The Effect of financial crisis on Standard & Poor
100 executive’s bonus
Did the executives bonus level of United States 100 largest firms
change during the financial crisis?
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Author:
Suleiman Amiri
Student number: 10687394
Faculty:
Economics & Business
Institution:
University of Amsterdam
Field:
Organization
Supervisor:
MSc. J. Sun
Date:
June 28
th, 2016
Abstract!
The!objective!of!this!study!is!to!examine!if!financial!crisis!has!an!effect!on!the!bonus! level!of!the!executive’s.!Based!on!data!collected!from!Standard!&!Poor!100!listed! companies!from!2000!to!2014.!The!study!reveals!that!the!financial!crisis!does!not! significantly!change!the!bonus!level!of!the!executive’s.!The!second!analysis!indicates! that!“Age”!is!an!important!determinant!for!the!bonus!level.!Further!investigation!is! needed!due!the!lack!of!long!term!incentive!pay!and!option!incentive!pay.!! ! Keywords! Financial!crisis,!S&P100,!Bonus,!CEO,!United!States,!Age!!
Contents!
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Introduction……….!!!3! Literature!review……….! 5! Methodology!&!Data………...! 6! !!!!Dependent!variable………..……….! 7! !!!!Independent!variable….………! 8! !!!!Control!variable………..! 8! Results…….……….! 9! Conclusion…….………..! 12! Discussion!……..………....! 13! References!……….……….! 14! Appendix!……..………! 15!
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1.#Introduction## Financial!crisis!of!2007,!also!known!as!the!global!financial!crisis,!is!considered!by! many!people!as!one!of!the!worst!financial!crisis!since!great!depression!of!the!1930.!It! all!started!with!the!housing!bubble!in!2004.!The!house!prices!raised!to!highest!level! ever!and!more!people!wanted!to!buy!a!house!because!they!expected!that!prices!will! go!even!higher!and!because!lending!money!from!a!bank!was!so!easy,!almost! everyone!was!encouraged!to!take!a!mortgage.!Banks!lend!a!lot!of!money!and!they! didn’t!had!any!clue!anymore!to!whom!they!were!lending,!because!they!were!really! easy!on!lending!out!they!didn’t!had!a!good!overview!over!their!type!of!customers.! Although!banks!were!optimistic!as!well!‘’what!could!go!wrong?’’!the!house!prices! were!increasing!and!they!also!expected!higher!housing!prices!in!the!future.!They!had! covered!the!risk!very!well,!at!least!that’s!what!they!thought.!Banks!sold!relative!small! mortgages,!they!bundled!them!together!and!sold!them!as!a!collateralized!debt! obligation!(CDO),!which!had!a!higher!liquidity.!Everybody!could!buy!a!CDO!which!in! general!had!a!lower!risk,!that’s!what!they!assumed.!In!this!transformation!of!the! mortgages!into!CDO’s,!there!was!not!a!clear!picture!of!who!is!caring!the!risk,!the! banks!or!the!obligation!owners.!All!of!this!created!an!unsecure!situation.!Eventually! when!the!housing!bubble!collapsed!and!a!lot!of!people!couldn’t!pay!their!mortgages! anymore,!banks!were!in!big!trouble.!This!threatened!the!international!financial! system!and!almost!all!central!banks!took!some!action!to!hold!the!balance!in!the! banking!sector.!But!this!wasn’t!enough,!a!lot!of!financial!banks!went!bankrupt.!Crisis! started!when!Lehman!Brothers!went!bankrupt,!because!everybody!thought!some! banks!are!to!big!to!fail.!This!decreased!the!consumers!trust!about!the!world!economy! and!the!financial!crisis!was!started.!
