The effect of ownership concentration on CEO compensation‐firm performance relationship in New Zealand

Abstract

Purpose

The purpose of this paper is to investigate the effect of ownership concentration on CEO compensation and firm performance relationship in New Zealand.

Design/methodology/approach

The paper applies regression analysis to data from New Zealand listed companies from 2001 to 2005.

Findings

The study finds a non‐linear effect of ownership concentration on CEO compensation‐firm performance relationship, that is CEO compensation is negatively (positively) related to firm performance in firms with high (low) concentrated ownership structure respectively.

Research limitations/implications

Results provide evidence for the proposition that ownership concentration at a high level in New Zealand does not constrain excessive management power, but exacerbates agency problems associated with executive pay. A highly concentrated ownership structure provides potential explanation for the misalignment between CEO compensation and firm performance in New Zealand. The positive effect of a low ownership concentration level on CEO compensation‐firm performance relationship suggests that monitoring the efficiency of large shareholders works better at a low ownership concentration level.

Originality/value

By exploring the non‐linear interaction between two governance mechanisms – CEO compensation and ownership concentration – the findings of the study make contributions to the current compensation and ownership literature mainly in two ways: although the non‐linearity between ownership concentration and firm value has attracted extensive research interest, little attention is given to the non‐linear effect of large shareholding on the CEO compensation contract in prior studies; and, in the context of a developed country with a small financial market, there are low regulatory “drag” and virtual absence of a litigation threat to organisations, as in New Zealand. This study suggests concentrated ownership as an underlying explanation for the misalignment between CEO compensation and firm performance.

Citation

Jiang, H., Habib, A. and Smallman, C. (2009), "The effect of ownership concentration on CEO compensation‐firm performance relationship in New Zealand", Pacific Accounting Review, Vol. 21 No. 2, pp. 104-131. https://doi.org/10.1108/01140580911002053