Executive pay and market value sensitivity

Abstract

Executive pay relative to that of average workers has risen dramatically worldwide. Such a high level of executive pay raises the question of whether a steep rise in executive pay affects firm value. This study examined the relationship between executive pay and firm value. A panel smooth transition regression model is adopted to determine an optimal level of executive pay that maximizes firm value for a sample of 512 Taiwanese-listed firms over the period 2006-2011. The finding is that when the ratio of executive pay to net income after tax exceeds 2.71%, the firm value increases. The results suggest a correlation between large executive ownership (corresponding to high executive pay) and both increased operational efficiencies and firm value. These findings may be useful when contemplating executive compensation policy.

Keywords

• executive ownership
• firm value
• executive pay
• optimal level