Sjoerd van der Zee
Master Thesis
Finance
The relationship between religious beliefs, equity-based
remuneration and firm performance
Sjoerd van der Zee
2012
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Sjoerd van der Zee
The relationship between religious beliefs, equity-based
remuneration and firm performance
Name: Sjoerd van der Zee
Student number: s861379
Date of graduation: August 31th, 2012
Graduation chairman: dr. Michel van Bremen
Supervisor: dr. Peter de Goeij
Faculty: Economics and Business Administration
Department: Finance
Programme: Master International Management
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Sjoerd van der Zee
Preface
Today, I proudly present my thesis on executive compensation and firm performance. My
interest in the dynamics of executive compensation, combined with the link it has with firm
performance made me choose this subject. Especially when taking into account my future
ambition in becoming a senior manager.
I would like to thank Peter de Goeij for being my supervisor. You were very helpful and the
feedback you gave me during our meetings was always very useful. It enabled me to write a
better thesis. In addition I would like to thank Michel van Bremen for reading my thesis and
being the graduation chairman.
Finally I would like to thank my family for being here today, but especially for their love and
support during the good times and hardship in my turbulent life as a student. I couldn’t have
done it without them. I’d also like to thank my great girlfriend for being there for me and for
the motivation she gave me to bring this ‘project’ to a good end. Thank you for your
understanding, patience and support during the ups and downs! My student life in Tilburg is
full of good memories. Memories I shared with friends I met during my study as well as
friends I met during the time I spent at student associations and the gym. These memories
give me the enthusiasm and motivation to move on to the next step of my life.
Sjoerd van der Zee
August, 31th, 2012
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Sjoerd van der Zee
Abstract
This thesis investigates the relationship between executive pay, religious beliefs and firm
performance, using a sample of US public firms over the period 1992-2006. The focus is on
examining the causality between executive pay and performance by means of an instrumental
analysis. It explains the endogenous ratio of equity-based compensation to total remuneration
with a proxy for religious beliefs; the ratio of Catholics to Protestants. Furthermore I explore
whether religious beliefs affect the structure of an executive’s compensation package. I find
that the direction of the causality is that executive pay impacts firm performance. Furthermore
the empirical evidence indicates a negative relationship between the ratio of equity-based
remuneration to total pay and firm performance. Finally I find empirical support that
executives working for firms in regions with a higher Catholic to Protestant ratio have a larger
share of their total compensation in the form of restricted stocks and stock options. The
several robustness checks in this thesis are in line with the main findings.
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Index
Preface ........................................................................................................................................ 3
Abstract ...................................................................................................................................... 4
Index ........................................................................................................................................... 5
Chapter 1: Introduction .............................................................................................................. 6
Chapter 2: Literature review and hypothesis development ........................................................ 8
2.1 The relationship between executive compensation and performance .............................. 8
2.2 Equity-based compensation............................................................................................ 10
2.3 The relationship between religious beliefs and gambling .............................................. 12
2.4 Hypotheses development................................................................................................ 13
Chapter 3: Data and Methodology ........................................................................................... 15
3.1 Data collection................................................................................................................ 15
3.2 Variables ......................................................................................................................... 16
3.3 Methodology .................................................................................................................. 18
3.4 Descriptive statistics ....................................................................................................... 20
Chapter 4: Empirical Findings ................................................................................................. 23
4.1 The ratio of equity-based pay to total compensation and firm performance.................. 23
4.2 Is the ratio Catholics to Protestants a good instrument? ............................................... 24
4.3 Instrumental analysis for the relation between executive pay and firm performance .... 25
4.4 An accounting measure for performance ....................................................................... 26
4.5 An absolute measure for executive remuneration .......................................................... 27
4.6 Old versus new economy firms ...................................................................................... 27
Chapter 5: Conclusions ............................................................................................................ 30
References ................................................................................................................................ 32
Appendix .................................................................................................................................. 35
Appendix A: Description variables ...................................................................................... 35
Appendix B: Industry dummies (Fama-French) .................................................................. 36
Appendix C: Construction of the control variable age ......................................................... 38
Appendix D: Denominations includes in the variable NON_PROT.................................... 39
Tables ....................................................................................................................................... 41
Table 1 .................................................................................................................................. 41
Table 2 .................................................................................................................................. 42
Table 3 .................................................................................................................................. 44
Table 4 .................................................................................................................................. 45
Table 5 .................................................................................................................................. 46
Table 6 .................................................................................................................................. 47
Table 7 .................................................................................................................................. 48
Table 8 .................................................................................................................................. 49
Table 9 .................................................................................................................................. 50
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Chapter 1: Introduction
Besides the historical worldwide corporate scandals few business issues have really gained
the same degree of attention as executive remuneration. 1 Historically the substantial amounts
of executive compensation have always created fierce debates. Bebchuck and Grinstein
(2005) find that average CEO compensation increased from $3.7 million in 1993 to $9.1
million in 2003. Obviously these large increases caught the attention of the media. Frontpage headlines, television, conferences and other forms of mass-media turned executive
remuneration into a ‘hot’ topic.
A large fraction of these remuneration packages come in the form of equity-based pay.
The use of executive stock options has long been encouraged by economists to align the
interests of mangers with those of the firm’s shareholders (e.g., Hirshleifer and Suh, 1992;
Hemmer, Kim and Verrecchia, 2000). As Treynor and Black (1976) illustrate:
‘If the corporation undertakes a risky new venture, the stockholders may not be very
concerned, because they can balance this new risk against other risks that they hold in
their portfolios. The managers, however, do not have a portfolio of employers. If the
corporation does badly because the new venture fails, they do not have any risks
except the others taken by the same corporation to balance against it. They are hurt by
a failure more than the stockholders, who also hold stocks in other corporations.’
Executive stock options mitigate this issue by rewarding executives when firm value
increases but not punishing them in case it drops. Such compensational structures promote
managers to take risky decisions.
This thesis is written in order to build a framework that answers the main research
question and sub question by the forthcoming empirical analysis. It is an additional
contribution to the limited but growing literature that examines the relationship between
executive pay and performance. I argue about the direction of this causality. Furthermore, it is
the first study that investigates how religious beliefs affect equity-based compensation and
how it relates to the association between executive pay and performance.
1
Throughout this thesis, I use the term ‘executive’ and ‘manager’ interchangeably to refer to top senior
managers who make decisions on behalf of a firm’s shareholders.
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The main research question can be summarized as follows: ‘What is the relationship
between the ratio of equity-based compensation to total pay and firm performance?’
To investigate the relationship between executive compensation and firm performance,
I perform a two stage least squares regression analysis. Since equity-based compensation is
considered endogenous, I include an instrument; religious beliefs. Control variables taken into
account are firm size, growth opportunities, leverage, assets in place, age and year and
industry dummies.
I find that the direction of the causality is that executive pay impacts firm
performance. Furthermore the empirical evidence indicates a negative relationship between
executive compensation and performance. This is in contrast with earlier evidence suggesting
a positive link between the two variables (Frye, 2001). In addition I find that executives
working for firms in regions with a higher Catholic to Protestant ratio tend to have a larger
fraction of their total compensation package in the form of stock options and restricted stocks.
The several robustness checks in this research are in line with the main findings.
The remainder of this thesis is structured as follows. The next chapter summarizes the
current state of the literature. It also includes the several hypotheses. Chapter 3 describes the
data, methodology and provides some descriptive statistics. Chapter 4 presents the results of
the regression analyses. An extensive analysis of both the economical and statistical
significance is given. Finally, Chapter 5 concludes and provides suggestions for future
research.
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Chapter 2: Literature review and hypothesis development
In this chapter I provide a review of existing empirical evidence and theory regarding the
relationship between executive remuneration and firm performance. In order to understand
how equity-based pay affects firm performance, it is of importance to have a general
understanding of the several components of equity remuneration. I discuss the relationship
between restricted stocks, stock options and how it induces managers to take on more risk.
Furthermore I introduce an instrument that measures religious beliefs and explain why it can
be considered a good proxy for risk-taking. This literature provides the basis for Section 2.4 in
which the hypotheses are developed.
2.1 The relationship between executive compensation and performance
A vast body of research examined the link between executive remuneration and firm
performance. In this subsection I explain how agency theory explains this relationship.
Afterwards I discuss existing empirical evidence on the link between executive remuneration
and firm performance.
Most of the existing literature on the relationship between executive compensation and
performance is founded on agency theory (Holmström, 1979; Eisenhardt, 1989). Agency
theory argues that managers can affect firm outcomes and hence his or her actions are visible
in the observable indicators of performance. As a result firm performance partly reflects the
actions of the mangers and therefore better performance implies that the manager acts in the
interest of the shareholders instead of expropriating shareholder value. In this framework
compensation should motivate executives to pursue actions that are in the interest of the
shareholders (Murphy, 1999).
