The board of directors and executive compensation in the context of crisis: A comparative study between the United States and France.
Bouras, Mehdi ; Gallali, Mohamed Imen
ABSTRACT
This study examines whether the characteristics of the board of
directors may affect the level of remuneration, for two samples having
different systems of governance for the period from 2002 to 2010. Given
the importance the financial crisis for executive pay, investigations in
executive compensation during periods of crisis are very limited. This
study provides a contribution to the literature where we tried to
determine if the manager takes advantage of this period of instability.
The results indicate the positive impact of the period of crisis on
the level of compensation of the U.S. manager, which is not true with
his French counterpart. To our knowledge, no study has been conducted on
board effectiveness during periods of instability. The results show that
during this period this mechanism is unable to control the manager who
benefits from excessive compensation.
JEL Classification: G34
Keywords: agency theory; executive compensation; board of
directors; financial crisis
I. INTRODUCTION
Research on the role of the board as a governance mechanism has
attracted the attention of researchers and professionals. The latest
crisis has reactivated the debate on the effectiveness of this mechanism
as a guarantee to protect the interests of shareholders (Ferrero-Ferrero
et al. 2011). Given the importance of the remuneration of managers in
the company, the main question is whether the board may have an
important role in determining the level of compensation. Several
empirical studies have examined the impact of board characteristics on
the level of executive compensation such as Ramaswamy et al. (2000),
Godard and Schatt (2004), Brick et al. (2006), Chhaochharia and
Grinstein (2009), and Ozdemir and Upneja (2012). However, the results
remain inconclusive due to the selected sample and the specificity that
represents the board of directors in each country.
In this analysis, we attempted to determine, the characteristics of
the board that can affect the level of remuneration for two samples
characterized by different governance systems (market-oriented system
vs. mixed governance system). In addition, given the importance of the
factor "financial crisis" on executive compensation
(Ferrero-Ferrero et al., 2011), we try to see if the manager takes
advantage of this instability by excessive compensation.
This study attempts to make a significant contribution to the
existing literature: First, it shows a comparison between two samples
belonging to two different systems of governance. Then, referring to the
work of Gupta et al. (2009) and Ferrero-Ferrero et al. (2011) we
integrate in our model a variable indicating the presence of the
financial crisis to determine if the executive takes advantage of this
period of instability. The investigations in terms of executive
compensation during the periods of crisis are very limited. This study
provides a contribution to the literature where we try to determine if
the manager takes advantage of this period of instability. Finally, we
determine whether the board of directors is effective during the period
of financial crisis. According to Broye and Moulin (2012), board
effectiveness is explained by the possibility of controlling the
executive to receive compensation in excess of what would be justified.
The rest of this paper is structured as follows. In Section II, we
will present the research hypotheses about the relationship between
board characteristics and the level of executive compensation. In
Section III, we will determine the sample and the data sources. In
Section IV, we will discuss the model and the variables selected. In
Section V, we will interpret the results on the impact of the
composition of the board on the remuneration received by the director.
In Section VI, we will study the effectiveness of the board in
determining the amount of managerial remuneration during the financial
crisis. In Section VII, we will conclude the paper.
II. THE RESEARCH HYPOTHESIS
A. Board Size
According to Bebchuk and Fried (2004), a large board size is
characterized by a problem of internal coordination and communication
problems between its members, which makes it inefficient. Therefore, the
leader will have an important part in the determination of his
compensation (Eisenberg et al., 1998). Core et al. (1999) find that
executive compensation is higher when the board size is large. We will
test the following hypothesis:
H1 : There is a positive relationship between the board size and
the remuneration received by the manager.
B. Duality
According to Firth et al. (2007) when the chairman of the board of
directors acts also as the company manager, the board's
effectiveness in the supervision of the executive is weak. The duality
can give to the manager excessive influence on the board and therefore
compromises the ability of the latter to exercise adequate control over
the executive compensation policy (Ryan and Wiggins, 2004). From these
findings, the hypothesis to be verified is the following:
H2: A duality of managerial functions (manager and chairman of the
board) is positively related to executive compensation.
C. Independent Directors According to Van Essen et al. (2015), the
presence of independent directors has an impact on managerial power.
Indeed, Kesner et al. (1986) and Malette et al. (1995) argue that a
board having a high proportion of outside directors could compensate the
manager in a reasonable manner, contrary to a board characterized by a
high proportion of inside directors. Based on the foregoing, we can
formulate the following hypothesis:
H3: A strong presence of independent directors has a negative
effect on executive compensation.
