The 'One Million Club':Executive Compensation and Firm Perfrmance
Using data for the 186 public corporations in which the CEO's total annual remuneration exceeded NIS 1 million in 1997, we examine the statistically significant variables affecting the CEO's salary and the mean compensation of the five top executives. The results of our cross-sectional examination display greater uniformity than those of other studies as regards the positive and significant effect of the size and performance variables, although the estimated sensitivity of wages to performance was greater than that reported in empirical studies in Israel and abroad. We estimate a sensitivity level of 0.325, which can be translated into average growth of NIS 85,000 rise in the CEO's annual remuneration associated with a rise of NIS 10 million in the firm's profits. Against the backdrop of the existence of external and internal controlling mechanisms, which constitute an alternative to drawing up a performance-sensitive employment contract, we examine policy regarding the CEO's compensation in the framework of the firm's capacity to cope with the agency problem. In this context, a significant correlation was found between a CEO's compensation and four substitute controlling mechanisms: monitoring by major shareholders, by mutual funds, by debt-holders, and dividend policy. One of our most interesting findings was that in 112 of the 186 companies in the sample there was a personal relationship between the holders of a controlling interest and the CEO. We also found that even though firms with a professional CEO were generally larger and more profitable, the overall compensation their CEOs received did not differ significantly from that paid to the CEO in firms where he had a close relationship with the holders of a controlling interest, although the proportion of the operating profit represented by the CEO's compensation in these companies was 2.6 times as great as it was in companies where no such relationship was found. One of the conclusions of our analysis is that, ceteris paribus, the total compensation awarded to a CEO will be 30 percent higher in a company where his connection with the major shareholders goes beyond natural business relations.