Agency theory is based on an agency relationship. Jensen and Meckling (1976) define
this relationship as follows: “a contract under which one or more persons (the principal(s))
engage another person (the agent) to perform some service on their behalf which involves
delegating some decision making authority to the agent.” The principal has good reasons to
believe that the agent will not always act in his or her best interests. When this happens the
agent is in a position to expropriate value of the principal.
Within a firm one also encounters a principal and an agent. Here the manager is the
agent who is supposed to act in the best interest of the shareholders (the principal). The
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agency problem emanates when the interest of the manager differ substantially from those of
the shareholders. It is impossible to perfectly contract every action the manager should take
into every possible scenario. Hence the shareholders will delegate some decision-making
authority to the manager. However, managers are rational human-beings and therefore their
actions will not always be in the best interest of the shareholders. It is not possible for the
shareholders to perfectly monitor the manger in order to verify that the manager acts in the
best interest of the shareholders. The difference in firm value when the company is
completely managed by its owners and when it’s managed by the agent is defined as the
agency costs. These costs include the monitoring of the managers (Jensen and Meckling,
1976)
Executive compensation is an important tool in reducing the agency problem.
Remuneration plans are made to align the interest of the managers with those of the
shareholders. Agency theory predicts that the interests of the shareholders and manager will
become more aligned when an executive’s compensation package is linked to firm
performance. This results in a higher firm valuation. (Jensen and Meckling, 1976). Murphy
(1990) argues that the shareholders can use two ways to provide managers with the right
incentive to increase firm value. First, remuneration can be made more dependent on firm
value. Second total remuneration levels can be raised. According to Jensen and Murphy
(1990) equity-based compensation, rather than cash and a fixed salary should provide
managers with the right incentives to maximize firm value.
A vast body of research examined executive compensation. More specifically a large
number of authors investigated the performance-pay relationship. (Bertrand and Mullainathan
2001; Hall and Liebman 1998; Jensen and Murphy 1990) The literature on the link between
executive compensation and firm performance on the other hand is much more limited.
Frye (2001) finds that firms perform better when executives receive higher amounts of
equity-based remuneration. Furthermore he finds evidence that higher firm performance
results into a greater use of equity-based compensation. However it is unclear whether equitybased compensation affects firm performance or the other way around. No instrument has
been used in order to examine whether the direction of the causality is pay-performance or
performance-pay. Abowd (1990) confirms the positive relationship between executive
compensation and performance. Using a dataset of 250 large firms and 16.000 managers he
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finds that an incremental 10% bonus for good stock market performance results into a 4-12%
increase in firm performance in the subsequent year. The goal of his research is not to
measure the sensitivity of compensation to current firm performance but on future firm
performance. Future performance is a result of the actions and decisions made by managers in
the present. Anderson et al. (2000) estimate a model which links executive bonuses and
options to the stock returns in the same period. They conclude that bonuses and stock options
positively affect firm performance.
Not all studies have found a significant positive relationship between executive
compensation and firm performance. The managerial power approach states that managers are
in a position to alter the payment setting process and they will do so in a way that weakens the
relationship between executive pay and performance (Bebchuck and Fried, 2003). Hence
compensation is not solely a tool to reduce agency problems but it also becomes part of the
agency problem itself.
Several studies have found contradicting evidence regarding the
expected positive relationship between compensation and performance. Sesil, Kroumova,
Kruse, and Blasi (2000) find mixed evidence that firms using options significantly perform
better. They find a significant positive relation between the use of option-plans and
productivity, sales growth and Tobin’s Q but no significant positive association with
shareholder returns. Aboody (1996) finds a negative relation between the value of outstanding
stock options and the share price. Finally, Ittner, Lambert and Larcker (2003) find that lower
than expected option holdings are associated with lower stock returns. However greater than
expected equity grants have little effect on future performance meaning that large equity
grants do not have a significant negative effect on performance.
Summarizing, the existing evidence regarding the relationship between executive
compensation and performance is mixed and quite limited. Especially when compared to the
extensive existing literature that investigates the link between firm performance and executive
compensation.
2.2 Equity-based compensation
Equity-based compensation aligns the interests of managers with those of the shareholders.
Here incentive-based compensation reduces the agency problem within the firm. In this
subsection I further elaborate on the components of equity-based compensation and how it
relates to risk-taking.
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Sjoerd van der Zee
Stock options
Stock options are contracts that give the executive the right to buy a share of the firm’s stock
at a pre-specified “exercise” price for a pre-specified term. Hall and Murphy (2003) show that
the fraction of stock options to total executive compensation skyrocketed during the 1990s. It
increased from 23% in 1992 to 49% in 2000 and 63% in 2002. The main argument in favour
of stock options is that the interests of both the shareholders and mangers become more
aligned by providing a direct link between compensation and performance. In addition, firms
which grant stock options to their executives, do not incur an immediate cash outflow. This
has been confirmed by Yermack (1995) who argues that firms experiencing cash flow
difficulties make greater use of stock options to conserve cash. This makes stock options
perfectly suited for companies that are short on cash at hand. Furthermore stock options
provide retention incentives. Due to their multiple year maturity stock options can solely be
exercised by individuals who stay within the firm until a stock option’s maturity date. Finally
Chen and Ma (2011) find that executive stock options encourage risk-taking. However such
risk-taking is constrained by an executive’s personal risk preferences.
Restricted stocks
While the importance of stock options increased considerably during the 1990’s the increase
in the use of restricted stocks is significantly less substantial. Bryan, Hwang, Lilien (2000)
find that the percentage of sample firms that granted their executives restricted stocks
increased from 18% in 1992 to about 21% in 1996 after which it slightly fell to 19,36% in
1997. In contrast, the percentage of firms that granted their executives stock options increased
from 54% in 1992 to almost 72% in 1997. Restricted stocks can be viewed as options with a
zero-strike price. In that respect they are similar to stock options (Berger, Ofek and Yermack,
1997). However one major difference concerns the promotion of risk-taking. Restricted stocks
have a linear payoff as opposed to stock options what makes restricted stocks relatively
inefficient to induce risk-averse managers to take more risky business decisions. (Bryan,
Hwang and Lilien, 2000). Furthermore executives own the stock as opposed to stock options
where the executive has the right to exercise the option at maturity. The value of restricted
stocks generally is lower compared to stock options. At maturity restricted stocks generally
still have some value while stock options can expire worthless.
Individuals with gambling preferences may find firms that offer variable compensation
plans attractive. The fact that individuals are likely to consider option-based compensation as
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gambles is supported by the fact that employees frequently overestimate the value of the
options. Their estimated value is higher than the actual fair value. (Hallock and Olson, 2006).
Furthermore Spalt (2009) finds that riskier firms choose to grant more options to their
employees as opposed to the less risky firms. Kumar, Page and Spalt (2011) find that stock
options-based compensation appeals more to non-executive employees with a stronger
preference for gambling. I argue that individuals who are more induced to take on risk would
prefer equity-based compensation over a fixed salary and hence have a larger fraction of their
total compensation in the form of equity-based components. This is in line with experimental
evidence by Niederle and Versterlund (2007). They find that overconfidence and preferences
for performing in a competition are two major factors influencing the decision to choose a
piece rate- over a safe payoff.
2.3 The relationship between religious beliefs and gambling
Verbeek (2009) states that an independent variable is biased and inconsistent in a regression
model if endogenous. Hence there is need for an alternative estimator; an instrument. Kumar,
Page and Spalt (2011) argue that an individual’s attitude towards gambling is strongly
determined by one’s religious background. Both the Protestant as well as the Catholic Church
have very opposing views on gambling. Consequently one could use religious beliefs as an
instrument to investigate the relationship between executive pay and firm performance.
Catholics
“A person is entitled to dispose of his own property as he wills… so long as in doing so he
does not render himself incapable of fulfilling duties incumbent upon him by reason of justice
or charity. Gambling, therefore, though a luxury, is not considered sinful except when the
indulgence in it is inconsistent with duty.” (New Catholic Encyclopedia)
Protestants
“Gambling is a menace to society, deadly to the best interests of moral, social, economic, and
spiritual life, and destructive of good government. As an act of faith and concern, Christians
should abstain from gambling and should strive to minister to those victimized by the
practice.” (United Methodist Church’s 2003 Book of Resolutions)
As one can conclude from the definitions stated above, the Catholic Church maintains
a much more tolerant attitude towards gambling as opposed to the Protestants. Diaz, (2000)
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and Hoffman, (2000) state that Catholics use gambling in the form of bingo for fund-raising
practices while the Protestant Church considers gambling a ‘menace’ for society. Kumar,
Page and Spalt (2011) use religious beliefs as a proxy for gambling in their paper. They argue
that the dominant local religion could affect cultural norms and values and hence economic
and financial behaviour even if the individual does not personally adhere to the dominant
religious group. They present empirical evidence that regions with a higher Catholic to
Protestant ratio tend to have stronger gambling preferences. More specifically differences in
religious beliefs can affect financial market outcomes. These outcomes include examples such
as the fact that investors located in regions with a higher Catholic to Protestant ratio are more
likely to hold a portfolio with lottery features. Moreover they find that stock options appeal
more to employees with a stronger preference for gambling.