D. Directors Shareholding
According to Vigliano (2007), on the basis of the postulates of the
agency theory about the importance of ownership in resolving conflicts
of interest between the agent and the principal, a director holding
shares will act in favor of shareholders by exercising a degree of
control more important on the elements of management, including
executive compensation. So the hypothesis to be verified is as follows:
H4: Directors shareholding has a negative influence on executive
compensation.
E. Women Directors
According to Adams and Ferreira (2009), women seem to behave
differently from men in attendance. More specifically, women are least
likely to have attendance problems than men. Bugeja et al. (2012) assume
that the women directors exert a stricter control on the manager, and
the latter's ability to extract rents through their compensation
contracts will be reduced. Therefore, our hypothesis is as follows:
H5: The presence of women in the board of directors has a negative
effect on executive pay.
F. Compensation Committee
Petra and Dorata (2008) suggest that the compensation committee is
a group composed of members of the board who are trying to create a more
attractive pay system for executive by avoiding his opportunistic
behavior. Companies without a remuneration committee can be less
effective in the determination of the remuneration policy for executives
(Newman and Mozes, 1999; Conyon and He, 2004). Conyon and Peck (1998)
indicate that the presence of the committee is not a guarantee for its
effectiveness, but the independence of its members improves the control
over the level of remuneration. From these observations, we can
formulate the following hypotheses:
H6.A: The presence of the remuneration committee has a negative
effect on executive compensation.
H6.B: The presence of independent directors in the remuneration
committee has a negative effect on executive compensation.
III. SAMPLE DATA SOURCES
In this study, we focus on the impact of board characteristics on
the determination of executive compensation levels for two markets with
different governance systems, namely the French market (mixed system of
governance) and the U.S. market (marketoriented system) for a study
period of 9 years, from 2002 to 2010.
In case of the French market our initial sample consists of all
companies belonging to the stock index CAC All-Tradable (ex SBF 250). In
the case of the U.S. market, our initial sample covers the 300 largest
U.S. companies by market capitalization and belonging to the S&P500
stock index. In both cases, we have eliminated financial firms because
of their specificities, in order to keep a more homogeneous panel and we
have excluded firms for which financial data or governance are lacking.
The final sample to examine is composed of 159 French companies or 1,431
observations, and 203 U.S. companies or 1,827 observations.
Table 1 shows the sectoral breakdown for the two samples. It
appears from this table that 30% of the sample belongs to the service
sector, followed by industry at 26% and consumer sectors and information
technology and communication with 18% for each of them and finally, the
health sector represents only 8% of the total companies selected.
In order to build our database, we used several sources of
information such as Compustat and annual reports (Table 2). Also,
according to Ferrero-Ferrero et al. (2011), the recent financial crisis
has revived the debate about the effectiveness of the board as a
mechanism to protect shareholders against the opportunistic behavior of
the manager as manifested by excessive remuneration. Bonazza (2008) and
Broye and Moulin (2012) stipulate that during a period of financial
crisis the managers continue to benefit from significant compensation
even if the business performance is low. Thus, in this investigation we
will incorporate a dummy variable indicating the period of instability
(crisis) inspired by the work Gupta et al. (2009) and Ferrero-Ferrero et
al. (2011) to determine whether the manager may take advantage of this
crisis to increasing its compensation.
IV. PRESENTATION OF THE MODEL USED
The model can be written in this manner:
Ln[(l + Pay).sub.it] =[alpha]+ [SIGMA][[beta].sub.i]Charact.BD +
[SIGMA][[gamma].sub.i]Cont.Var + [[delta].sub.i]Crisis +
[SIGMA][[theta].sub.i] [sec.sub.i] + [SIGMA][[lambda].sub.i][Y.sub.i] +
[[xi].sub.it] (1)
where the dependent variable representing the level of annual
compensation received by the CEO is measured by the natural logarithm of
executive pay (Ln (1+ Pay)), which includes the sum of salary, bonus,
other annual remuneration and the total value of shares and share
options measured by the Black-Scholes model. This proxy is used by
several authors such as Malette et al. (1995), Conyon and Peck (1998),
and Conyon and He (2011).
The variable (Charact.BD) corresponds to the characteristics of the
board, inspired by the financial literature and previous empirical
studies (Ramaswamy et al., 2000; Ozdemir and Upneja, 2012). Therefore,
they include the board size, the presence of independent directors and
women in the board of directors and the existence and the independence
of the compensation committee.
In terms of control variables (Cont.Var), they are deduced from
previous works, such as Li et al. (2007), Conyon and He (2011) and
Bugeja et al. (2012). They mainly represent the characteristics of firms
such as market-to-book, stock return volatility and the return on assets
(ROA).