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! Despite!of!the!financial!crisis!and!the!bad!condition!of!the!economy,!a!lot!of!chief! executive!officers!(CEO’s)!got!tremendous!amounts!of!bonuses.!According!to!Gregg! et!al.!(2012)!it!is!unlikely!that!incentive!structures!could!be!held!responsible!for!the! financial!crisis.!But!how!could!CEO’s!obtain!such!a!big!bonus!even!if!their!firm! performance!were!so!poor?!For!example,!Richard!Fuld,!CEO!of!Lehman!Brothers,! obtained!a!bonus!of!$22!million!despite!Lehman!Brothers’!bankruption!in!September! 2008,!due!to!their!inability!to!gratify!their!obligations.!This!leads!us!to!the!following! research!question:!Did!the!executives!bonus!level!of!United!States!100!largest!firms!most!by!the!financial!crisis,!but!did!this!changed!the!structure!of!bonuses!or!did!the! company!pay!the!same!amount!of!bonuses!as!before!despite!the!financial!crisis?! The!effect!of!financial!crisis!on!the!CEO’s!bonuses!is!still!not!really!clear.!There!are! some!studies!in!this!field,!but!none!of!them!has!taken!a!wide!range!of!United!States! firms.!K.!James!&!B.!Jafaar!(2014)!find!that!the!trends!for!remuneration!increased! during!and!after!the!financial!crisis.!They!also!show!that!the!structure!of! remuneration,!such!as!salary!and!bonuses!for!executives,!exhibited!an!increasing! trend!during!and!after!the!financial!crisise!however,!the!trend!of!director!remuneration! in!family!firms!after!the!financial!crisis!was!decreasing.’’!However,!K.!James!&!B.! Jafaar!(2014)!analysed!486!companies!who!were!listed!in!Bursa!Malaysia,!I!expect! that!the!opposite!is!true!for!the!100!largest!US!firms,!because!the!pattern!in!US!might! be!different!from!other!financial!markets.!! ! This!paper!will!provide!an!overview!about!the!effect!of!the!financial!crisis!on!the! executive!bonuses!in!100!largest!US!firms.!These!are!100!firms!which!are!listed!on! S&P100!index,!which!is!a!subgset!of!the!S&P!500.!The!index!consists!100!major! companies!across!multiple!industry!groups.!The!index!is!well!diversified:!Information! Technology!24.2%,!Health!care!15.1%,!Financials!13.7%,!Consumer!Discretionary! 12.1%!etc.!(see!appendix!figure!2).!! I!conducted!ordinary!least!squares!(OLS)!regressions!with!CEO!cash!bonus!as! dependent!variable,!and!time!indicators!for!financial!crisis!as!the!main!explanatory! variable.!Other!control!variables!include!number!of!employees,!CEO’s!age,!gender,! percentage!of!ownership,!etc.!Bonus!level!(dependent)!will!be!regressed!on!several! independent!variables!according!to!following!regressione!! !
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I!expect!that!the!financial!crisis!has!no!effect!on!the!executive’s!bonus!level.!The! reason!here!for!is!the!continuing!of!bonus!pay!of!large!financial!firms!during!the! crisis.!This!leads!us!to!the!following!hypothesise!B1!is!equal!to!zero,!the!financial! crisis!has!no!effect!on!the!cash!bonus!level!(H0:!B1=!0).!
! The!remainder!of!this!paper!is!organized!as!follows.!Section!2!reviews!the!literature!on!the!effect!of!financial!crisis!on!the!CEO!bonuses.!Section!3!describes!the!data! and!methodology!in!detail.!Section!4!reports!the!empirical!results.!Section!5! concludes!the!results!and!discuss!this.! ! 2.#Literature#review# ! During!the!financial!crisis!a!lot!of!companies!continued!paying!their!executives!the! same!amount!of!bonuses!or!sometimes!even!higher!compensations!than!usually.!J.! J.!Chen!et!al.!(2011)!investigated!five!British!banks,!“Bradford!&!Bingley!(B&B),! Halifax!Bank!of!Scotland!(HBOS),!Lloyds!TSB,!Northern!Rock!and!Royal!Bank!of! Scotland!