Composition of the board of directors and pay-performance sensitivity

Brandão, Isac de Freitas; Vasconcelos, Alessandra Carvalho de; Luca, Márcia Martins Mendes De; Crisóstomo, Vicente Lima

doi:10.1590/1808-057x201806610

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Original Article • Rev. contab. finanç. 30 (79) • Jan-Apr 2019 • https://doi.org/10.1590/1808-057x201806610 copy

Composition of the board of directors and pay-performance sensitivity^* * Paper presented at the XI ANPCONT Congress, Belo Horizonte, MG, Brazil, June 2017.

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

This article investigates, in the Brazilian capital market, the effect of the composition of the board of directors on executive compensation sensitivity to market performance, known as pay-performance sensitivity (PPS). Due to potential agency conflicts between controlling and minority shareholders and between shareholders and managers, members of the board of directors of the executive board or those appointed by the controlling shareholder might have less independence, something which may compromise monitoring effectiveness and, consequently, reduce the PPS. The purpose is contributing to understand the agency conflicts that have taken place in the Brazilian capital market and to define the configuration of the monitoring and compensation mechanisms that minimize total agency costs, maximizing shareholders’ wealth. The research results have implications for understanding the agency relations and for corporate governance in the Brazilian capital market. It is concluded that the relation between the monitoring exercised by the board of directors and executive compensation is a condition for its effectiveness as a governance mechanism in the Brazilian capital market. Data within the period 2013-2015 from 92 companies that participate in the Brazil 100 Index (IBRX 100) of the São Paulo Stock, Mercantile & Futures Exchange (BM&FBOVESPA) were analyzed. In addition to tests of difference between mean values and correlation, estimates were processed through feasible generalized least squares modeling. The independence of the board of directors vis-à-vis the controlling shareholder and the executive board may work as a corporate governance mechanism supplementing executive compensation. The results of this study indicate that the proportion of executives and independent members in the board of directors reduces the PPS, a measurement for executive compensation effectiveness made operational by the contemporary relation between increased managers’ compensation and increased company’s market value.

Keywords
agency conflicts; corporate governance; board of directors; executive compensation; pay-performance sensitivity

Construct	Variable	Operationalization	Data source	References
Executive board compensation variation (∆COM)	Total compensation variation (∆TCOM)	Difference between total executive board compensation in t and t-1 (in R$ units) weighted by market value in t-1 (in thousand R$)	Reference Form, item 13.2, SInc	Jensen and Murphy (1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives.Journal of Political Economy, 98(2), 225-264.) Víctor (2013Víctor, F. S. (2013). Estrutura de propriedade e remuneração executiva: efeitos diretos e indiretos da regulamentação (Tese de doutorado). Porto Alegre: Universidade Federal do Rio Grande do Sul.)
Executive board compensation variation (∆COM)	Per capita pay variation (∆PCCOM)	Difference between per capita executive board compensation in t and compensation in t-1 (in R$ units) weighted by market value in t-1 (in thousand R$)	Reference Form, item 13.2, via SInC	Jensen and Murphy (1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives.Journal of Political Economy, 98(2), 225-264.) Víctor (2013Víctor, F. S. (2013). Estrutura de propriedade e remuneração executiva: efeitos diretos e indiretos da regulamentação (Tese de doutorado). Porto Alegre: Universidade Federal do Rio Grande do Sul.)
Performance (∆MV)	Market value variation (∆MV)	Difference between company’s market value in t and value in t-1 (in thousand R$) weighted by market value in t-1 (in thousand R$)	Economática^®	Jensen and Murphy (1990Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives.Journal of Political Economy, 98(2), 225-264.)
Composition of the BoD (COMPBD)	CEO duality (DUALBD)	Accumulation of positions of CEO and chairman of the BoD (dummy variable)	Reference Form, item 12.6/8	Conyon, (1997Conyon, M. J. (1997). Corporate governance and executive compensation.International Journal of Industrial Organization, 15(4), 493-509.) Lippert and Porter (1997Lippert, R. L., & Porter, G. (1997). Understanding CEO pay: a test of two pay-to-performance sensitivity measures with alternative measures of alignment and influence.Journal of Business Research, 40(2), 127-138.)
	Members of the BoD participating in the executive board (INTBD)	Proportion of effective members of the BoD that hold an executive board position	Reference Form, item 12.6/8	Lippert and Porter (1997Lippert, R. L., & Porter, G. (1997). Understanding CEO pay: a test of two pay-to-performance sensitivity measures with alternative measures of alignment and influence.Journal of Business Research, 40(2), 127-138.)
	Minority members of the BoD (MINBD)	Proportion of effective members of the BoD not indicated by the controlling shareholder	Reference Form, item 12.6/8	Víctor (2013Víctor, F. S. (2013). Estrutura de propriedade e remuneração executiva: efeitos diretos e indiretos da regulamentação (Tese de doutorado). Porto Alegre: Universidade Federal do Rio Grande do Sul.)
	Independente members of the BoD (INDBD)	Proportion of members of the BoD regarded as independent	Reference Form, item 12.6/8	Chhaochharia and Grinstein (2009Chhaochharia, V., & Grinstein, Y. (2009). CEO compensation and board structure.The Journal of Finance, 64(1), 231-261.)
Control variables (CONT)	Compensation committee (COMPCOM)	Presence of a compensation committee in the BoD (dummy variable)	Reference Form, item 12.1	Guthrie et al. (2012Guthrie, K., Sokolowsky, J., & Wan, K. M. (2012). CEO compensation and board structure revisited.The Journal of Finance , 67(3), 1149-1168.)
	Return on equity (ROE)	Ratio between company’s net income in t and the company’s equity in t-1	Economatica^®	Aguiar and Pimentel (2017Aguiar, A. B., & Pimentel, R. C. (2017). Remuneração de executivos e desempenho no mercado brasileiro: relações contemporâneas e defasadas. Revista de Administração Contemporânea, 21(4), 545-568.)
	Size (SIZE)	Natural logarithm of total company assets in t-1	Economatica^®	Aguiar and Pimentel (2017Aguiar, A. B., & Pimentel, R. C. (2017). Remuneração de executivos e desempenho no mercado brasileiro: relações contemporâneas e defasadas. Revista de Administração Contemporânea, 21(4), 545-568.)
	Concentration of voting rights (OWNER)	Percentage of ordinary shares held by the company's three biggest shareholders in t	Economatica^®	Correia et al. (2014Correia, L. F., Amaral, H. F., & Louvet, P. (2014). Remuneração, composição do conselho de administração e estrutura de propriedade: evidências empíricas do mercado acionário brasileiro.Advances in Scientific and Applied Accounting, 7(1), 2-37.)
	Activity sector (SECTOR)	Company’s activity sector according to the Economatica^® (dummy variable)	Economatica^®	Aguiar and Pimentel (2017Aguiar, A. B., & Pimentel, R. C. (2017). Remuneração de executivos e desempenho no mercado brasileiro: relações contemporâneas e defasadas. Revista de Administração Contemporânea, 21(4), 545-568.)
	Time period (YEAR)	Year of observation (dummy variable)	-	-