In referring to the work of Escaffre and Sefsaf (2010), the crisis
variable is a dummy variable that takes the value 1 if year t is
characterized by high instability and 0 otherwise.
As for the variables (Sec) and (Y), they help to detect
respectively the effect of sector and year on the level of compensation
paid to the officer.
The model can then be written in this way: Ln[(l + Pay).sub.it]
=[alpha] + [beta].sub.1]Bd.[Size.sub.it] + [[beta].sub.2][Dual.sub.it] +
[beta].sub.3]lnd.[Dir.sub.it] +[[beta].sub.4]Dir.[Own.sub.it] +
[[beta].sub.5]Wom.[Dir.sub.it] + [[beta].sub.6]Comp.Comm +
[[beta].sub.7]Comp.Comm.[Ind.sub.it] + [[gamma].sub.1][MTB.sub.it] +
[[gamma].sub.2][ROA.sub.it] +[[gamma].sub.3][Volat.sub.it]
+[[delta].sub.1][Crisis.sub.it] + [[SIGMA][[theta].sub.i][Sec.sub.i]
+[[SIGMA][[lambda].sub.i][Y.sub.i] + [[xi].sub.it] (2)
where Ln (1 + Pay)=The natural logarithm of total executive pay,
with Pay the sum of salary, bonus, other annual compensation and the
value of free shares and stock options; Bd.Size=The size of the board
measured by the number of directors; Dual=Binary variable which equals 1
if the manager is also chairman, 0 otherwise; Ind.Dir=Percentage of
independent directors on the board, measured by the ratio between the
number of independent directors and the total number of members of the
Board; Dir.Own=Percentage of stock owned by the directors;
Wom.Dir=Percentage of women on the board of directors, measured by the
ratio between the number of female directors and the total number of
members of the board; Comp.Comm=A dummy variable equal to one if the
firm has a compensation committee and zero otherwise;
Comp.Comm.Ind=Percentage of independent directors within the
compensation committee measured by the ratio between the number of
independent members of the compensation committee and the total
membership of the remuneration committee; MTB=The market to book
measured by the ratio between the market capitalization in the last
period (price of the share*number of outstanding shares) and the book
value of common stock; ROA=Return on assets, calculated as the ratio of
net income and book value of total assets; Volat=The stock volatility,
measured by the standard deviation of the firm's stock returns; and
Crisis=A dummy variable equals to 1 if year t corresponds to a period of
instability and 0 otherwise.
The financial crises includes foreign exchange crises, banking
crises and stock market crashes. However, our study focuses only on
crises causing high volatility in the stock market (Escaffre and Sefsaf,
2010). In order to identify periods of instability for both American and
French markets, we will use the stock index returns (CAC All-Tradable
and S&P500) to determine the intervals that correspond to a high
volatility of these indexes. The figures (1 and 2) illustrate the daily
returns of stock index CAC All-Tradable and S&P500 for the period
from 01/01/2002 to 31/12/2011, we note that the years 2002, 2008 and
2009 are characterized by high return daily.
[FIGURE 1 OMITTED]
[FIGURE 2 OMITTED]
Also in Table 3, we present the return volatility index CAC
All-Tradable and S&P500. The three years 2002, 2008 and 2009
recorded a high volatility of returns of the two indexes compared to
other years. This is explained by the burst of the dot-com bubble in the
year 2002 and the subprime crisis that occurred during the summer of
2007 and became more important in 2008 and 2009 for both markets. In
conclusion, the variable "Crisis" is a dummy variable that
takes 1 for years 2002, 2008 and 2009 and 0 otherwise.
V. INTERPRETATION OF THE RESULTS OBTAINED
Table 4 presents the descriptive statistics of dependent and
independent variables for the period 2002 to 2010. It follows from this
table that French companies have an average of 10 directors on the board
of directors with a minimum of 3 and a maximum of 21 members. This
result is very similar to the study of Godard and Schatt (2004) covering
97 French companies in which they have obtained an average of 11 members
on the board of directors. U.S. companies have 11 members on average
according to the work of Carter et al. (2003). According to agency
theory, these average numbers are very high: Jensen (1993) suggests that
the number of directors should be between 7 and 8 directors.
For the variable duality, we find that 50.4% of managers of French
companies include the functions of management and control against 80.9%
in the case of U.S. firms. The different average between these two
samples is statistically significant at the 1% level. This is explained
by the diversity of the governance systems adopted by each country.
The average percentage of independent directors in French and
American companies is respectively 36.2% and 76.8%; this difference is
explained by the diversity in regulations in each country. Indeed, the
NASDAQ requires the board of directors to be composed of a majority of
independent directors, but in France, the AFEP-MEDEF Code emphasizes
that independent directors should be between one-third and one-half of
the board members.