2.4 Hypotheses development
The previous subsections discussed existing empirical results and theory concerning the
relationship between executive pay and performance, equity based compensation, risk-taking
as well as the association between religious beliefs and gambling. It forms the basis for the
hypotheses of my thesis. In this subsection I elaborate on the different hypotheses.
Equity-based compensation provides managers with the right incentives to maximize
firm value (Jensen and Murphy, 1990). This aligns the interests of the managers with those of
the shareholders. Morck, Shleifer and Vishny (1988) argue that incentives for executives on
average are too low. If this is true higher equity-based compensation should increase firm
value. Consequently one should expect a positive relationship between the fraction of equitybased to total remuneration and firm performance. This brings us to the main research
question of this paper.
H1: “There exists a positive relationship between the ratio of equity-based remuneration to
total pay and firm performance.”
What distinguishes this paper from other studies examining the relationship between
executive compensation and performance is that I include an instrument; religious beliefs. As
a result, I argue about the direction of the causal relationship between executive pay and firm
performance. As mentioned in the previous subsections an individual’s attitude towards
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gambling is strongly determined by one’s religious beliefs and background. Hence I expect
that an executive’s religious background has an effect on the structure of his or her
compensation package. In this scenario I assume that executives have the power to influence
the structure of their remuneration package and hence the payment setting process. I
conjecture that executives working for a company incorporated in a region with a higher
Catholic to Protestant ratio are more inclined to gamble and hence will have a higher fraction
of their pay in the form of equity-based compensation. This results in the following
hypothesis:
H2: “Executives working for a firm incorporated in a region with a higher ratio of Catholics
to Protestants have a higher fraction of their total pay in the form of equity-based
remuneration.”
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Chapter 3: Data and Methodology
This section describes the data and explains the methodology used in this research. I first
describe where and how I retrieved the data after which I describe the variables used. A
detailed overview of the key variable definitions is stated in Appendix A. Next I present and
explain the models used in the regression analysis. Finally I provide some summary statistics
to describe the data together with a correlation matrix.
3.1 Data collection
The research topic addressed in this paper requires data about executive remuneration, firm
performance and religious beliefs. I study firms for a 15-year period from 1992 till 2006. The
starting year 1992 has been chosen because as of 1992 the SEC obliged public firms to
disclose information about compensation of top executives. The sample does not include post2006 data since ExecuComp solely includes information about the Black-Scholes value of
stock-options granted until 2006.2 To obtain data regarding executive remuneration, firm
performance and religious beliefs I consulted and retrieved information from several
databases.
Information regarding executive remuneration is retrieved from the ExecuComp
database. It includes all the S&P 500, Mid-Cap 400 and Small-Cap 600 companies. Together,
these firms (also known as the S&P 1500) constitute more than 80% of the total market
capitalization of United States public firms. ExecuComp is consulted because it is widely
used and the most comprehensive. The following items are retrieved from ExecuComp: total
remuneration (TDC1), options granted Black-Scholes (BLK_VALUE), restricted stocks
granted (RSTKGRNT), present age and the executive’s age in the belonging fiscal year
(AGE).
CompuStat is used to retrieve balance sheet data in order to both construct a proxy for
firm performance and construct several control variables required for this study. The
following items are retrieved from CompuStat: total assets (AT), common equity (CEQ),
common shares outstanding (CSHO), closing price (PRCC_F), total sales (REVT), research
and development expenditures (XRD), property, plant and equipment (PPEGT), inventory
(INVT) and total debt (DLTT).
2
Retrieving information regarding the Black-Scholes value of the stock options after 2006 would imply
searching through the annual statements of thousands of firms.
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Finally, the Association of Religion Data Archives (ARDA) is used to construct a
variable that captures the portion of Catholics to Protestants per state in the United States.
Following Selody (2010) I disregard observations with missing data for total
compensation, stock options or restricted stocks. Furthermore I drop observations where total
compensation equals zero and where an executive has negative values for any of the
components of compensation or the executive’s age. A large fraction of the sample is
incorporated in Delaware. Daines (2001a) suggests that incorporation in Delaware is
associated with a higher Tobin’s Q. Furthermore Heron and Lewellen (1998) argue that
incorporation in Delaware results in abnormal returns. Consequently I drop these observations
from the sample since I expect the relationship between religious beliefs and firm
performance to be weaker for these firms. As a result the final sample includes 44.280
observations.
3.2 Variables
Firm performance
The dependent variable in this study is firm performance. Firm performance can be measured
in multiple ways such as ROA and Tobin’s Q. Gjerde, Knivsfla, and Sættem (2008) argue
that changes in accounting legislation make return on assets (ROA) less reliable than proxies
such as Tobin’s Q. Moreover Tobin’s Q is a market based measure of performance. As a
result I use Tobin’s Q as a proxy for performance in this study. Following Kumar, Page and
Spalt (2011) and Ahern and Dittmar (2011) I define Tobin’s Q as follows:
Executive remuneration
To examine the relationship between executive compensation and firm performance I use the
ratio of the absolute amount of equity-based compensation as a percentage of total
remuneration. Following ExecuComp, total compensation of the executive includes salary,
bonus, restricted stock grants, total value of stock options granted (Black-Scholes), long-term
incentive payouts, and others. Equity-based compensation includes the value of restricted
stock grants plus the total value of stock options granted (Black-Scholes). Following Bouwens
and van Lent (2006) I decide not to include cash bonuses in my measure of equity-based pay.
Bouwens and van Lent (2006) find that cash bonuses have no independent association with
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the overall performance effect of the incentive plan. As a result I expect that considering
bonuses as a component of equity-based compensation will underestimate the association with
firm performance.
Religious beliefs
Kumar, Page and Spalt (2011) state that the religious composition of a region is unlikely to
directly affect financial market outcomes. I use the ratio of Catholics to Protestants as an
instrument to argue about the direction of the causality between executive remuneration and
firm performance. The ratio of Catholics to Protestants is given per state in the United States.
This geographical segmentation strategy has been based on Becker (2007) who uses the
concentration of seniors in regions as a proxy for respectively supply and dividend demand.
Kumar (2009) states that other measures such as age, education, gender or income could also
be used as a proxy for gambling. However Kumar, Page and Spalt (2011) argue that the
relation between these variables and gambling is less clearly established.
The construction of the ratio of Protestants per state is not straight forward. Following
Kumar, Page and Spalt (2011) I first calculate a variable that includes the number of
Orthodox, Other and Catholic adherents. Afterwards I subtract the total number of adherents
to the previously explained variable to obtain a variable which includes the total number of
Protestants. A detailed overview of the denominations belonging to this variable is stated in
Appendix D.
Control variables
In order to address concerns about omitted variables I introduce an extensive set of
control variables. These include several factors that might affect either the relation between
executive pay and performance or the link between religious beliefs and compensation.
Following Mehran (1995) I control for growth opportunities, leverage, business risk, firm
size, and assets in place. The ratio of total debt to total assets is be used to measure leverage.
Gayle et al. (2011) find that the mean salaries and bonuses in small firms are smaller
compared to larger firms. Hence I use the log of total assets as a proxy for firm size. The ratio
of inventory plus gross plant and equipment to total assets is included as the proxy for assets
in place. I use research and development expenditures as a percentage of sales for the growth
opportunities proxy. Next I create industry dummies following the classification created by
Fama and French (1997). It classifies firms into 48 categories. A detailed overview of the
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several categories and the corresponding SIC codes can be found in Appendix B. Year
dummies are also included in this study and besides firm characteristics I also control for the
executive’s age. The executive’s age as it is reported in the annual statements can easily be
retrieved from ExecuComp. However due to the restricted number of observations I created
my own proxy for age. A description of this control variable is available in Appendix C.
‘Age’ describes the age of the executive in the corresponding fiscal year.
Finally I conclude the results with some additional robustness checks. First I replace
the dependent variable Tobin’s Q for the return on assets (ROA). ROA is an accounting based
measure of performance as opposed to Tobin’s Q which is a market based proxy. Second, I
replace the main key variable; the ratio of equity-based pay to total remuneration for the log
of total equity-based compensation, an absolute measure of equity compensation. Finally, I
divide the sample into a subsample which contains the ‘technology’ firms and another
subsample that includes the more ‘traditional’ firms.
Subsection 3.4 will provide some
summary statistics while Chapter 4 presents the empirical evidences from the regression
analyses.
3.3 Methodology
The answers to the hypotheses and the main research question are tested by several empirical
methods. Univariate analyses are used for descriptive purposes while the multivariate
analyses are used for explanatory insights.