(RBS)”!who!had!asked!for!government!financial!support!to!solve!their! liquidity!problem!in!order!to!survive!the!financial!crisis.!They!use!a!case!study! approach!from!existing!facts!to!explore!new!theoretical!relationships!between! financial!crisis!and!the!executive’s!rewards.!The!remuneration!package!of!all!five! banks!were!similare!fixed!salary,!cash!bonuses!and!share!options.!Table!1!(see! appendix)!provides!an!overview!of!the!reward!structure!of!the!five!British!banks.!In! contrast!of!these!high!amounts!of!bonuses!and!salaries!received!by!the!executives,! the!performance!of!the!banks!was!poor.!To!be!able!to!evaluate!which!executive! reward!scheme!was!the!best!J.!J.!Chen!et!al.!(2011)!investigated!three!existing! theoriese!prospect!theory,!real!option!theory!and!the!managerial!power!approach! “Golden!Goodbyes”.!‘The!prospect!theory!suggests!that!individuals!derive!values! from!gains!and!losses!with!respective!to!a!reference!point,!rather!than!from!absolute! levels!of!wealth’!(Fiegenbaum!and!Thomas,!1988e!Shen!and!Chih,!2005e! Kouwenberg!and!Ziemba,!2007).!Real!option!theory!plays!a!key!role!of!linking!stock! options!and!executives!remuneration!with!interest!of!shareholders.!This!tends!to!be! one!of!the!best!solutions!for!agent!and!principal!problem,!the!stock!option!theory! aligns!the!interest!of!the!principal!with!those!of!agents.!Last!but!not!least!theory!is! ‘Golden!Goodbyes’!which!simply!is!a!safety!net!for!the!executive,!If!he’s!fired!or! when!he!leaves!the!company!he!will!get!a!compensation!even!if!he!performed!poorly.! In!their!study!they!find!that!the!compensation!design!of!the!five!banks!were!not! aligned!with!their!performance,!which!led!to!an!excessive!bonus!payment!even! though!the!bank!performance!were!poor.!Bank!failures!have!deep!roots!in!the! executive!remuneration!design.!
The!J.!J.!Chen!et!al.!(2011)!study!shows!the!inverse!of!our!study.!It!shows!the!effect! that!bonuses!had!on!the!failure!of!banking!sector!during!the!financial!crisis,!while!our! study!is!the!effect!of!financial!crisis!on!the!bonus!level!of!executives.!This!paper! contains!only!five!British!banks!who!had!a!liquidity!problem.!This!five!banks!can’t! reflect!for!the!entire!financial!market.! ! K.!James!&!B.!Jafaar!(2014)!examine!the!trends!of!CEO’s!remuneration!during!and! after!the!financial!crisis.!They!have!taken!a!wide!range!of!Malaysian!companies!that! are!listed!in!Bursa!Malaysia!from!2007!to!2009.!K.!James!&!B.!Jafaar!(2014)! conclude!that!the!executive!remuneration!is!slightly!increased!during!and!after!the! financial!crisis!(see!appendix!table!2).!Although!they!have!taken!a!really!small!range! of!time!for!their!study!2007!to!2009,!this!could!lead!to!a!different!conclusion!which!is! only!consistent!for!that!short!period,!this!data!is!relevant!for!the!effect!in!period!of! during!the!crisis,!but!not!for!the!effect!after!the!crisis!to!the!bonus!level.!In!our!study! we!have!taken!a!wide!range!of!data!from!different!time!periods!it!starts!from!2000!to! 2014!which!allows!us!to!investigate!postgcrisis!CEO!bonus!level.!! The!J.!J.!Chen!et!al.!(2011)!paper!contains!only!five!British!banks!who!had!a!liquidity! problem.!The!five!banks!can’t!reflect!for!the!entire!financial!market.!K.!James!&!B.! Jafaar!(2014)!took!a!wide!range!of!Malaysian!companies!listed!on!Bursa!Malaysia! index,!but!these!firms!may!be!less!relevant!than!US!firms!because!the!financial!crisis! had!a!bigger!impact!on!the!US!firms!than!on!the!Malaysian!firms.!This!makes!it!less! comparable!with!the!periods!before!and!after!the!crisis,!again!in!our!study!the!period! of!data!is!from!2000!to!2014!which!contains!all!above!mentioned!periods.!! ! ! 