Variable		Minimum	Maximum	Average	Standard deviation	Coefficient of variation
Number of members	Total	4.00	17.00	8.60	2.01	0.23
	Minority	0.00	11.00	2.50	2.93	1.17
	Internal	0.00	6.00	0.68	0.84	1.23
	Independent	0.00	8.00	2.35	1.66	0.71
Proportion	Minority (MINBD)	0.00	1.00	0.29	0.34	1.16
	Internal (INTBD)	0.00	0.55	0.08	0.10	1.20
	Independent (INDBD)	0.00	1.00	0.28	0.21	0.73

Variables		Minimum	Maximum	Average	Standard deviation	Coefficient of variation
Total compensation	In the period	69,000	453,527,265	29,990,392	56,413,309	1.88
Total compensation	Annual variation	-46,215,088	89,552,431	2,644,262	11,033,969	4.17
Per capita remuneration	In the period	19,220	15,261,692	3,397,387	2,570,666	0.76
Per capita remuneration	Annual variation	-5,577,924	6,895,910	343,161	1,396,859	4.07
Market value	In the period	386,079	279,978,928	20,680,448	40,274,047	1.95
Market value	Annual variation	-87,182,129	32,440,328	-1,515,975	10,218,206	-6.74

	Minimum	Maximum	Mean	Median	Standard deviation	Coefficient of variation
∆TCOM	-6.806	6.502	0.259	0.115	1.111	4.285
∆PCCOM	-1.710	1.150	0.036	0.015	0.239	6.624
∆MV	-0.817	1.385	-0.044	-0.059	0.317	-7.168
SIZE	20.504	27.994	23.300	23.159	1.533	0.066
ROE	-1.914	8.605	0.173	0.134	0.605	3.503
OWNER	0.069	1.000	0.599	0.630	0.235	0.393