The main hypothesis: whether there exists a positive relationship between the ratio of
equity-based remuneration to total pay and firm performance, is tested in two ways. First I
use an ordinary least squares regression in order to obtain preliminary results. The following
regressions is used:
is measured by Tobin’s Q.
will measure the impact of a change in the ratio of
equity-based pay to total compensation in the dependent variable
an extensive set of control variables;
. Furthermore I include
. These have already been mentioned in subsection
3.2 and include growth opportunities, leverage, business risk, firm size, assets in place, age
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and industry dummies according to the Fama-French model. However there may still remain
many unobserved factors that influence the relation between the ratio of equity-based
compensation to total remuneration and firm performance. These unobserved effects will be
included in
.
Second, in order to be able to argue about the direction of the causality I introduce an
instrument; religious beliefs. I use this instrument in a two stage least squares regression
where I perform an instrumental analysis. Religious beliefs will be instrumented on the ratio
of equity-based remuneration to total compensation. I again include control variables.
However an instrumental analysis involves a strong instrument. If the instrument is
considered ‘weak’ the results have little meaning. Consequently I perform several tests in
order to find out whether the instrument is valid.
First I apply a first-stage ordinary least squares regression analysis to find out both the
direction and the significance of the relationship between the ratio of Catholics to Protestants
and the ratio of equity-based remuneration to total pay. This also brings us to an answer to the
second hypothesis where I test whether executives working for a firm incorporated in a region
with a higher ratio of Catholics to Protestants have a higher fraction of their total pay in the
form of equity-based compensation. It involves the following regression:
is measured by the ratio of equity-based pay to total compensation.
the impact of a change in the ratio of Catholics to Protestants in
measures
. Here I again control for
several variables explained in subsection 3.2. This regression forms the basis for the
subsequent two stage least squares regression where I instrument religious beliefs on the
relationship between executive compensation and performance.
The last test I apply is a Cragg-Donald Wald F test. Staiger and Stock (1997) argue
that you do not have to worry about weak instruments if the F-statistic of the reduced form
regression exceeds 10.
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Sjoerd van der Zee
3.4 Descriptive statistics
Table 1 presents descriptive statistics of the variables used. It shows the mean, median,
standard deviation, number of observations, minimum and maximum of the observations
included in the dataset. From Table 1 one can conclude that over the sample period an
executive received substantial sums of remuneration, with an average of $1.376.430. The
average amount of equity-based compensation equals $672.230. This results in an average
equity-based pay to total remuneration ratio of 29,0%. Not surprisingly, the amounts of
compensation vary considerably across firms in the sample. The resulting mean is higher than
the median. The standard deviation of $4.144.200 illustrates that the sample consists of
numerous executives who received substantial sums of remuneration and therefore affect the
average amount of pay.
Average Tobin’s Q equals 1,86 with outliers to even 48,84 resulting in a mean higher
than the median which is 1,38. The average age of the executive is 51,16 years while the
youngest executive is solely 16 years old. Table 2 describes the main instrument used in this
research; the ratio of Catholics to Protestants. It has already been indicated that Delaware has
been dropped from the sample. The largest number of executives in the sample are working
for firms incorporated in Ohio. The ratio of Catholics to Protestants in this state is 0,88. On
the contrary in the second largest state New York, this ratio is 4,13.
40
30
20
10
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0
1992
Equity-based to total pay %
Ratio of Equity-based Compensation to
Total Pay 1992-2006
Figure 1: Development of the ratio of equity-based compensation to total pay for the period 1992-2006
This graph shows the development of equity-based compensation to total remuneration measured by restricted
stocks plus the value of the options granted (Black-Scholes) for the period 1992-2006. The data has been
retrieved from ExecuComp.
20
Sjoerd van der Zee
In Figure 1 one can observe that the ratio of equity-based compensation to total
remuneration steadily increased until 2001 after which it sharply declined until 2003. It
peaked at 35,9% in 2000 and decreased to 30,2% in 2003. This large decline might be
explained by the DOT-com crisis in 2001. However in the subsequent years it seems to
steadily grow again.
Tobin's Q 1992-2006
2,2
2,1
Tobin's Q
2
1,9
1,8
1,7
1,6
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1,5
Figure 3: Development of Tobin’s Q for the period 1992-2006
This graph shows the development of Tobin’s Q. Tobin’s Q is measured as total assets minus common equity
plus market equity divided by total assets. The development of Tobin’s Q is shown for the period 1992-2006.
The data has been retrieved from CompuStat.
During the sample period 1992-2006 firms had a positive Tobin’s Q, with an average
of 1,86. It varied from approximately 1,6 in 2002 to a maximum of over 2,1 in 1999. The
large fluctuations are supported by the standard deviation of 1,49. The development of
Tobin’s Q is shown in figure 3. Tobin’s Q is quite low in 1994 after which it steadily grew
until 1997. It reached its peak in 2000 after which it dropped to 1,57 in 2002. The DOT-com
crisis again might be a major factor explaining this large decline. From the period 2002 till
2006 Tobin’s Q steadily returned to 2000 levels.
In order investigate the relationship between executive remuneration and firm
performance and to check for multicollinearity, I elaborate on the correlations between the
several variables used in this research. The correlation matrix is presented in Table 3. I will
only discuss the most interesting correlations. The correlation between ‘The ratio of equitybased compensation to total pay’ and ‘Tobin’s Q’ is positive and equals 15,6%. The
correlation between ‘The ratio of Catholics to Protestants’ and ‘The ratio of equity-based pay
to total compensation’ equals 7,2% while the correlation with ‘Tobin’s Q’ is 4,4%
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Sjoerd van der Zee
Furthermore ‘Age’ is negatively correlated with ‘Tobin’s Q’. The positive correlation
between ‘The ratio of Catholics to Protestants’ and ‘The ratio of equity-based compensation
to total pay’ supports the hypothesis that executives working for firms incorporated in regions
with a higher Catholics to Protestant ratio will have a higher share of their compensation
package in the form of equity-based pay. The expected relation between remuneration and
performance is positive. The question remains whether this effect holds true when ‘The ratio
of Catholics to Protestants’ is used as an instrument for “The ratio of equity-based pay to total
compensation’. There are no exceptionally high correlations in the matrix. Hence I do not
expect to experience any problems involving multicollinearity.
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Sjoerd van der Zee
Chapter 4: Empirical Findings
This section provides the empirical results of this thesis. Subsection 4.1 presents the
regression analysis of the key variable executive compensation on the dependent variable firm
performance. Subsection 4.2 continues with an analysis of the instrument; religious beliefs.
Subsection 4.3 includes an instrumental analysis of the relationship between executive
remuneration and firm performance. Subsections 4.4 till 4.6 conclude with some additional
robustness checks. The tables accompanying this section are available in the appendix.
4.1 The ratio of equity-based pay to total compensation and firm performance
This subsection presents the results of the ordinary least squares regression that examines the
association between the ratio of equity-based pay to total compensation and firm performance.
Results are presented in Table 4. The key variable used in the regression is the ratio of equitybased pay to total compensation.
The R-squared of the model varies from 3,2% to 21,5% when several controls are
included in the regression. The empirical evidence indicates that there is a positive significant
relationship between ‘The ratio of equity-based pay to total compensation’ and ‘Tobin’s Q’.
The significance remains robust when various additional controls are introduced into the
regression. The empirical evidence is in accordance with Sesil, Kroumova, Kruse, and Blasi
(2000) and Frye (2001). From Table 4 one can compute that a one standard deviation increase
in ‘The ratio of equity-based pay to total remuneration’ is associated with an increase in
‘Tobin’s Q’ in the range of 7,9% to 17,9%. When introducing industry dummies to the model
a one standard deviation increase in ‘The ratio of equity-based pay to total remuneration’
results in an increase in ‘Tobin’s Q’ of 9,1%. ‘Size’ is positive and statistically significant in
all models. The effect of ‘Leverage’ and ‘Assets in place’ on ‘Tobin’s Q’ is negative and
statistically significant. In model IV when I introduce industry dummies a one standard
deviation increase in ‘Leverage’ results in a decrease of 31,5% in ‘Tobin’s Q’. The
association between ‘Growth opportunities’ and ‘Tobin’s Q’ is positive and statistically
significant. Last the effect of ‘Age’ on ‘Tobin’s Q’ is negative and statistically significant. A
one standard deviation increase in ‘Age’ results in a 5,3% decrease in ‘Tobin’s Q’.
The empirical evidence presented in Table 4 is in line with the main research question
of this thesis; there exists a positive relationship between the ratio of equity-based
23
Sjoerd van der Zee
remuneration to total pay and firm performance. Note that reversed causality might still be a
problem here. Hence I include an instrument in the subsequent analyses.
4.2 Is the ratio Catholics to Protestants a good instrument?
This subsection examines whether religious beliefs are a good instrument to investigate the
association between executive compensation and firm performance. The estimated results are
presented in Table 5. It describes the reduced form regression for the ratio of equity-based
remuneration to total compensation. The key variable used is ‘The ratio of Catholics to
Protestants’.