At the level of shareholders, directors of French firms holds on
average 34% of the outstanding shares with a maximum of 97%, but in the
U.S. case, they retain only 4% of capital. The United States have a much
dispersed ownership structure; even the largest number of shares held by
the directors does not exceed 7%, unlike France where actions are
concentrated in the hands of holders block.
The statistics represented above are for the sample of 159 French
Firms and 203 U.S firms for a period of nine years (2002-2010). The
dependent variable is calculated by the natural logarithm of the total
compensation received by the manager in U.S. dollars. Independent
variables are: Bd.Size=The size of the board measured by the number of
individuals on the main board; Dual=Leadership structure of the firm is
a dummy variable set equal to one if the posts of CEO and chairperson
are combined, and zero otherwise; Ind.Dir=The fraction of the board
comprised of independent directors; Dir.Own=Percentage of stock owned by
the directors; Wom.Dir=Percentage of women on the board of directors;
Comp.Comm=A dummy variable equal to one if the firm has a compensation
committee and zero otherwise; Comp.Comm.Ind=Percentage of independent
directors on the compensation committee. Control Variables are: MTB=The
market to book ratio measured by the market value divided by the book
value of common stock; ROA=Return On asset, calculated as the ratio of
net income and book value of total assets; Volat=The stock volatility,
measured by the standard deviation of the firm's stock returns;
Crisis=A dummy variable equal to 1 if year t corresponds to a period of
instability and 0 otherwise.
On average, 13.6% of women are members of the board of directors
for the American case. This result is higher than the proportion of
women in the case of French firms which does not exceed 9% and the
results found in similar studies, such as Adams and Ferreira (2009) and
Bugeja et al (2011).
[FIGURE 3 OMITTED]
Figure 3 illustrates the distribution of average pay received by
year. We see that throughout the study period (2002-2010), American
managers are better paid than their French counterparts. In addition,
there is a tendency to increase even during the crisis period.
In Table 5 we present the regression results where the column (1)
shows the impact of board characteristics on executive compensation. We
aggregate the panel data for the French and American cases by using
ordinary least squares; in this case the independent variable of
interest is the indicator variable U.S. (U.S. indicator) (dummy variable
equal to 1 for the U.S. and 0 for the French case).
We find that the variable (U.S. indicator) is positive and
statistically significant at the 1 % level; this result is consistent
with the descriptive analysis according to which a U.S. executive
compensation is significantly higher compared to the French case.
Firstly, based on the study of Conyon and He (2011), the
international differences in executive compensation exist also in other
professions such as doctors, teachers and engineers who all gain lot
more in the United States than in France. Then, another reason for this
difference is given by Conyon and Murphy (2000) and Rosen (1981) who
consider that the market for managers is very active in the United
States. Indeed, either because the demand for such talent leads to a
higher salary, or because the leaders in the United States may face a
greater risk of being fired for poor performance compared to French
managers and therefore they require greater compensation. Finally,
according to Conyon and He (2011), this difference is explained on the
basis of social, legal and living standards that may exist between the
two countries. Indeed, following the recent financial crisis, France
limits the remuneration of managers of public firms.
For the columns (2) and (3), we check the effect of the board on
remuneration levels for each country separately. The probability of
Hausman test is equal to 0 which implies that we must retain the fixed
effect model for the French and American cases.
The board size does not seem to weaken or strengthen the control in
the American case in accordance with the studies of Li et al. (2007),
and Ozdemir and Upneja (2012) and Masulis et al. (2012). In the case of
French firms, the coefficient is positively significant at the 1% level
as the work of Yermack (1996) and Lipton and Lorsh (1992). The large
board is characterized by an intensification of communication problems
and coordination between its members, which makes it inefficient the
control officer. We can deduce that American leaders are less vigilant
than the French to take advantage of the large size of the board of
directors. The variable (Dual), where the leader occupies simultaneously
the positions of CEO and Chairman of the board, it is positive and
statistically significant at 1% for U.S. firms. This is proven in
several studies as Conyon and Peck (1998) Core et al. (1999), Anerson
and Bizjak (2003) and Masulis et al. (2012). In the French case, the
result is not significant (p> 0.10), so the French leaders do not
take advantage of the dual functions for extracting remuneration. This
divergence in results is explained by the difference between systems of
governance: France is characterized by a mixed system of governance
where the function officer is monistic, that is to say, a separation
between the control and management, unlike the U.S., where it is
characterized by a duality of functions of the manager. So appears to it
takes advantage of the dual function to ask for more pay, compared to
the case where it occupies only the position of CEO.