3.#Data#&#Methodology## ! !!The!firms!I!use!for!my!research!are!Standard!&!Poor!100!companies!who!are!listed! in!this!index!(see!table!3).!The!S&P100!is!an!index!of!100!large!cap!companies!in!the! United!States!and!includes!100!major!companies!across!a!broad!range!of!industries.! I!obtained!data!about!executive’s!compensation!and!firm!revenues!for!this! companies!from!''Compustat!Executive!Compensation!g!Annual!Compensation''!and! ''Compustat!Monthly!Updates!g!Fundamentals!Annual''.!This!data!is!provided!by! Wharton!online!database.!#
!The!data!for!total!annual!cash!bonuses!of!the!executives!(dependent!variable),! number!of!employees,!base!salary,!percentage!of!ownership,!gender,!total! compensation!and!age!(control!variables)!are!provided!by!the!Compustat!database.! Although!the!data!needs!some!adjustment!e.g.!number!of!employees!working!in!a! company!is!not!provided!by!Execucomp!but!rather!by!Global!(fundamental!annuals).! The!data!from!two!different!resources!needed!some!adjustment!due!of!missing! values!in!some!years.!! ! The!explanatory!variable!“Financial!crisis”!Is!a!dummy!variablee!it!takes!a!value!of!1!if! the!bonus!is!paid!during!the!financial!crisis!and!0!if!not.!According!to!J.!B.!Taylor,! (2009)!the!financial!crisis!started!in!August!2007!because!of!frequently!monetary! excesses.!Which!lead!to!a!boom!and!eventually!to!a!bust!(see!figure!1).!In!our!data! we!have!taken!the!entire!2007!as!financial!crisis.!This!is!because!of!the!bonus! payment!of!the!CEO’s!are!in!general!paid!at!the!end!of!the!fiscal!year!or!later.!The! impact!of!crisis!was!in!a!lot!of!companies!huge!enough!to!influence!the!revenue!of! the!entire!fiscal!year!and!this!in!order!influences!the!bonus!level.!! ! Studies!have!shown!that!firm!size!is!an!important!measurement!for!the!executive’s! compensation!level!John!et!al.!(2008).!There!are!many!ways!to!measure!firm!size!eg.! revenues,!number!of!employees,!assets!and!market!capitalization.!In!this!paper!we! use!number!of!employees!to!measure!firm!size,!this!is!due!the!simplicity!and!the! available!data!on!Compustat.!! ! Martin!K.!et!al.!(1987)!says!that!executive’s!age!should!be!a!further!influence!in! compensation!package.!The!younger!executives!have!in!general!more!incentive!to! deviate!to!external!labor!market!than!older!executives.!On!the!other!hand,!older! executives!are!in!general!wealthier!and!may!be!more!willing!to!accept!higher!risk!that!
could!go!with!longer!term!forms!of!bonuses.!All!of!this!gives!us!a!reasonable!reason! to!include!this!control!variable.!! ! Ownership!of!firm!is!determined!by!the!percentage!of!common!stocks!owned!by!the! executive.!Studies!have!shown!that!ownership!in!a!company!has!a!positive!effect!on! the!firm!performance.!This!positive!performance!in!addition!has!a!positive!effect!on! the!compensation!Martin!K.!et!al.!(1987).!Table!4!shows!how!much!of!the!total! executive!compensation!is!related!to!the!stock.!On!average!24!percent!of!the!total!! compensation!is!related!to!the!stock!compensation,!this!concludes!that!owning! shares!has!influence!on!the!compensation!paid.!This!is!why!we!use!the!percentage! of!common!stocks!owned!by!the!CEO!as!a!measurement!for!the!ownership.!! ! I!conduct!ordinary!least!squares!(OLS)!regressions!with!CEO!cash!bonus!as! dependent!variable,!and!time!indicators!for!financial!crisis!as!the!main!explanatory! variable.!Other!control!variables!include!number!of!employees,!CEO’s!age,!gender,! percentage!of!ownership,!etc.!Bonus!level!(dependent)!will!be!regressed!on!several! independent!variables!according!to!following!regressione! !