To verify that ‘The ratio of equity-based compensation to total pay’ is endogenous and
to evaluate whether ‘The ratio of Catholics to Protestants’ is a valid instrument, I estimate a
reduced form regression. The Cragg-Donald Wald F statistic in model IV when I introduce
industry dummies equals 11,71, indicating that ‘The ratio of Catholics to Protestants’ can be
considered an appropriate instrument.
‘The ratio of Catholics to Protestants’ is positive and significant in all models. A one
standard deviation increase in ‘The ratio of Catholics to Protestants’ is associated with an
increase in ‘The ratio of equity-based pay to total compensation’ of between 1,9% and 6,4%.
‘Size’ is positive and statistically significant. This is in accordance with Gayle et al. (2011)
who argue that larger firms just pay their executives more. Furthermore the coefficient
remains rather constant when I introduce various control variables to the model. The effect of
‘Growth opportunities’ is positive and has the most significance in model II and III. The
association between ‘Leverage’ and ‘The ratio of equity-based pay to total compensation is
negative and statistically significant. Similar evidence is found for ‘Assets in place’. Finally,
‘Age’ is negative and statistically significant. A one standard deviation increase in ‘Age’
results in a 12,3% decrease in ‘The ratio of equity-based remuneration to total compensation’.
My findings indicate that executives working for firms incorporated in regions with a
higher Catholics to Protestant ratio have a higher share of their total compensation package in
the form of equity-based compensation. It suggests that executives working for firms
incorporated in regions with more Catholics relative to Protestants are more inclined to
gamble. Hence the hypothesized positive relationship between the ratio of Catholics to
Protestants and the ratio of equity to total compensation is confirmed. These empirical results
24
Sjoerd van der Zee
are in line with the findings of Kumar, Page and Spalt (2011). Furthermore the presented
evidence suggests that older executives tend to have a smaller share of their total
remuneration in the form of stock options and restricted stocks. This might be due to an
increasing degree of risk-aversion by older executives relative to younger ones.
4.3 Instrumental analysis for the relation between executive pay and firm performance
This subsection takes into account the ratio of Catholics to Protestant as an instrument to
investigate the link between executive pay and performance. Table 6 presents the empirical
results. The key variable used in the two stage least squares regression is ‘The ratio of equitybased to total pay’. The R-squared in a two stage least squares analysis often is negative. This
happens when the residual sum of squares exceeds the total sum of squares. Consequently Rsquared has less meaning compared to an ordinary least squares regression. Hence it will not
be included in the table (Verbeek, 2009).
The coefficient of ‘The ratio of equity-based pay to total compensation’ gradually
becomes negative when I introduce various controls to the models. ‘The ratio of equity-based
pay to total remuneration’ is negative and significant in model IV when I control for industry.
These results are in line with Aboody (1996). In the final model where I control for ‘Age’ the
coefficient is considerably more negative and no longer significant. However the sample is
reduced with more than 35% when I control for ‘Age’. Hence the lacking significance might
partly be explained due to the reduced number of observations. In model II when I control for
firm characteristics a one standard deviation increase in ‘Equity-based pay to total
compensation (%)’ is associated with an increase of 45,0% in ‘Tobin’s Q’. However it
becomes negative in model IV where a one standard deviation increase results in a decrease of
103,6% in ‘Tobin’s Q’. ‘Size’ is negative in model II and III. However it turns positive and
statistically significant in model IV when I introduce industry dummies. The effect of
‘Leverage’ is negative and statistically significant. The results are robust when I introduce
additional control variables. The same holds for ‘Assets in place’. ‘Growth opportunities’ is
positive and statistically significant. Its coefficient remains rather robust across the different
models. Finally the effect of ‘Age’ on ‘Tobin’s Q’ is negative and statistically significant. A
one standard deviation increase in ‘Age’ is associated with a decrease in ‘Tobin’s Q’ of
21,7%.
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Sjoerd van der Zee
My findings contradict the evidence of Frye (2001) and illustrate that higher shares of
equity-based compensation as a percentage of total pay have a negative effect on firm
performance as opposed to the ordinary-least squared regression. Based on these findings,
there is no reason to raise the equity-based component for executives. I find no evidence for
the hypothesized positive relationship between the fraction of equity-based pay to total
remuneration and firm performance. Empirical evidence furthermore indicates that the causal
relationship is that executive compensation results in changes in firm performance. Finally
complementing the results of Subsection 4.1; younger executives tend to manage higher
performing firms compared to companies ran by older executives.
4.4 An accounting measure for performance
This subsection replaces ‘Tobin’s Q’ for ‘ROA’ to measure firm performance. It can be
considered the first robustness check in this research. The empirical results are shown in
Table 7. The key variable used in the two stage least squared regression is ‘The ratio of
equity-based to total pay’.
The empirical evidence in Table 7 is in line with the earlier findings in which the
dependent variable is ‘Tobin’s Q’. ‘The ratio of equity-based pay to total compensation’ is
negative and statistically significant. Both the direction and significance remain robust when
introducing several control variables. A one standard deviation increase in ‘The ratio of
equity-based remuneration to total pay’ is associated with a decrease in ‘ROA’ of between
51,2% and 284,7%. ‘The ratio of equity-based pay to total remuneration’ in Table 6 gradually
becomes negative while it consistently stays negative in Table 7 where I use ROA as a proxy
for performance. The same holds true for ‘Size’. ‘Growth opportunities’ is positive and
statistically significant in Table 7 where it is negative and statistically significant in Table 6.
‘Age’ is negative although not statistically significant in model V.
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Sjoerd van der Zee
4.5 An absolute measure for executive remuneration
While Subsection 4.4 replaces the dependent variable, this subsection examines the effect on
Tobin’s Q when the ratio of equity-based to total compensation is replaced for an absolute
measure of equity compensation. The empirical results can be found in Table 8. The key
variable used in the two stages least squares regression is the log of ‘Equity-based
compensation’.
‘Equity-based compensation (thousands)’ is positive and statistically significant in
model I .However it no longer remains significant in model II where I control for firm
characteristics. It becomes negative and not statistically significant in model IV and remains
negative in the last model where I control for ‘Age’. ‘Size’ becomes positive and statistically
significant in model IV. These results are in accordance with the evidence presented by Table
6. ‘Leverage’ and ‘Assets in place’ are negative and statistically significant. ‘Growth
opportunities’ is positive and statistically significant. Finally age is positive and statistically
significant at a 1% level. A one standard deviation increase in ‘Age’ results in a 6,9%
decrease in ‘Tobin’s’ Q.
My findings are in line with an earlier analysis where I regressed ‘The ratio of equitybased compensation to total pay’ on ‘Tobin’s Q’. The absolute effect of ‘Equity-based
compensation (thousands)’ on ‘Tobin’s Q’ gradually becomes negative and although the
results are not statistically significant it confirms earlier analyses like the one in Table 6
where the independent variable becomes negative in model IV where I include industry
dummies .
4.6 Old versus new economy firms
This subsection investigates the pay-performance relationship differences for both new and
old economy firms. It serves as a final robustness check. Table 9 presents the empirical
evidence. Panel A presents the results for old economy firms while Panel B shows the
empirical evidence for new economy firms.
Anderson et al. (2000) argue that the emergence of options and restricted stocks in
executive compensation packages is especially pronounced in the so called ‘new economy’
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Sjoerd van der Zee
firms3. These new economy firms differ in numerous ways from old economy firms. Ittner,
Lambert and Larcker (2003) explain that new economy firms generally are smaller, grow
faster, invest more in research and development and lower marginal tax rates as opposed to
their old economy counterparts. Murphy (2003) furthermore complements these differences
with the fact that executives in new economy firms receive more stock-based compensation
than do executives of old economy firms. A potential explanation found by Murphy (2003) is
that the decision to grant options is based on the perceived cost of the options instead of the
economic costs. Firms grant options without incurring an immediate cash outflow. Hence the
perceived costs of the options are lower than their true economic costs. This phenomenon is
stronger in new economy firms than old economy firms explaining the increased use of
option-based compensation in these types of companies. As a result, I decide to split up the
sample as a final robustness check to examine pay-performance differences for new and old
economy firms.
Table 9 uses ‘Equity-based to total compensation (%)’ as a key explanatory variable.