Contrary to what is expected, the presence of independent directors
is positively associated (significant at the 1% level) on executive
compensation for both countries. This result converges with those
obtained in previous studies such as Firth et al. (1999), Fahlenbrach
(2008) and Masulis et al. (2012). This positive relationship is
explained on the one hand, by the fact that independent directors may
inflate executive compensation so they use it as a reference when
negotiating their remuneration in companies where they occupy the
position of manager (Firth et al. 2007). On the other hand, this type of
director occupies several posts in parallel, which makes their work
ineffective in controlling manager (Chang et al, 2012).
Hypothesis four, which states that the ownership of directors
(Dir.Own) has a negative influence on the compensation is checked
whatever the selected sample. The coefficient of the variable (Dir.Own)
is negative and statistically significant at the 10% threshold for the
French case and 5% in the American case, according to the predictions of
the agency theory and the study of Collin et al. (2012). The
shareholding director allows it to act as a shareholder, so directors
can exercise more control over the manager to avoid opportunistic
behavior including obtaining excessive salaries.
In terms of effect of the compensation committee (Comp.Comm) for
the sample of U.S. firms, we find an insignificant relationship, as did
the studies of Conyon and He (2004) and Bugeja et al. (2012). This
inefficiency in controlling remuneration is mainly due to the nature of
the directors appointed to the committee. NASDAQ requires that the
compensation committee should be composed exclusively of independent
directors, but such directors have a positive effect on the level of
compensation as shown above. For French companies, there is a positive
and statistically significant relationship, at 5%, which was also shown
by Broye and Moulin (2012). Contrary to the U.S., French legislation
does not prohibit the compensation committee chairman from being the
manager, while the remuneration policy can be dominated by the latter,
which can allow of high compensation. The presence of the compensation
committee is not effective in controlling the compensation of executives
that allows us to reject the hypothesis H6a.
The presence of independent directors in the compensation committee
has a positive effect and statistically significant at the 5% threshold
on executive compensation for French and American companies, in
accordance with Conyon and Peck's (1998) work. This positive impact
is explained by the overlap of functions (Chang et al, 2012), where the
independent directors are characterized by several selection committees
(compensation committee and audit committee), since their nomination
allows for better defending the interests of shareholders, however, a
nomination committee leads to spread efforts, so it reduces the
effectiveness of its members in the control of its executive and its
compensation.
Our research shows that the presence of women in the board does not
have an effect on the levels of executive compensation, so that
hypothesis H5 is not verified, contrary to the results obtained by
Bugeja et al. (2012). This result is explained by a low presence of
women on the board. In fact women directors represent only 9% and 13%
respectively for the French and American companies and therefore their
presence does not affect the determination of the level of executive
compensation.
VI. THE EFFECTIVENESS OF THE BOARD OF DIRECTORS DURING THE
FINANCIAL CRISIS
The mechanism responsible for determining the composition and
amounts of compensation granted to executives is the board of directors
and the compensation committee, especially when excessive compensation
is explained by the inefficiency of the latter. According to Masulis et
al. (2012), Ferrero-Ferrero et al. (2011), Linck et al. (2008) and
Pathan and Skully (2010), the board of directors has two main roles. On
the one hand, a strategic function (De Andres and Vallelado, 2008; Payne
et al., 2009; Sundaramurthy and Lewis, 2003),which is associated with
the participation of directors in determining corporate strategy to
maximize its economic value due to various risk factors (Pathan, 2009).
On the other hand, a control function, the board of directors, is a
mechanism of control of management decisions and of limiting undesirable
behavior of managers (Fama and Jensen, 1983). According to Haspeslagh
(2010), an external factor that affects the behavior of the board is the
turbulent economic environment, in particular, financial crisis.
In this study, the effectiveness of the board is computed from a
score that includes several variables including those used in the
previously developed (1). The model (1) can then be rewritten as
follows, where we combine the features of the board in a single variable
called (Bd.Index) to determine if the board of directors can reduce
opportunistic behavior be explained by excessive executive compensation
during the periods of crisis.
Ln[(l + Pay).sup.it] = [alpha]+ [[beta].sub.i].Bd.Index +
[SIGMA][[gamma].sub.i].Cont.Var + [SIGMA][[theta].sub.i] [sec.sub.i] +
[SIGMA][[lambda].sub.i] [Y.sub.i]+ [[xi].sub.it] (3)
where Ln (1+Pay) is the natural logarithm of total compensation
received by executives and Bd.Index is the functioning score of the
board of directors calculated manually. The control variables (Cont.Var)
include the market-to-book (MTB), return on assets (ROA) and stock
return volatility (Volat), the variable (sec) indicates the sector and
the variable (Y) indicates the year.