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Dependent!variable! Bonus!! ! ! ! This!is!the!total!cash!compensation!of!the!! ! ! ! ! ! executives.!! Explanatory!variable!Financial!crisis! Dummy!variablee!takes!value!of!1!if!the!bonus!is! paid!during!the!financial!crisis!and!0!if!the!bonus!is! not!paid!during!the!financial!crisis.!!! Control!variables!!!! Employees!! ! ! ! Number!of!employees!working!in!the!company.! Age! ! ! ! ! Executive!present!age!in!years.! Own! Executives!ownership!(%!of!common!share!owned! by!the!executives).! Gender!! Takes!value!of!1!if!male!and!0!if!female! Tcomp! Total!compensation!obtained!by!CEO.! Salary!! Base!salary! e! ! ! ! ! Error!term.! ! 4.#Results
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Table!5!presents!trends!of!average!bonus,!base!salary!and!total!compensation! of!the!CEO!for!periods!before,!during!and!after!the!financial!crisis.!It!shows!that!the! bonus!level!before!crisis!was!almost!three!times!higher!than!the!period!of!during!the! crisis.!The!bonus!level!decreased!tremendous!during!the!financial!crisis!for!the! S&P100!listed!companies,!this!negative!effects!holds!even!for!the!period!after!the! crisis.!The!gap!between!before!and!during!the!crisis!is!g75.6%!and!the!gap!between! during!and!after!the!crisis!is!g9.7%.!Table 5. Trend of average bonus, base salary and total compensation of the CEO; before (2000-2006), during (2007-2009) and after (2010-2014) the financial crisis
! The!base!salary!is!increased!by!a!small!amount!on!average.!The!gap!between! before!and!during!the!crisis!is!+13%!and!the!gap!between!during!and!after!is!+8.5%.! The!base!salary!increase!is!after!the!crisis!a!bit!lower!than!the!before!crisis.!An! explanation!for!this!could!be!that!the!cut!in!bonus!level!was!between!after!and!during! much!higher!than!gap!between!during!and!after,!to!compensate!for!this!bonus!cut!the! base!salary!increased!a!bit!more!for!before!and!after!period.!!
! BONUS! SALARY# TCOMP#
2000I2006# 2518,810! 1136,901! 17338,832!
2007I2009! 865,798! 1285,554! 14542,186!
The!table!shows!also!trends!of!the!total!compensation!average.!It’s!from!the!table! clear!that!the!total!compensation!decrease!is!not!as!big!as!the!bonus!decrease.!The! total!compensation!gap!for!the!period!before!and!during!the!crisis!is!g16.1%!and!for! the!period!of!during!and!after!+10.1%.!We!can!conclude!that!the!total!compensation! decreased!during!the!financial!crisis,!but!restored!almost!back!to!the!initial!level!after! the!financial!crisis.!! Although!that!average!bonus!level!decreased!a!lot!and!average!base!salary! increased!just!by!few!percent,!but!the!total!compensation!is!quit!stable!on!long!term.! This!is!possible!because!total!compensation!exists!of!more!variables!than!just!cash! bonus!and!base!salary.!Total!compensation!consists!of!cash!bonuses,!non!cash! bonuses,!long!term!incentive!pays,!options,!pensions!and!others.!With!others!we! mean!small!things!like!company!car,!housing!and!business!flights.! To!test!if!the!financial!crisis!has!a!significant!effect!on!bonus!we!will!regress! cash!bonus!on!several!variable!according!the!following!regression!model:!! The!results!are!presented!in!table!6.!The!table!starts!with!regression!1!which! includes!only!the!effect!of!financial!crisis!on!the!bonus.!We!observe!from!table!6!that! if!we!include!financial!crisis!as!the!only!variable!that!there’s!a!really!strong!negative! effect!which!is!significant!at!1%glevel.!Although!the!level!of!bonus!paid!is!not!just! explained!by!the!financial!crisis!only,!so!we!build!our!regression!further!to!increase! the!validity!of!our!regression.!As!table!6!present!the!effect!of!financial!crisis!is! decreasing!each!time!an!extra!control!variable!is!added,!but!the!Rgsquared!is! increasing.!This!means!that!more!is!explained!by!the!regression.!! ! 1# 2# 3# 4# 5# 6# 7# Crisis! "1000.4!
(
0.000)*! "1012.3! (0.000)** (0.000)**"898.9! (0.227"214.2!)* (0.210)*"222.6! (0.302)*"181.6! (0.319)*"173.8! Emp! ! .00017! (0.636)* (0.722)*.00013! ".00057!(0.129)! ".00055!(0.144)* ".00055!(0.136)! (0.099)****".00061! Age! ! ! 69.31682! (0.000)** 49.33364!(0.000)** (0.000)**48.4001! (0.000)**43.7578! (0.000)**35.9289! Own! ! ! ! "33.625! (0.003*)* (0.002*)*"34.469! (0.016)***"27.287! "14.536!(0.216)* Gender! ! ! ! ! 554.0174! (0.184)* 537.7065!(0.193)* 584.6725!(0.154)*Tcomp! ! ! ! ! ! .0240163! (0.000)** .0198418!(0.001)** Salary! ! ! ! ! ! ! .3300869! (0.000)** Constat! 1846.2! 1829.582! g2681.80! g1941.53! g2412.84! g2499.70! g2447.99! R2! 0.0222! 0.0227! 0.0550! 0.0390! 0.0414! 0.0619! 0.0797! #!of!obs.! 1397! 1385! 1385! 714! 714! 714! 714!