The variable is positive and significant in column I-III of panel A but becomes negative and
insignificant when industry dummies are introduced into the model. It remains negative and
insignificant when the final control variable age is added. A one standard deviation increase in
‘Equity-based to total compensation (%)’ is associated with an increase of between 42,2% and
60,9% in Tobin’s Q in models I-III. However it becomes negative in model IV where a one
standard deviation increase results in a decrease of 121,2% in ‘Tobin’s Q’. Panel B on the
other hand consistently presents negative results. The coefficients are rather large and not
statistically significant in any of the five models. They vary from a positive 14,093 in model I
to a negative -47,884 in model V. In panel B a one standard deviation increase in ‘Equitybased to total compensation (%)’ is associated with a decrease of between 130,3% and
821,6% in ‘Tobin’s Q’ in models II-V. ‘Size’ turns positive in Panel A when industry
dummies are introduced to the model, while size is consistently positive in all of the models in
Panel B. The relationship between ‘growth opportunities’ and ‘Tobin’s Q’ is positive in both
of the panels. ‘Leverage’ on the other hand has a negative effect on ‘Tobin’s Q’. It can be
3
New economy firms are defined as companies with the following SIC codes: 3570
(Computer and Office Equipment), 3571 (Electronic Computers), 3572 (Computer Storage Devices), 3576
(Computer Communication Equipment), 3577 (Computer Peripheral Equipment), 3661 (Telephone &
Telegraph Apparatus), 3674 (Semiconductor and Related Devices), 4812 (Wireless Telecommunication),
4813 (Telecommunication), 5045 (Computers and Software Wholesalers), 5961 (Electronic Mail-Order
Houses), 7370 (Computer Programming, Data Processing), 7371 (Computer Programming Service), 7372
(Prepackaged Software), and 7373 (Computer Integrated Systems Design). Old economy firms are firms
not otherwise categorized as new economy. (Murphy, 2003)
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Sjoerd van der Zee
considered statistically significant at different levels in any of the models besides column V in
panel B. The relationship between ‘Assets in place’ and ‘Tobin’s Q’ is negative and in
varying models statistically significant. Finally ‘Age’ is negatively associated with ‘Tobin’s
Q’ for both old and new economy firms. These results are not statistically significant although
it shows that older executives tend to manage firms with lower firm performance compared to
younger ones.
There is no consistent evidence for a positive relationship between executive pay and
performance. The empirical results indicate more evidence for a negative link. The results for
new economy firms illustrate that religious beliefs might be an invalid instrument to analyze
the relationship between executive pay and performance. This is confirmed by the CraggDonald Wald F-statistic which equals 0,24 in model IV where I introduce industry dummies.
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Sjoerd van der Zee
Chapter 5: Conclusions
This research contributes to the existing literature on executive remuneration and firm
performance by providing additional insights into the direction of the causality. The purpose
of this thesis is to examine the association between executive remuneration and firm
performance and to investigate how the instrument religious beliefs contributes in explaining
this causal relationship. In this section I provide a discussion of the main findings.
Furthermore I discuss potential limitations as well as suggestions for future research.
A vast body of research investigates the link between executive remuneration and firm
performance. A central point of discussion is the endogeneity issue; it is unclear whether
larger compensation packages lead to better firm performance or above average performing
firms just pay their executives more.
Using the ratio of Catholics to Protestants as an instrument for the fraction of equitybased remuneration to total pay, my findings indicate a negative relationship between
executive compensation and firm performance. Although the results lack significance in some
models, there is at least no consistent evidence for a positive relationship. The empirical
evidence suggests that there is no reason for firms to raise the equity-component of the
executive’s compensation package. Furthermore, I find that executives working for firms in
regions with a higher ratio of Catholics to Protestants have a higher portion of their
remuneration package in the form of equity-based compensation meaning that these
executives have a higher tendency to gamble. This empirical evidence contributes to the
emerging literature that investigates the link between culture and economic outcomes. The
results indicate that the relationship between culture and executive compensation might be
stronger than previously believed. The additional robustness checks are in line with the main
findings. I first replaced Tobin’s Q for the return on assets. Next, I replaced the key
explanatory variable for an absolute measure of equity-based compensation. Finally, I divided
the sample into two subsamples; one including ‘technology’ firms and the other including the
more ‘traditional’ firms.
A potential limitation of this thesis is that it is not directly possible to examine
religious beliefs. I had no access to religious attitudes of executives on a personal level. Hence
I could solely infer a proxy for religious beliefs on behalf of a geographical segmentation
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Sjoerd van der Zee
strategy. My analysis would be more accurate if data on the religious beliefs of each
individual executive was available. A potential approach would be to run a survey among a
selective group of executives. This however is beyond the scope of this thesis. Furthermore
this thesis solely focuses on equity-based pay while the total compensation package of
executives is much broader than equity-based pay. Future research should aim at investigating
the pay and performance link regarding fixed salary and cash bonuses. Following Kumar,
Page and Spalt (2011) one could hypothesize that executives working for firms in regions
with a higher ratio of Protestants to Catholics have a larger fraction of their total
compensation package in the form of fixed pay. Next, although Bouwens and van Lent (2006)
find that cash bonuses have no independent association with overall performance, it is
interesting to analyze how the results change when including cash bonuses either in the fixed
or equity component of pay. How does this affect the association between executive
remuneration and firm performance? The required data can easily be retrieved from
ExecuComp. Finally it would be interesting to see how results change when a more recent
sample is used.
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Sjoerd van der Zee
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Appendix
Appendix A: Description variables
Firm Performance
Tobin’s Q
=
Executive Remuneration
Executive pay
= includes salary, bonus, restricted stock grants, total
value of stock options Granted (using Black-Scholes),
Long-Term Incentive Payouts, and others.
Restricted Stocks
= the dollar value of the restricted stocks granted by the
named executive officer during the fiscal year. In
thousands of dollars.
Stock Options
= the dollar value of the options (Black-Scholes value)
granted by the named executive officer during the fiscal
year. In thousands of dollars.
Religious beliefs
Ratio Catholics to Protestants
=
Firm Controls
Firm size
= The logarithm of the total assets.
Growth opportunities
= Research and development expenditures divided by
sales.
Leverage ratio
= Total debt divided by total assets.
Assets in place
= (Inventory + PPE) divided by total assets.
Managerial Controls
Age
= Age of the executive (see appendix for further
information)
35
Sjoerd van der Zee
Appendix B: Industry dummies (Fama-French)
Variable
Long name
SIC codes
Agric
Agriculture
0100-0799,2048-2048
Food
Food Products
2000-2046,2050-2063,2070-2079, 2090-2095,2098-2099
Soda
Candy and Soda
2064-2068,2086-2087,2096-2097
Beer
Alcoholic Beverages
2080-2085
Smoke
Tobacco Products
2100-2199
Toys
Recreational Products
0900-0999, 3650-3652, 3732-3732, 3930-3949
Fun
Entertainment
7800-7841, 7900-7999
Books
Printing and Publishing
2700-2749,2770-2799
Hshld
Consumer Goods
2047-2047,2391-2392,2510-2519,
name
2590-2599,2840-
2844,3160-3199,
3229-3231,3260-3260,3262-3263,3269-3269,3630-3639,3750-3751, 38003800,3860-3879,3910-3919, 3960-961,3991-3991,3995-3995
Clths
Apparel
2300-2390,3020-3021,3100-3111, 3130-3159, 3965-3965
Hlth
Healthcare
8000-8099
MedEq
Medical Equipment
3693-3693, 3840-3851
Drugs
Pharmaceutical products
2830-2836
Chems
Chemicals
2800-2829,2850-2899
Rubbr
Rubber and Plastic Products
3000-3000, 3050-3099
Txtls
Textiles
2200-2295,2297-2299,2393-2395, 2397-2399
BldMt
Construction Materials
0800-0899,2400-2439,2450-2459, 2490-2499, 2950-2952, 3200-3219,
3240-3259,3261-3261,3264-3264, 3270-3299,3420-3442,3446-3452,34903499, 3996-3996
Cnstr
Construction
1500-1549, 1600-1699, 1700-1799
Steel
Steel Works Etc.
3300-3369, 3390-3399
FabPr
Fabricated Products
3400-3400,3443- 3444,3460-3479
Mach
Machinery
3510-3536, 3540-3569, 3580-3599
ElcEq
Electrical Equipment
3600-3621,3623-3629,3640-3646, 3648-3649, 3660-3660, 3691-3692,
3699-3699
Misc
Miscellaneous
3900-3900, 3990-3990, 3999-3999, 9900-9999, 3800,3860-3879,39103919, 3960-3961,3991-3991,3995-3995
Autos
Automobiles and Trucks
2296-2296,2396-396,3010-3011,3537-3537, 3647-3647, 3694-3694,37003716, 3790-3792, 3799-3799
Aero
Aircraft
3720-3729
Ships
Shipbuilding, Railroad Eq
3730-3731, 3740-3743
Guns
Defence
3480-3489, 3760-3769, 3795-3795
Gold
Precious Metals
1040-1049
36
Sjoerd van der Zee
Mines
Non-metallic Mining
1000-1039, 1060-1099, 1400-1499
Coal
Coal
1200-1299
Enrgy
Petroleum and Natural Gas
1310-1389,2900-2911,2990-2999
Util
Utilities
4900-4999
Telcm
Telecommunications
4800-4899
PerSv
Personal Services
7020-7021, 7030-7039, 7200-7212,7215-7299, 7395-7395, 7500-7500,
7520-7549,
7600-7699,
8100-8199,8200-8299,
8300-8399,
8400-
8499,8600-8699, 8800-8899
BusSv
Business Services
2750-2759, 3993-3993, 7300-7372,7374-7394, 7397-7397, 7399-7399,
7510-7519,8700-8748,8900-8999
Comps
Computers
3570-3579, 3680-3689, 3695-3695,7373-7373
Chips
Electronic Equipment
3622-3622, 3661-3679, 3810-3810,3812-3812
LabEq
Measuring and Control Equip
3811-3811,3820-3830
Paper
Business Supplies
2520-2549,2600-2639,2670-2699,2760-2761, 3950-3955
Boxes
Shipping Containers
2440-2449, 2640-2659, 3210-3221, 3410-3412
Trans
Transportation
4000-4099, 4100-4199, 4200-4299, 4400-4499, 4500-4599, 4600-4699,
4700-4799
Whlsl
Wholesale
5000-5099, 5100-5199
Rtail
Retail
5200-5299, 5300-5399, 5400-5499, 5500-5599, 5600-5699, 5700-5736,
5900-5999
Meals
Restaurants, Hotel, Motel
5800-5813, 5890-5890, 7000-7019, 7040-7049, 7213-7213
Banks
Banking
6000-6099, 6100-6199
Insur
Insurance
6300-6399, 6400-6411
RlEst
Real Estate
6500-6553
Fin
Trading
6200-6299, 6700-6799
37
Sjoerd van der Zee
Appendix C: Construction of the control variable age
The variable age is used as a control variable. This variable can be retrieved in two ways. First
one could use the variable AGE – Executive’s Age as it is reported in ExecuComp.