During the period of studies 2002 to 2010, U.S. firms have a higher
score on the board of directors' index compared to French
companies. The last recorded a lower score than average (20 points)
until the year 2010 where they reached 20,459 points (Figure 4). However
we notice in both cases an increase in scores of the board of directors,
which can be explained by the fact that companies are following
increasingly the recommendations of the rating agencies to improve the
functioning of the board and therefore greater efficiency of the latter
but with a very low growth rate.
[FIGURE 4 OMITTED]
Table 6 presents the regression results for the model presented
earlier. Column 1 presents the results of the whole sample, the
coefficient (U.S. indicator) is positive and statistically significant
at the level of 1%. We can deduce that even during periods of crisis,
U.S. leaders are paid more than their French counterparts. On the level
of analysis by country, we perform the same tests of the first model
(homogeneity test and Hausman test), the results show that we must
choose the fixed effects model for French companies, since the
probability test is less than 10% (Prob > [chi square] = 0.0000) and,
in the case of U.S. firms, the probability of this test is equal to
0.2315 above 10%, which implies that the model of individual effects is
random.
During the period of crisis the variable Bd.Index is positively and
statistically significant at the 1% threshold for the two samples and
even for the whole sample. The board is ineffective in the determining
the level of remuneration of the manager. This result is not consistent
with the findings of the agency theory developed by Jensen (1993),
Weisbach (1988) and Boyd (1994), where the board exercises a high
control on the officer, and this due to a good score board of directors,
and less compensation is needed to align the interests between
shareholders and the manager.
During the crisis period the members of the board aim to maintain
their positions by drawing attention to the strategic role of the board,
and solving economic problems due to degraded performance of firms.
During this phase of instability, the directors neglect their principal
responsibilities by performing less supervision of the manager and
consequently an increased risk of managerial opportunism as an excessive
compensation. This result confirms the idea of Miller-Millesen (2002),
which states that in an unstable environment the approach based on the
strategic role of the board is preferred to its oversight role.
In conclusion, during the periods of crisis, managers benefit from
the inefficiency of the board in the control for excessive compensation,
which explains the positive results found in the American case between
the variable measuring the level of compensation received by the CEO and
the dummy variable indicating the periods of crisis. For the French
case, the French managers do not benefit. From this extra compensation.
This is not explained by the effectiveness of the board by regulation
but at limiting compensation with the appearance of the new
recommendation by AEFP-MEDEF in 2008 which states that the compensation
of executive officers should reflect the evolution of recorded
performance.
VII. CONCLUSION
This study examines whether the characteristics of the board can
affect the level of remuneration for two samples with different
governance systems. In addition, given the importance that represents
the factor of the financial crisis on executive compensation,
investigations on executive compensation during periods of crisis is
very limited.
First, we have determined the characteristics of the board which
can give an influence on the remuneration received by the directors for
a sample of 159 French firms and 203 U.S. firms for the period 2002 to
2010. We have concluded that in both cases, the shareholding of
directors is a way to strengthen the control of the manager. The
presence of independent directors, contrary to what is expected, is
positively related to the compensation of directors for the American and
French cases. Also the presence of the woman has no impact for both
cases. In terms of other variables (board size, duality of functions and
the presence of the compensation committee) the results remain
inconclusive and depend on the nature and characteristics of the study
sample. Then, we have shown that the leader benefits from the crisis
period for excessive compensation despite a decreasing performance,
which confirms the idea of Bonazza (2008).
Finally, the results obtained at the relationship between the
presence of the instability and the level of compensation leads us to
test the effectiveness of the board, which is the main mechanism
responsible for determining the composition and amount compensation
manager. The results of this part lead to the conclusion that the board
of directors during the period of instability has a role more strategic
than the control of the manager. Faced with an inefficiency of the board
during this period, state intervention through enactment of laws
limiting the amount of remuneration and particularly the variable
component linked to the performance of the firm is essential, as the
French case in order to limit managerial opportunism.
In conclusion, this study provides an overview of the remuneration
of managers during the crisis, and more, it can open perspectives for
interesting research questions such as the effect of the crisis on each
component of remuneration and specifically equity based compensation. In
addition in our study, we have used a score on the functioning of the
board and it would be useful to develop a global score including other
control mechanisms of the manager such as the presence of the audit
committee and shareholding concentration.
ENDNOTE
(1). The score board for each company in year t corresponds to the
total of points obtained. The items and their measurements are deducted
Globe and Mail corporate governance rating.
