Report: Best interest of share holders requires tough CEO choices
David Prater
Issue date: 11/20/06 Section: News
- Page 1 of 1
A UA economics professor will be publishing the "first evidence of what the press has said all along," concerning the relationship between CEO compensation and employee layoffs.
Craig Rennie, an assistant professor of finance and the Clete and Tammy Brewer Professor of Business/Financial Markets, and his fellow researchers Jeff Brookman and Saeyoung Chang, business professors at the University of Nevada, Las Vegas, will publish their paper "CEO Cash and Stock Based Compensation Changes, Layoff Decisions, and Shareholder Value" in The Financial Review Journal.
Rennie is a graduate of the University of Oregon, and the focus of his research is corporate governance and empirical investments.
The key question of Rennie's research has been whether managers are acting in the interest of shareholders.
While the subject of CEO compensation has received substantial media attention and a large volume of academic research, Rennie said that his research was enlightening in a different kind of way.
"Firms are not work projects. They are meant to create value for shareholders," Rennie said. "If an executive is making a difficult decision and it will be in the interest of the shareholders, he is doing his job and should be properly compensated."
Rennie said that making layoffs falls under the category of tough decisions.
"Making layoffs is an unpopular act, and good CEOs are managers that will act in the interest of shareholders regardless of the popularity of their actions."
There are different ways to compensate CEOs for past performance and to encourage future value-enhancing decisions. One is a fixed salary plus bonuses. The other is stock-based compensation.
With stock-based compensation, CEOs and shareholders both benefit from increased value, thus eliminating some of this disconnect from the managers and owners of a company.
Rennie and his colleagues found that between 1993 and 1999, salary compensation for non-layoff firms was actually higher for CEOs of non-layoff firms.
In years that CEOs laid off employees, their stock-based compensation increased by 19.6 percent and continued to rise to the point of 77.4 percent.
"These accumulated stock portfolios pay off for CEOs as well as shareholders," Rennie said of his findings.
Rennie's research has also indicated that layoffs increase future operating costs.
The study included 229 firms that underwent a round of layoffs between 1993 and 1999. The CEOs of these firms were rewarded by governing boards with an average increase in total pay of 22.8 percent.
The question of whether CEOs are acting in shareholders' interest has drawn a lot of attention with corporate scandals grabbing headlines. Rennie and his colleagues' research is some of the first to concerning how governing boards compensate CEOs for past performance and motivate value-earning policies for firms.
Craig Rennie, an assistant professor of finance and the Clete and Tammy Brewer Professor of Business/Financial Markets, and his fellow researchers Jeff Brookman and Saeyoung Chang, business professors at the University of Nevada, Las Vegas, will publish their paper "CEO Cash and Stock Based Compensation Changes, Layoff Decisions, and Shareholder Value" in The Financial Review Journal.
Rennie is a graduate of the University of Oregon, and the focus of his research is corporate governance and empirical investments.
The key question of Rennie's research has been whether managers are acting in the interest of shareholders.
While the subject of CEO compensation has received substantial media attention and a large volume of academic research, Rennie said that his research was enlightening in a different kind of way.
"Firms are not work projects. They are meant to create value for shareholders," Rennie said. "If an executive is making a difficult decision and it will be in the interest of the shareholders, he is doing his job and should be properly compensated."
Rennie said that making layoffs falls under the category of tough decisions.
"Making layoffs is an unpopular act, and good CEOs are managers that will act in the interest of shareholders regardless of the popularity of their actions."
There are different ways to compensate CEOs for past performance and to encourage future value-enhancing decisions. One is a fixed salary plus bonuses. The other is stock-based compensation.
With stock-based compensation, CEOs and shareholders both benefit from increased value, thus eliminating some of this disconnect from the managers and owners of a company.
Rennie and his colleagues found that between 1993 and 1999, salary compensation for non-layoff firms was actually higher for CEOs of non-layoff firms.
In years that CEOs laid off employees, their stock-based compensation increased by 19.6 percent and continued to rise to the point of 77.4 percent.
"These accumulated stock portfolios pay off for CEOs as well as shareholders," Rennie said of his findings.
Rennie's research has also indicated that layoffs increase future operating costs.
The study included 229 firms that underwent a round of layoffs between 1993 and 1999. The CEOs of these firms were rewarded by governing boards with an average increase in total pay of 22.8 percent.
The question of whether CEOs are acting in shareholders' interest has drawn a lot of attention with corporate scandals grabbing headlines. Rennie and his colleagues' research is some of the first to concerning how governing boards compensate CEOs for past performance and motivate value-earning policies for firms.
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