CEO COMPENSATION AND OWNER’S PREFERENCE: A SECTORAL ANALYSIS

Abstract

Globalization is accompanied with rapid development in capital markets resulting in heterogeneity of the ownership structure of the organizations. In the presence of such a diverse portfolio of owners and considering each one’s involvement in governance, this paper aims to investigate whether ownership structure (i.e., managerial ownership, foreign ownership, institutional ownership and blockholders ownership) affects remuneration/compensation offered to CEOs (Chief Executive Officers) working in different industries in a similar pattern or there exists a difference. Using financial information taken from annual reports of non-financial companies listed on Pakistan Stock Exchange (PSX) during 2012-2018 researchers have observed that ownership structure has material effects on CEO compensation. Notably, impact of ownership structure on CEO compensation depends on industry dynamics. For instance, managerial ownership is positively related to CEO compensation in glass & ceramics and chemical sectors whereas negatively related to CEO compensation in automobile and food & personal care products sectors. Foreign ownership is positively related to CEO compensation in engineering, food & personal care products, technology & telecommunications and textile sectors. In contrast, foreign ownership is negatively related to CEO compensation in automobile, pharmaceuticals, and power generation & distribution sectors. Institutional ownership affects negatively only in pharmaceutical sector. Blockholders ownership affects negatively almost in all sectors except cement sector where it affects positively. In sum, results suggest that ownership structure does matter while determining the CEO compensation. This study provides evidence that ownership structure affect CEO compensation across various sectors. It provides empirical support on the argument that each ownership group has its own interests, and how their interests affect CEO pay-slice. Results indicate that impact of various ownership groups on CEO compensation can be explained with the help of managerial power theory, human capital theory and efficient monitoring hypothesis. This study provides support to corporate boards to understand how different ownership groups affects pay-setting process of CEOs working in different industries.