Table 6 P-values are reported in the parenthesis. *, **, ***, significant at the 1, 5 and 10 percent level, respectively.! ! The!number!of!observations!analysed!in!regression!7!is!much!lower!than!the!initial! regression!1,!this!is!caused!by!ownership!variable.!Because!not!all!CEO’s!own! shares!of!their!company,!but!just!a!fraction!of!them!do!so.!In!our!sample!only!714! observations!could!be!detected.!Despite!this!down!side!of!including!ownership! variable!we!decided!to!include!ownership,!because!of!it’s!tremendous!incentive!effect! to!CEO’s!performance.!! Crisis! As!table!6!shows!financial!crisis!has!a!negative!effect!on!the!bonus!level!of!CEO.! This!negative!coefficient!means!that!during!the!financial!crisis!the!bonus!level!is! lower!than!when!the!bonus!is!not!paid!during!the!crisis.!Although!the!coefficient!is!not! significant,!so!the!null!hypothesise!“the!financial!crisis!has!no!effect!on!the!cash! bonus!level”!can!not!be!rejected!at!the!10%glevel!(two!sided!tKtest).!! Firm!size! Firm!size!as!measured!by!number!of!employees!has!almost!no!effect!on!the!bonus! level!in!the!second!regression,!but!decreases!even!to!a!negative!coefficient!in!the! last!regression,!which!means!that!the!bonus!level!decreases!with!respect!to!increase! of!number!of!employees.!This!could!be!caused!by!leak!of!control!over!the!firm!by!the! CEO.!If!the!firm!size!increases,!the!CEO!can!loss!some!control!over!the!firm!and! employees,!which!eventually!lead!to!bad!firm!performance.!Bonus!level!is!highly! dependent!on!firm!performance,!so!the!bonus!decreases!M.!Jensen!and!K.!Murphy! (1990).!! Age! As!table!6!shows!CEO’s!age!is!an!important!determinant!for!the!bonus!level.!Older! CEO’s!receive!a!higher!bonus,!than!younger!CEO’s.!This!could!be!caused!by!many!
factors,!one!of!them!could!be!that!older!CEO’s!are!more!experienced!than!the! younger!ones.!This!coefficient!is!significant!at!1%glevel!(two!sided!tKtest).!! Ownership! In!contrast!of!our!expectations!CEO’s!who!own!a!shares!of!the!company,!pay!them! self!a!lower!bonus!than!when!they!don’t!own!any!share.!This!could!be!caused! because!when!ownership!increases,!the!more!the!CEO/owner!wants!to!hold!the! money!within!the!firm!rather!than!withdraw!money!from!the!firm.!! Gender! Although!there!are!just!few!female!CEO’s!in!the!S&P100!firms,!we!still!observe!a!big! difference!between!male!and!female!CEO!compensation.!This!difference!is!shown!in! table!6.!The!gender!difference!is!more!than!half!million!dollars,!which!is!alarming.! Total!compensation!&!Base!salary! Total!compensation!and!base!salary!have!both!a!really!small!influence!on!the!bonus! level.!Base!salary!is!a!fixed!amount!which!has!not!much!to!do!with!bonus!level,!only! if!the!base!salary!is!relatively!much!higher!than!the!bonus,!then!you!could!become! careless!about!the!bonuses!and!don’t!have!any!incentives!anymore.! ! Previous!studies!which!are!discussed!in!the!literature!review!section!concluded!that! there!is!an!effect!between!financial!crisis!and!executive’s!bonus!level.!! K.!James!&!B.!Jafaar!(2014)!conclude!in!their!research!paper!that!the!executive! remuneration!is!slightly!increased!during!and!after!the!financial!crisis.!This!is!in! contrast!of!our!findings.!! J.!J.!Chen!et!al.!(2011)!in!their!study!they!find!that!the!compensation!design!of!the! five!banks!were!not!aligned!with!their!performance,!which!leaded!to!an!excessive! bonus!payment!even!though!the!bank!performance!were!poor.!This!could!be!an! answer!to!the!question!why!did!the!firms!still!paid!the!same!amount!or!even!more!to! their!CEO’s!even!though!their!performance!were!poor!during!the!financial!crisis.!The! compensation!design!is!not!dependent!of!firm!performance,!thus!during!the!crisis! when!the!firm!performances!were!poor,!the!compensation!package!of!firms!didn’t! change.!This!is!perfectly!aligned!with!our!results,!because!we!have!found!that!there! is!not!a!significant!effect!between!crisis!and!bonuses.!Crisis!decreased!all!of!S&P100! firm’s!performance!on!average,!this!means!that!crisis!reflects!bad!performance!and! the!bonus!level!didn’t!change!in!our!study!even!when!the!performances!were!poor.!!! !
