Factors Influencing CEO Pay: Analysis and Implications for Prudent A

Chief Executive Pay

Determine how this information can be used to identify the factors that influence chief executive pay. Then write a report for the Directors of Prudent A which addresses these issues.

You have recently been appointed as an analyst within PMC Inc. PMC is a UK consultancy company that undertakes independent research for client organisations. Your first client is a large pension company (Prudent A) that has most of its assets invested in the UK stock market. Prudent A has a well diversified portfolio of UK shares that covers most industries, although the emphasis tends to be on medium and large sized firms.  

The Directors of Prudent A are concerned about the pay (salary plus bonuses) that the CEOs of these firms receive and want to commission some independent research which looks at whether this pay is in some way related to the performance of the firm or results from the position and power of the chief executive. You have been asked to undertake some quantitative analysis looking at this issue. While you are familiar with various different aspects of statistics and a number of statistical packages you have not undertaken a project of this nature before. Hence you start by conducting a literature search. This search proves beneficial and you find that there are a number of existing studies which look at the factors that determine chief executive pay, although none specifically in a UK context.

Most of these studies consider whether CEO pay is determined by the performance of the company they manage or whether it simply relates to the influence which the CEO has over the board of directors. Various measures of company performance have been used including accounting profit, shareholder wealth and growth in sales. It has also been suggested that the size of the firm can have an impact on CEO pay and hence this has frequently been incorporated in empirical work. CEO influence over the board of directors has usually been measured by the proportion of executive directors on the board. Executive directors are individuals who work for the company in question (usually senior managers). Hence their position in the organisation is dependent at least to some extent on decisions made by the chief executive. In contrast, non-executive directors are not employees of the company nor are they affiliated to the company in any way. Some studies have further suggested that if the CEO is also the chairman of the board of directors then this person will have even more influence over decisions made by the board. Hence a measure designed to incorporate this effect has sometimes been included in empirical work.  

From the material you have identified you draw up a list of specific variables which can be used to measure the possible influences on CEO pay and collect numerical data on each of these (details of the data can be found in Appendix I). You now need to consider how you will analyse this information. In addition you need to consider how you will explain the approach(es) you have adopted and the implication of your analysis given that the Directors of prudent A are not experts in quantitative or statistical methods.