Board of directors	n	∆TCOM	∆PCCOM	∆MV	SIZE	ROE	OWNER
Without minority members	89	0.285	0.048	-0.069	23.415	0.231	0.665
With minority members	183	0.246	0.030	-0.032	23.244	0.144	0.566
Mann Whitney’s U (Z test)		-0.170	-0.707	-0.550	-0.803	-0.688	-3.268***
Without internal members	136	0.285	0.026	-0.005	23.010	0.215	0.590
With internal members	136	0.246	0.046	-0.084	23.590	0.131	0.608
Mann Whitney’s U (Z test)		-0.980	-0.658	-1.696*	-2.095**	-0.378	-0.544
Without independent members	50	0.418	0.065	-0.067	24.368	0.128	0.747
With independent members	222	0.223	0.009	-0.039	23.060	0.183	0.565
Mann Whitney’s U (Z test)		-0.800	-0.501	-0.619	-5.329***	-2.143	-4.973***
Without CEO duality	256	0.231	0.031	-0.035	23.275	0.179	0.601
With CEO duality	16	0.712	0.119	-0.186	23.699	0.074	0.555
Mann Whitney’s U (Z test)		-0.419	-0.835	-1.916*	-1.114	-1.572	-1.063

	∆TCOM	∆PCCOM	∆MV	MINBD	INTBD	INDBD	SIZE	ROE
∆PCCOM	0.81***
∆MV	0.14**	0.11*
MINBD	-0.06	-0.06	0.05
INTBD	0.09	0.04	-0.09	0.01
INDBD	-0.17***	-0.16***	-0.01	0.42***	-0.09
SIZE	-0.04	-0.04	-0.03	-0.21***	0.15**	-0.31***
ROE	0.06	-0.03	-0.12*	-0.02	-0.05	-0.01	-0.10*
OWNER	-0.04	0.00	-0.05	-0.52***	0.09	-0.39***	0.32***	0.04

Explanatory variables	Panel A Dependent variable: ∆TCOM						Panel B Dependent variable: ∆PCCOM
Explanatory variables	1	2	3	4	5	6	7	8	9	10	11	12
∆MV	0.614***	1.521***	0.639**	0.948***	1.083***	0.698***	0.082*	0.406***	0.091	0.159***	0.293***	0.104**
MINBD		-0.057	-0.273					0.033	-0.034
MINBD*∆MV		0.308	-0.126					0.115	-0.036
INTBD		1.176*		1.505**				0.105		0.203
INTBD*∆MV		-4.570**		-4.586**				-1.143***		-1.079**
INDBD		-1.208***			-1.257***			-0.318***			-0.297***
INDBD*∆MV		-2.239**			-1.765*			-0.939***			-0.769***
DUALBD^a		0.191				0.362		0.034				0.059
DUALBD*∆MV		-1.094				-1.520		-0.341				-0.430*
SIZE	0.027	-0.018	0.021	0.005	-0.003	0.020	-0.001	-0.010	-0.002	-0.004	-0.008	-0.000
COMPCOM	-0.301**	-0.163	-0.293**	-0.231	-0.236*	-0.260*	-0.050	-0.026	-0.049	-0.042	-0.034	-0.040
ROE	0.195*	0.174	0.195*	0.224**	0.150	0.201*	-0.011	-0.021	-0.011	-0.004	-0.026	-0.010
OWNER	-0.421	-0.783**	-0.633*	-0.502	-0.695**	-0.38	-0.039	-0.083	-0.064	-0.05	-0.101	-0.030
SECTOR	Yes*	Yes*	Yes	Yes*	Yes	Yes**	Yes	Yes**	Yes	Yes*	Yes*	Yes*
YEAR	Yes	Yes	Yes	Yes*	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Wald χ²	32.22*	62.35***	33.67	43.47**	45.83***	93.01**	17.84	58.23***	18.31	26.24	39.46**	25.42
Average FIV	4.71	4.37	4.57	4.53	4.73	4.5	4.71	4.37	4.57	4.54	4.73	4.50

Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade, Departamento de Contabilidade e Atuária Av. Prof. Luciano Gualberto, 908 - prédio 3 - sala 118, 05508 - 010 São Paulo - SP - Brasil, Tel.: (55 11) 2648-6320, Tel.: (55 11) 2648-6321, Fax: (55 11) 3813-0120 - São Paulo - SP - Brazil
E-mail: recont@usp.br

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[1] Correspondence address: Isac de Freitas Brandão. Universidade Federal do Ceará, Programa de Pós-Graduação em Administração e Controladoria. Avenida da Universidade, 2846 - CEP 60020-180. Benfica - Fortaleza - CE - Brazil

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Composition of the board of directors and pay-performance sensitivity* * Paper presented at the XI ANPCONT Congress, Belo Horizonte, MG, Brazil, June 2017.

ABSTRACT

Composition of the board of directors and pay-performance sensitivity^* * Paper presented at the XI ANPCONT Congress, Belo Horizonte, MG, Brazil, June 2017.