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Mehdi Bouras (a) and Mohamed Imen Gallali (b)
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gallalim@yahoo.fr
Table 1
Sample selection and distribution
French U.S.
Firms Firms
Initial sample 250 300
Financial firms 36 48
Number of companies whose data are 55 49
unavailable
Final sample 159 203
Number % Number %
Industry (sec1) 42 26.41 53 26.10
Consumer goods (sec2) 28 17.61 37 18.22
Health (sec3) 12 7.55 16 7.88
Services (sec4) 48 30.18 61 30.04
Communications technology (sec5) 29 18.23 36 17.73
The statistics represented above are for the sample of 159 French Firms
and 203 U.S firms for a period of nine years (2002-2010). The sample
for two countries is distributed by sectors (Industry (Sec1), Consumer
goods (Sec2), Health (Sec3), Services (Sec4), Information and
Communications Technology (Sec5).
Table 2
Data sources (accounting and governance) of the sample selected
Data Sources
French Firms U.S. Firms
Accounting Data Compustat Global Compustat North America
Governance Data
- CEO compensation Reference Documents Executive Compensation
(Annual Reports) Database
(Compustat ExecuComp)
- Characteristics of the Reference Documents Proxy Statement
board of directors (Annual Reports) (DEFI 4a)
The data are collected from different sources: - Compustat Global and
Compustat North America for accounting data. - Annual reports,
Compustat ExcuComp and proxy statement (DEF14a) for governance data.
Table 3
Volatility index returns CAC all-tradable and S&P500
Year CAC All-Tradable S&P500
2002 0.0200 0.0164
2003 0.0114 0.0107
2004 0.0077 0.0069
2005 0.0065 0.0064
2006 0.0090 0.0063
2007 0.0103 0.0100
2008 0.0245 0.0258
2009 0.0228 0.0172
2010 0.0106 0.0086
The annual volatility indices (CAC All-Tradable and S&P500) tor nine
years (2002-2010) is determined from the standard deviation from daily
return indices.
Table 4
Descriptive statistics of variables
Number Average Min Max Std.dev Difference
Ln (1+Pay(M$))
FR 1431 0.835 9.41e-07 3.527 0.617 - 0.60 (*)
US 1827 1.435 0.007 4.825 0.589
Bd.Size
FR 1431 9.532 3 21 3.937 -1.10 (*)
US 1827 10.630 5 23 2.204
Dual
FR 1431 0.704 0 1 0.456 -0.11 (*)
US 1827 0.809 0 1 0.393
Ind.Dir
FR 1431 0.362 0 1 0.243 -0.41 (*)
US 1827 0.768 0 1 0.182
Dir.Own
FR 1431 0.340 0 0.973 0.279 0.29 (*)
US 1827 0.046 0 0.601 0.075
Wom.Dir
FR 1431 0.090 0 0.750 0.122 -0.05 (*)
US 1827 0.136 0 0.545 0.091
Comp.Comm
FR 1431 0.616 0 1 0.486 -0.35 (*)
US 1827 0.970 0 1 0.169
Comp.Comm.Ind
FR 1431 0.319 0 1 0.349 -0.57 (*)
US 1827 0.892 0 1 0.299
MTB
FR 1431 0.655 0.013 4.621 0.467 0.22 (*)
US 1827 0.437 0.027 6.780 0.444
ROA
FR 1431 0.028 -0.808 0.481 0.121
US 1827 0.062 -0.889 0.449 0.109 -0.03 (*)
Volat
FR 1431 0.026 0.007 0.293 0.198 0.00 (*)
US 1827 0.022 0.013 0.134 0.007
Crisis
FR 1431 0.333 0 1 0.471 0.00 (*)
US 1827 0.333 0 1 0.471
(*) Significant at 1%
Table 5
Regression results of the relationship between executive compensation
and board characteristics
Pooled French Ln (1+Pay)
Ln Fixed Random
(1+Pay) Effects Effects
U.S. indicator 0.70 (a)
(14.58)
Bd.Size 0.82 (a) 0.36 (a) 0.6l (a)
(16.02) (3.87) (7.86)
Dual 0.36 (a) -0.78 -0.78