! 5.#Conclusion#and#Discussion## This!study!examines!if!there!is!an!effect!between!financial!crisis!and!executive’s! bonus!level!in!Standard!&!Poor!100!listed!companies.!The!sample!size!existed!of! 714!observations!for!the!period!of!2000!to!2014.!The!regression!was!tested!by!the! ordinary!least!square!test!method!using!STATA.!This!created!a!clear!overview!about! the!effect!of!the!financial!crisis!on!bonus!level.!According!to!K.!James!&!B.!!Jafaar! (2014)!executive!remuneration!is!slightly!increased!during!and!after!the!financial! crisis!in!comparison!to!the!period!before!the!crisis,!but!according!to!J.!J.!Chen!et!al.! (2011)!bonus!levels!didn’t!change!during!the!financial!crisis.!The!result!of!this!paper! confirms!the!study!of!J.!J.!Chen!et!al.!(2011).!! In!the!results!we!didn’t!reject!the!null!hypothesis,!as!result!Standard!&!Poor!100! company’s!compensation!pay!was!not!affected!by!financial!crisis.!There!is!no! significant!effect!between!financial!crisis!and!executive!bonus!level.!! ! This!study!focuses!only!on!cash!bonus!level,!which!makes!up!only!one!type!of! remuneration.!Results!are!generalized!to!cash!based!compensation!analysis!only,! this!doesn’t!show!the!complete!picture,!but!is!rather!one!piece!of!the!puzzle.!In!this! study!we!couldn’t!take!“long!term!incentive!pay”!and!‘options”!variables!into!account,! because!of!collinearity,!this!limits!the!scope!of!the!study.!Further!study!could!be!done! to!investigate!just!the!relationship!between!long!term!incentive!pay!/!options!and! financial!crisis.!! ! ! ! ! ! ! ! ! ! ! !
References## # Abdul!Wahab,!E!&!Abdul!Rahman,!R!2009,!‘Institutional!investors!and!director! remuneration:!do!political!connections!matter?’,!Corporate!Governance!and!! Firm!Performance,!vol.!139.! Basu,!S,!Hwang,!L,!Mitsudome,!T!&!Weintrop,!J!2007,!‘Corporate!governance,!top!!!!!!!!!!!! ! executive!compensation!and!firm!performance!in!Japan’,!PacificgBasin!! !! Finance!Journal,!vol.!15,!no.!1,!pp.!56g79.! Claessens,!S,!Djankov,!S!&!Lang,!L!2000,!‘The!separation!of!ownership!and!control!! in!East!Asian!Corporations*!1’,!Journal!of!Financial!Economics,!vol.!58,!no.!1g 2,!pp.!81g112.! Fiegenbaum,!A.!and!Thomas,!H.!(1988)!Attitudes!toward!risk!and!the!riskKreturn!!!! paradox!prospect!theory!explanations,!Academy!of!Management!Journal,!31,! 85–106.! Jensen,!M!&!Murphy,!K!1990,!‘Performance!pay!and!topKmanagement!incentives’,!! Journal!of!Political!Economy,!vol.!98,!no.!2,!pp.!225g264.!! John,!B,!Danthine,!J,!Donaldson,!P.!(2008)!Executive!compensation!and!stock!! !! options:!An!inconvenient!truth,!Centre!for!Economic!Policy!Research.! Kouwenberg,!R.!and!Ziemba,!W.!T.!(2007)!Incentives!and!risk!taking!in!hedge!funds,!! !! Journal!of!Banking!and!Finance,!31,!3291–310.! Martin,!K,!Lewellen,!W.!and!Loderer,!C.!(1987)!Executive!compensation!and!! executive!incentive!problems,!Journal!of!Accounting!and!Economics,!9,!287g 310.! Ozkan,!N!(2007),!Do!corporate!governance!mechanisms!influence!CEO!! compensation?!An!empirical!investigation!of!UK!companies’,!Journal!of! Multinational!Financial!Management,!vol.!17,!no.!5,!pp.!349g364.!! Shen,!C.!H.!and!Chih,!H.!L.!(2005)!Investor!protection,!prospect!theory,!and!earnings!!! management:!an!international!comparison!of!the!banking!industry,!Journal!of! Banking!and!Finance,!29,!2675–97.! Taylor,!J.!B.!(2009)!The!financial!crisis!and!the!policy!responses:!An!empirical!! analysis!of!what!went!wrong,!National!bureau!of!economic!research,!E0gG01,! p.!1.! ! ! ! ! ! ! ! ! ! ! !
