M., & Rui, O. M. (2006). Corporate performance and CEO com‑ pensation in China. Journal of Corporate Finance, 12(4), 693–714. https://doi.org/10.1016/j.jcorpfin.2005.03.002 DOI: https://doi.org/10.1016/j.jcorpfin.2005.03.002
View in Google Scholar

21. Gibbons, R., & Murphy, K. J. (1990). Relative performance evaluation for chief executive officers. ILR Review, 43(3), 30–51. https://doi.org/10.1177/001979399004300303 DOI: https://doi.org/10.1177/001979399004300303
View in Google Scholar

22. Haid, A., & Yurtoglu, B. B. (2006). Ownership structure and executive compensation in Germany. https://doi.org/10.2139/ssrn.948926 DOI: https://doi.org/10.2139/ssrn.948926
View in Google Scholar

23. Imai, A. (2017). Pay ratio legislation in the United Kingdom: A prospect. Journal of Investment Compliance, 18(4), 78–82. https://doi.org/10.1108/JOIC­07­2017­0046 DOI: https://doi.org/10.1108/JOIC-07-2017-0046
View in Google Scholar

24. Khenissi, M., Hamrouni, A., & Farhat, N. B. (2022). Executive compensation indexed to Corporate Social Responsibility and firm performance: Empirical evidence from France. Finance Research Letters, 50, 103213. https://doi.org/10.1016/j.frl.2022.103213 DOI: https://doi.org/10.1016/j.frl.2022.103213
View in Google Scholar

25. Kirkpatrick, G. (2009). The corporate governance lessons from the financial crisis. OECD Journal: Financial Market Trends, (1), 61–87. https://doi.org/10.1787/fmt­v2009­art3­en DOI: https://doi.org/10.1787/fmt-v2009-art3-en
View in Google Scholar

26. Lazear, E. P., & Rosen, S. (1981). Rank­order tournaments as optimum labor contracts. Journal of Political Economy, 89(5), 841–864. https://doi.org/10.1086/261010 DOI: https://doi.org/10.1086/261010
View in Google Scholar

27. Lei, L. (2017). CEO-to-worker pay disparity and the cost of debt [doctoral disserta‑ tion]. Virginia Polytechnic Institute. https://vtechworks.lib.vt.edu/server/api/core/bitstreams/ccc726dd­9c72­49d8­ba48­81eb1ba9d01d/content
View in Google Scholar

28. Mäkinen, M. (2007). CEO compensation, firm size and firm performance: Evidence from Finnish panel data. ETLA Discussion Papers, 1084. https://www.econstor.eu/bitstream/10419/63644/1/526669918.pdf
View in Google Scholar

29. Martínez­Ferrero, J., Ramón­Llorens, M. C., & García­Meca, E. (2024). CEO narcissism and ESG misconduct. Research in International Business and Finance, 111178. https://doi.org/10.1016/j.econlet.2023.111178 DOI: https://doi.org/10.1016/j.econlet.2023.111178
View in Google Scholar

30. Mo, K., Park, K. J., & Kim, Y. (2018). CEO pension and selling, general and administrative cost stickiness. International Journal of Entrepreneurship, 22(4). https://www.abacademies.org/articles/Ceo­pension­and­selling­general­administrative­cost­stickiness­1939­4675­22­4.pdf
View in Google Scholar

31. Mroczek­Dąbrowska, K., & Shemesh, Y. (2020). (Re)­structuring the CEO’s compensa‑ tion—the case of Israel. Economics and Business Review, 6(3), 105–117. https://doi.org/10.18559/ebr.2020.3.6 DOI: https://doi.org/10.18559/ebr.2020.3.6
View in Google Scholar

32. Ozkan, N. (2007). CEO pay­for­performance sensitivity and corporate governance: An empirical investigation of UK panel data. European Financial Management, 17(2), 260–285. https://doi.org/10.2139/ssrn.1102703 DOI: https://doi.org/10.1111/j.1468-036X.2009.00511.x
View in Google Scholar

33. Raithatha, M., & Komera, S. (2016). Executive compensation and firm performance: Evidence from Indian firms. IIMB Management Review, 28(3), 160–169. https://doi.org/10.1016/j.iimb.2016.07.002 DOI: https://doi.org/10.1016/j.iimb.2016.07.002
View in Google Scholar

34. Rosen, S. (1986). Prizes and incentives in elimination tournaments. American Economic Review, 76, 701–715. https://doi.org/10.3386/w1668 DOI: https://doi.org/10.3386/w1668
View in Google Scholar

35. Rouen, E. (2020). Rethinking measurement of pay disparity and its relation to firm performance. The Accounting Review, 95(1), 343-378. https://doi.org/10.2308/accr­52440 DOI: https://doi.org/10.2308/accr-52440
View in Google Scholar

36. Sajnóg, A., & Rogozińska-­Pawełczyk, A. (2022). Executive compensation and the financial performance of Polish listed companies from the corporate governance perspective. Equilibrium. Quarterly Journal of Economics and Economic Policy, 17(2), 459–480. https://doi.org/10.24136/eq.2022.016 DOI: https://doi.org/10.24136/eq.2022.016
View in Google Scholar

37. Uygur, O. (2019). Income inequality in S&P 500 companies. The Quarterly Review of Economics and Finance, 72, 52–64. https://doi.org/10.1016/j.qref.2018.11.007 DOI: https://doi.org/10.1016/j.qref.2018.11.007
View in Google Scholar

38. Wade, J. B., O’Reilly III, C. A., & Pollock, T. G. (2006). Overpaid CEOs and underpaid managers: Fairness and executive compensation. Organization Science, 17(5), 527–544. https://doi.org/10.1287/orsc.1060.0204 DOI: https://doi.org/10.1287/orsc.1060.0204
View in Google Scholar

39. Yanadori, Y., & Cui, V. (2013). Creating incentives for innovation? The relationship between pay dispersion in R&D groups and firm innovation performance. Strategic Management Journal, 34(12), 1502–1511. https://doi.org/10.1002/smj.2071 DOI: https://doi.org/10.1002/smj.2071
View in Google Scholar

40. Ye, R., Chen, Y., & Kelly, K. A. (2023). The effects of firm performance on CEO com‑ pensation and CEO pay ratio before and during COVID­19. Research in Economics, 77(4), 453–458. https://doi.org/10.1016/j.rie.2023.07.002 DOI: https://doi.org/10.1016/j.rie.2023.07.002
View in Google Scholar

41. Zhou, X. (2000). CEO pay, firm size, and corporate performance: Evidence from Canada. Canadian Journal of Economics, 33(1), 213–251. https://doi.org/10.1111/0008-4085.00013 DOI: https://doi.org/10.1111/0008-4085.00013
View in Google Scholar

Downloads

Published

2024-09-26 — Updated on 2024-09-30

Versions

Issue

Section

Research article- regular issue

How to Cite

Byrka-Kita, K., & Bulasiński, K. (2024). CEO pay ratio versus financial performance in Polish public companies. Economics and Business Review, 10(3), 197-215. https://doi.org/10.18559/ebr.2024.3.1480 (Original work published 2024)

Similar Articles

1-10 of 162

You may also start an advanced similarity search for this article.