Definition: Age of the executive as reported in the annual proxy statement.
However a considerable fraction of the sample has missing values for AGE. Another variable
which is included in ExecuComp is present age.
Definition: The latest known age of the named executive.
In order to obtain more observations I have used present age as a proxy to calculate the
executive’s age when AGE – Executive’s Age is missing. I found out that the latest year in
which the variable present age has been updated is 2009. I have taken this into account when
calculating my proxy for age. As a result the number of observations increases from 14,989 to
28,621.
Descriptives for variable AGE – Executive’s Age
Variable
Obs
Mean
Std. Dev.
Min
Max
Age
14,989
52.95
8.07
18
86
Descriptives for variable Age_Final
Variable
Obs
Mean
Std. Dev.
Min
Max
Age_Final
28,621
51.19
7.89
16
86
38
Sjoerd van der Zee
Appendix D: Denominations includes in the religious beliefs other than Protestants
Catholic Denominations
Catholic Church
Other Denominations
Bahá'ís
Buddhists
Church of Christ, Scientist
Church of Jesus Christ of Latter-day Saints
Hindus
Jains
Jewish
Muslims Estimate
Sikhs
Taoists
Unitarian Universalist Assocation
Zoroastrians
Orthodox Denominations
Albanian Orthodox Diocese of America
American Carpatho-Russian Orthodox Greek Catholic
Church
Antiochian Orthodox Christian Archdiocese of North
America
Apostolic Catholic Assyrian Church of the East, North
American Dioceses
Armenian Apostolic Church / Catholicossate of Cilicia
Armenian Apostolic
Etchmiadzin
Bulgarian Orthodox Diocese of the USA
Byelorussion Council Of Orthodox Churches In North
America
Coptic Orthodox Church
Greek Orthodox Archdiocese of America
Greek Orthodox Archdiocese of Vasiloupulis
Holy Orthodox Church in North America
Macedonian Orthodox Church: American Diocese
Malankara Archdiocese of the Syrian Orthodox Church in
North America
Malankara Orthodox Syrian Church, American Diocese of
the
Orthodox Church in America: Albanian Orthodox
Archdiocese
Orthodox Church in America: Bulgarian Diocese
Orthodox Church in America: Romanian Orthodox
Episcopate of America
Orthodox Church in America: Territorial Dioceses
Patriarchal Parishes of the Russian Orthodox Church in
the USA
Romanian Orthodox Archdiocese in America and Canada
Russian Orthodox Church Outside of Russia
Serbian Orthodox Church in the USA
Serbian Orthodox Church in the USA (New Gracanica
Metropolitanate)
Church
/
Catholicossate
39
of
Sjoerd van der Zee
Syrian Orthodox Church of Antioch
Ukranian Orthodox Church of the USA
40
Sjoerd van der Zee
Tables
Table 1
Descriptive statistics
Table 1 present the descriptive statistics of the variables used. The sample data has been retrieved from
CompuStat and ExecuComp. Data definitions can be found in Appendix A.
__________________________________________________________________________________________
Variable
Mean Std. Deviation Minimum
Maximum
Median
N
Total compensation
1376.43 4144.20
0.00
600347.4
656.93
44280
Equity-based pay
672.23 3806.60
0.00
600347.4
157.41
44280
Equity/Total pay %
0.29
0.26
0.00
1.00
0.26
44280
Tobin’s Q
1.86
1.49
0.41
48.84
1.38
44280
Catholics/Protestants %
1.67
1.64
0.07
6.06
0.95
44280
Age of the executive
51.19
7.89
16
86.00
51.00
28621
41
Sjoerd van der Zee
Table 2
Descriptive statistics
Table 2 present the number of observations in the sample per state in the US in which the firm is incorporated.
The ratio of Catholics to Protestants has been retrieved from The Association of Religion Data Archives
(ARDA).
__________________________________________________________________________________________
State name
Ratio Catholics to Protestants
Number of observations
Alabama
0.07095555
231
Alaska
0.48129587
52
Arizona
1.4077611
258
Arkansas
0.08894669
107
California
2.9125625
2,059
Colorado
1.0211045
79
Connecticut
3.2628696
685
District Of Columbia
0.98944089
137
Florida
0.83414934
1,579
Georgia
0.12268151
1,368
Hawaii
1.6491104
136
Idaho
0.73497163
145
Illinois
1.6059675
879
Indiana
0.50537866
1,299
Iowa
0.50055653
479
Kansas
.47286946
259
Kentucky
0.24502596
257
Louisiana
1.1836483
354
Maine
1.8092693
140
Maryland
0.94704577
2,255
Massachusetts
5.9669649
2,309
Michigan
1.1038951
1,194
Minnesota
Mississippi
0.75069313
0.08420354
2,077
124
Missouri
0.46085747
879
Montana
0.86486625
47
Nebraska
0.62719726
107
Nevada
2.2444943
1,507
New Hampshire
3.4635104
13
New Jersey
4.4384303
1,920
New Mexico
2.1824896
127
New York
4.1295597
3,440
North Carolina
0.09839175
1,284
Ohio
0.87894047
3,457
Oklahoma
0.09357414
280
Oregon
0.62616696
763
Pennsylvania
1.3470061
2,897
Rhode Island
6.0608946
193
South Carolina
0.08050837
419
42
Sjoerd van der Zee
South Dakota
0.56459935
80
Tennessee
0.07516518
1,231
Texas
0.68402373
1,579
Utah
1.3524978
451
Vermont
1.9464944
157
Virginia
0.28599938
1,856
Washington
0.75024043
1,330
West Virginia
0.2101175
40
Wisconsin
1.157968
1,749
Wyoming
0.80733438
19
43
Sjoerd van der Zee
Table 3
Correlation matrix
Table 3 presents the correlation matrix of the variables used. The variables have been retrieved from CompuStat
and ExecuComp. Data definitions can be found in Appendix A.
Total
Pay
Equity
Pay
Equity/
Total
Pay %
Tobin’s
Q
Cath/
Prot
Age
Equity/Total Pay %
Tobin’s Q
Total Pay
1.000
Equity Pay
0.9624
1.000
0.250
0.260
1.000
0.0586
0.668
0.156
1.000
0.051
0.042
0.041
0.005
0.072
-0.104
0.044
-0.060
Cath/Prot
Age
1.000
0.013
1.000
44
Sjoerd van der Zee
Table 4
OLS Analysis Pay and Performance
Table 4 presents the results of ordinary least squares regressions with Tobin’s Q as dependent variable. The ratio
of equity-based compensation to total compensation is the key variable. Column II adds firm controls. Columns
III adds year dummies. Column IV adds industry dummies and column V adds a managerial control; age. Precise
data definitions can be found in Appendix A.