Appendix!
Table: 1 Executive remuneration of the five UK banks in 2007 (in 000). Source; J. J. Chen (2011)
Table: 1 Trend of remuneration. source; K. James & B. Jaafar (2014)
Symbol Name
AAPL Apple Inc.
ABBV AbbVie Inc.
ABT Abbott Laboratories
ACN Accenture plc
AIG American International Group Inc.
ALL Allstate Corp.
AMGN Amgen Inc.
AMZN Amazon.com
APA Apache Corp.
AXP American Express Inc.
BA Boeing Co.
BAC Bank of America Corp
BIIB Biogen Idec
BK Bank of New York
BLK BlackRock Inc
BMY Bristol-Myers Squibb
BRK.B Berkshire Hathaway
C Citigroup Inc
CAT Caterpillar Inc
CL Colgate-Palmolive Co.
CMCSA Comcast Corporation
COF Capital One Financial Corp.
COP ConocoPhillips
COST Costco
CSCO Cisco Systems
CVS CVS Caremark
CVX Chevron
DD DuPont
DIS The Walt Disney Company
DOW Dow Chemical
DVN Devon Energy
EBAY eBay Inc.
EMC EMC Corporation
EMR Emerson Electric Co.
EXC Exelon
F Ford Motor
FB Facebook
FCX Freeport-McMoran
FDX FedEx
FOXA Twenty-First Century Fox, Inc
GD General Dynamics
GE General Electric Co.
GILD Gilead Sciences
GM General Motors
GOOG Google Inc.
GS Goldman Sachs
HAL Halliburton
HD Home Depot
HON Honeywell
IBM International Business Machines
INTC Intel Corporation
JNJ Johnson & Johnson Inc
JPM JP Morgan Chase & Co
KO The Coca-Cola Company
LLY Eli Lilly and Company
LMT Lockheed-Martin LOW Lowe's MA Mastercard Inc MCD McDonald's Corp MDLZ Mondelēz International MDT Medtronic Inc.
MET Metlife Inc.
MMM 3M Company
MO Altria Group
MON Monsanto
MRK Merck & Co.
MS Morgan Stanley
MSFT Microsoft
NEE NextEra Energy
NKE Nike
NOV National Oilwell Varco
NSC Norfolk Southern Corporation
ORCL Oracle Corporation
OXY Occidental Petroleum Corp.
PEP Pepsico Inc.
PFE Pfizer Inc
PG Procter & Gamble Co
PM Phillip Morris International
QCOM Qualcomm Inc.
RTN Raytheon Company
SBUX Starbucks Corporation
SLB Schlumberger
SO Southern Company
SPG Simon Property Group, Inc.
T AT&T Inc
TGT Target Corp.
TWX Time Warner Inc.
TXN Texas Instruments
UNH UnitedHealth Group Inc.
UNP Union Pacific Corp.
UPS United Parcel Service Inc
USB US Bancorp
UTX United Technologies Corp
V Visa Inc.
VZ Verizon Communications Inc
WBA Walgreens Boots Alliance
WFC Wells Fargo
WMT Wal-Mart
XOM Exxon Mobil Corp
Figure 1 The Boom-Bust in Housing Starts Compared With the Counterfactual. (The line with shorter dashes shows model simulations with the actual interest rate). source: Taylor, J. B. (2009)
