The asymmetric role of corporate governance in CEO pay determination: evidence from South Africa

Document Type

Article

Source of Publication

Applied Economics

Publication Date

2-7-2020

Abstract

© 2019, © 2019 Informa UK Limited, trading as Taylor & Francis Group. Previous studies suggest that CEOs may be incentivised to pursue actions aimed at restoring equity when pay deviates from the predicted CEO labour market compensation rate. This study investigates the effect of corporate governance (CG) quality on CEO pay deviation in an emerging economy characterised by weaker external corporate regulatory environment. Using a unique hand-collected data of 185 South African listed firms over a six-year period, We document that whereas CG quality impacts negatively on total CEO pay deviation, this is only conspicuous when the CEO is overpaid. CG quality has no effect on CEO compensation when the CEO is underpaid. We find that CEO underpayment reduces firm value in poorly-governed firms. In contrast, CEO overpayment has no effect on firm value irrespective of the level of CG quality. The findings imply that recent CEO pay level agitations have resulted in the design of CG mechanisms that reduces the tendency of CEO pay to adjust upwards. The results are robust to alternative econometric techniques and endogeneity concerns.

ISSN

0003-6846

Publisher

Routledge

Volume

52

Issue

7

First Page

671

Last Page

693

Disciplines

Business

Keywords

corporate governance, equity theory, executive compensation, Pay deviation

Scopus ID

85070490607

Indexed in Scopus

yes

Open Access

no

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