Total shareholder return

Abstract: The author, using 1981–86 data on more than 16,000 managers at 250 large corporations, investigates whether the sensitivity of managerial compensation to corporate performance in one year is positively related to corporate performance in the next year. Accounting-based measures of performance yield only weak evidence of such an association, but economic and market measures yield stronger evidence. Payment of an incremental 10% bonus for good economic performance is associated with a 30 to 90 basis point increase in the expected after-tax gross economic return in the following fiscal year; and payment of an incremental raise of 10% following a good stock market performance is associated with a 400 to 1200 basis point increase in expected total shareholder return.

Abstract: This paper examines the link between CEO pay and performance employing a unique, hand-collected panel data set of 390 UK non-financial firms from the FTSE All Share Index for the period 1999–2005. We include both cash (salary and bonus) and equity-based (stock options and long-term incentive plans) components of CEO compensation, and CEO wealth based on share holdings, stock option and stock awards holdings in our analysis. In addition, we control for a comprehensive set of corporate governance variables. The empirical results show that in comparison to the previous findings for US CEOs, pay-performance elasticity for UK CEOs seems to be lower; pay-performance elasticity for UK CEOs is 0.075 (0.095) for cash compensation (total direct compensation), indicating that a ten percentage increase in shareholder return corresponds to an increase of 0.75% (0.95%) in cash (total direct) compensation. We also find that both the median share holdings and stock-based pay-performance sensitivity are lower for UK CEOs when we compare our findings with the previous findings for US CEOs. Thus, our results suggest that corporate governance reports in the UK, such as the Greenbury Report (1995) that proposed CEO compensation be more closely linked to performance, have not been totally effective. Our findings also indicate that institutional ownership has a positive and significant influence on CEO pay-performance sensitivity of option grants. Finally, we find that longer CEO tenure is associated with lower pay-performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure.

Abstract: Shareholder value is not a new idea. But it entails a shift in control over businesses with far-reaching macro-economic consequences. They are mostly apparent in the USA. The required financial return spurs a momentous equity price appreciation which discourages private saving. Meanwhile, the achievement of a financial profitability consistently above the economic rate of return on real capital induces a rising leverage cum share buybacks. The financial dynamic is highly procyclical and generates a financial fragility which questions the hypothetical advantage of private pension funds over pay-as-you-go retirement systems.

Abstract: This paper investigates whether improvements in the firm's internal corporate governance create value for shareholders. We analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings. This provides a clean causal estimate that deals with the endogeneity of internal governance rules. We find that passing a proposal leads to significant positive abnormal returns. Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, stronger investor activism, and for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long-term performance improves.