(9.84) (- 1.11) (-1.26)
Ind.Dir 0.76 (a) 0.49 (a) 0.55 (a)
(8.93) (4.12) (4.84)
Dir.Own - 0.81 (a) -0.26 (c) -0.55 (a)
(-9.58) (- 1.78) (-4.61)
Wom.Dir 0.10 0.05 -0.22
(1.56) (0.20) (-0.97)
Comp.Comm 0.32 (a) 0.17 (b) 0.2l (a)
(5.46) (2.34) (3.02)
Comp.Comm.Ind 0.30 (b) 0.20 (b) 0.19 (b)
(2.06) (2.22) (2.19)
MTB - 0.06 (c) 0.12 (a) 0.09 (b)
(- 1.71) (2.82) (2.09)
ROA 0.65 (a) 0.89 (a) 0.85 (a)
(4.72) (6.44) (6.20)
Volat 1.29 0.73 0.76
(1.28) (0.91) (0.95)
Crisis 0.04 - 0.56 (c) -0.04
(1.02) (- 1.71) (-1.28)
Constant 0.22 1.34 (a) 0.72 (a)
(1.61) (6.45) (3.64)
sector yes No yes
year yes yes yes
[R.sup.2] 0.56 0.11 0.56
Fisher 262.47 (a)
Hausman
N 3258 F(158, 1261) = 13.66
Prob > F = 0.0000
[chi square] = 49.41
Prob > [chi square] = 0.0000
1431 1431
U.S Ln (1+Pay)
Fixed Random
Effects Effects
U.S. indicator
Bd.Size 0.17 0.37 (a)
(1.14) (2.89)
Dual 0.54 (a) 0.59 (a)
(10.43) (11.89)
Ind.Dir 0.81 (a) 0.72 (a)
(5.84) (5.48)
Dir.Own -1.08 (b) -1.23 (a)
(-2.33) (-3.22)
Wom.Dir 0.27 0.25
(0.83) (0.87)
Comp.Comm -0.36 -0.24
(-0.98) (-1.03)
Comp.Comm.Ind 0.24 (b) 0.27 (a)
(2.15) (2.68)
MTB -0.18 (b) -0.13 (c)
(-2.20) (-1.93)
ROA 0.25 0.27
(1.43) (1.58)
Volat 0.96 1.55
(0.57) (0.94)
Crisis 0.08 (b) 0.06 (c)
(2.07) (1.69)
Constant 2.75 (a) 2.10 (a)
(5.55) (5.39)
sector No yes
year yes yes
[R.sup.2] 0.13 0.24
Fisher
Hausman
N F(202, 1613) = 8.18
Prob > F = 0.0000
[chi square] = 37.50
Prob> [chi square] = 0.0001
1827 1827
(a) Significant at 1%, (b) Significant at 5% , and (c) Significant at
10%
Table 6
Results of regression of the relationship between executive
compensation and the score board of directors during the crisis
Pooled France Ln(l + Pay)
Ln (2002-2008-2009)
(1+Pay) Fixed Random
Effects Effects
U.S. indicator 1.01 (a)
(11.73)
Bd.Index 0.06 (a) 0.05 (a) 0.06 (a)
(10.89) (6.13) (8.36)
MTB -0.08 0.20 (a) 0.12 (c)
(-1.45) (3.07) (1.92)
ROA 0.49 (b) 1.18 (a) 1.15 (a)
(2.44) (5.43) (5.43)
Volat 3.51 -1.37 -0.02
(1.62) (-0.65) (-0.01)
Constant 1.24 (a) 1.39 (a) 0.99 (a)
(7.29) (8.56) (4.76)
sector yes No yes
year yes yes yes
R2 0.46 0.21 0.16
Fisher 99.93 (a)
Hausman
F(158, 314) = 6.73
Prob > F = 0.0000
[chi square] = 20.32
N Prob > [chi square] = 0.0004
1086 477
U.S. Ln(l + Pay)
(2002-2008-2009)
Fixed Random
Effects Effects
U.S. indicator
Bd.Index 0.07 (a) 0.06 (a)
(7.39) (7.48)
MTB -0.34 (b) -0.2 l (b)
(-2.37) (-2.14)
ROA 0.08 0.10
(0.28) (0.41)
Volat 6.84 (c) 6.11 (c)
(1.75) (1 .81)
Constant 2.04 (a) 2.31 (a)
(6.82) (8.23)
sector No yes
year yes yes
R2 0.13 0.03
Fisher
Hausman
F(202, 402) = 2.68
Prob > F = 0.0000
[chi square] = 4.98
N Prob > [chi square] = 0.2894
609 609
(a) Significant at 1 %, (b) Significant at 5%, (c) Significant at 10%
Ln(l+ Pay)=The natural logarithm of the total compensation received by
the manager in U.S. dollars; Bd.Index=The score board of each company
in year t is the sum of points obtained; MTB=The market to book ratio
measured by the market value divided by the book value of common stock;
ROA=Retum On asset, calculated as the ratio of net income and book
value of total assets; Volat=The stock volatility, measured by the
standard deviation of the firm's stock returns.