__________________________________________________________________________________________
I
II
III
IV
V
***
***
***
***
Equity compensation (%)
1.044
0.711
0.700
0.533
0.462***
(38.36)
(14.77)
(14.54)
(11.25)
(7.57)
Size
0.023*
0.038***
0.049***
0.022*
(2.58)
(4.32)
(5.41)
(1.81)
Growth opportunities (%)
0.024***
0.023***
0.017***
0.018***
(7.15)
(6.82)
(5.28)
(4.84)
Leverage (%)
-2.216***
-2.296***
-2.045***
-2.098***
(-33.63)
(-35.14)
(-30.56)
(-23.65)
Assets in place (%)
-0.979***
-1.015***
-0.696***
-0.673***
(-25.00)
(-25.91)
(-13.77)
(-9.97)
Age
-0.010***
(-4.58)
Year dummies
No
No
Yes
Yes
Yes
Industry dummies
No
Observations
R-squared
44,280
0.032
No
No
19,886
19,886
0.139
0.159
t-statistics in parentheses
***
p<0.01, **p<0,05, *p<0.1
Yes
Yes
19,886
0.215
12,904
0.202
45
Sjoerd van der Zee
Table 5
The Link Between Equity-based Compensation and Religious Beliefs
Table 5 presents reduced form regression with the ratio of equity-based compensation to total pay as dependent
variable. The ratio of Catholics to Protestants is the key variable. Column II adds firm controls. Columns III adds year
dummies. Column IV adds industry dummies and column V adds a managerial control; age. Precise data definitions
can be found in Appendix A.
__________________________________________________________________________________________
I
II
III
IV
V
Catholics to Protestants (%)
0.010***
0.006***
0.007***
0.004***
0.003*
(14.10)
(5.88)
(6.98)
(3.42)
(2.25)
Size
0.043***
0.041***
0.044***
0.050***
(33.87)
(32.44)
(33.91)
(29.47)
Growth opportunities (%)
0.002**
0.001**
0.001*
0.001
(3.04)
(2.64)
(2.07)
(1.58)
Leverage (%)
-0.140***
-0.143***
-0.103***
-0.101***
(-14.37)
(-14.89)
(-10.24)
(-7.85)
Assets in place (%)
-0.152***
-0.135***
-0.102***
-0.103***
(-26.55)
(-23.44)
(-13.53)
(-10.62)
Age
-0.004***
(-12.41)
Year dummies
No
No
Yes
Yes
Yes
Industry dummies
No
Observations
R-squared
44,280
0.005
No
No
19,886
19,886
0.092
0.116
t-statistics in parentheses
***
p<0.01, **p<0,05, *p<0.1
Yes
Yes
19,886
0.143
12,904
0.149
46
Sjoerd van der Zee
Table 6
Remuneration and Performance instrumented with Religious Beliefs
Table 5 presents the two stage least squares regression with Tobin’s Q as dependent variable. The ratio of equity-based
compensation to total pay is the key variable. Column II adds firm controls. Columns III adds year dummies. Column
IV adds industry dummies and column V adds a managerial control; age. Precise data definitions can be found in
Appendix A.
__________________________________________________________________________________________
I
II
III
IV
V
Equity compensation (%)
5.360***
2.621*
1.794
-6.037*
-7.702
(10.51)
(2.18)
(1.82)
(-2.21)
(-1.62)
Size
-0.060*
-0.007
0.342**
0.433
(-1.14)
(-0.18)
(2.78)
(1.80)
Growth opportunities (%)
0.021**
0.021***
0.024***
0.024***
(5.38)
(5.90)
(4.46)
(3.55)
Leverage (%)
-1.935***
-2.130***
-2.740***
-2.948***
(-10.23)
(-13.02)
(-9.01)
(-5.73)
Assets in place (%)
-0.678***
-0.860***
-1.317***
-1.520**
(-3.51)
(-5.94)
(-4.73)
(-3.01)
Age
-0.041*
(-2.22)
Year dummies
No
No
Yes
Yes
Yes
Industry dummies
No
Observations
44,280
No
No
19,886
19,886
t-statistics in parentheses
***
p<0.01, **p<0,05, *p<0.1
Yes
Yes
19,886
12,904
47
Sjoerd van der Zee
Table 7
Remuneration and Performance (ROA) instrumented with Religious Beliefs
Table 7 presents the two stage least squares regression with ROA as dependent variable. The ratio of equity-based
compensation to total pay is the key variable. Column II adds firm controls. Columns III adds year dummies. Column
IV adds industry dummies and column V adds a managerial control; age. Precise data definitions can be found in
Appendix A.
__________________________________________________________________________________________
I
II
III
IV
V
Equity compensation (%)
-0.234***
-1.020***
-0.943***
-1.179**
-1.301*
(-6.41)
(-5.41)
(-6.31)
(-3.20)
(-2.13)
Size
0.065***
0.062***
0.076***
0.088**
(7.94)
(9.79)
(4.61)
(2.87)
Growth opportunities (%)
-0.005***
-0.005***
-0.005***
-0.004***
(-7.65)
(-9.26)
(-6.74)
(-4.24)
Leverage (%)
-0.363***
-0.360***
-0.367***
-0.380***
(-12.22)
(-14.52)
(-8.97)
(-5,77)
Assets in place (%)
-0.146***
-0.125***
-0.151***
-0.173**
(-4.82)
(-5.70)
(-3.86)
(-2.67)
Age
-0.050
(1.94)
Year dummies
No
No
Yes
Yes
Yes
Industry dummies
No
Observations
44,280
No
No
19,886
19,886
t-statistics in parentheses
***
p<0.01, **p<0,05, *p<0.1
Yes
Yes
19,886
12,904
48
Sjoerd van der Zee
Table 8
Remuneration (log equity pay) and Performance instrumented with Religious Beliefs
Table 8 presents the results of ordinary least squared regressions with Tobin’s Q as dependent variable. The log
of equity-based compensation is the key variable. Column II adds firm controls. Columns III adds year dummies.
Column IV adds industry dummies and column V adds a managerial control; age. Precise data definitions can be
found in Appendix A.
__________________________________________________________________________________________
I
II
III
IV
V
***
Equity compensation
0.756
0.316
0.235
-0.644
-0.379
(thousands)
(6.17)
(1.70)
(1.54)
(-1.36)
(-1.48)
Size
-0.148
-0.082
0.486
0.336
(-1.24)
(-0.84)
(1.59)
(1.70)
Growth opportunities (%)
0.023***
0.022***
0.020**
0.019**
(4.86)
(5.45)
(2.64)
(3.09)
Leverage (%)
-1.773***
-1.978***
-3.099***
-2.754***
(-5.31)
(-6.93)
(-4.13)
(-6.30)
Assets in place (%)
-0.714**
-0.855***
-1.280**
-1.082***
(-3.13)
(-4.90)
(-3.15)
(-4.02)
Age
-0.013***
(-3.52)
Year dummies
No
No
Yes
Yes
Yes
Industry dummies
No
Observations
44,280
No
No
19,886
19,886
t-statistics in parentheses
***
p<0.01, **p<0,05, *p<0.1
Yes
Yes
19,886
12,908
49
Sjoerd van der Zee
Table 9
Pay-Performance instrumented with Religious Beliefs for New and Old Economy Firms
Table 8 presents the results of a two stage least squares regression with ‘Tobin’s Q’ as dependent variable. Panel A
examines old economy firms while Panel B presents the results for new economy firms. The ratio of equity-based
compensation to total pay is the key variable. Column II adds firm controls. Columns III adds year dummies. Column
IV adds industry dummies and column V adds a managerial control; age. Precise data definitions can be found in
Appendix A.
__________________________________________________________________________________________
Panel A
I
II
III
IV
V
***
*
*
*
Equity compensation (%)
3.017
2.799
2.091
-6.000
-6.004
(5.04)
(2.16)
(2.00)
(-1.90)
(-1.53)
Size
-0.114
-0.069
0.321*
0.337
(-1.80)
(-1.40)
(2.00)
(1.56)
Growth opportunities (%)
0.026*
0.032**
0.030
0.071
(2.42)
(3.28)
(1.76)
(1.49)
Leverage (%)
-1.438***
-1.568***
-2.239***
-2.317***
(-7.39)
(-9.39)
(-6.03)
(-5.38)
Assets in place (%)
-0.491**
-0.625***
-1.119**
-1.139**
(-2.92)
(-5.05)
(-3.47)
(-2.77)
Age
-0.029
(-1.94)
Year dummies
No
No
Yes
Yes
Yes
Industry dummies
No
Observations
40,369
No
No
16,968
16,968
t-statistics in parentheses
***
p<0.01, **p<0,05, *p<0.1
Yes
Yes
16,968
11,026
__________________________________________________________________________________________
Panel B
I
II
III
IV
V
Equity compensation (%)
14.093
-7.596
-7.442
-17.045
-47.884
(0.97)
(-0.60)
(-0.74)
(-1.06)
(-0.48)
Size
0.416
0.427
0.794
2.117
(1.17)
(1.60)
(1.63)
(0.54)
Growth opportunities (%)
0.024*
0.012
0.011
0.007
(2.12)
(1.35)
(0.85)
(0.22)
Leverage (%)
-5.526***
-5.480***
-6.493**
-11.209
(-3.51)
(-5.27)
(-3.58)
(-0.81)
Assets in place (%)
-2.653
-2.303
-1.819
-3.006
(-1.25)
(-1.71)
(-1.86)
(-0.60)
Age
-0.057
(-0.57)
Year dummies
No
No
Yes
Yes
Yes
Industry dummies
No
Observations
3,911
No
No
2,918
2,918
t-statistics in parentheses
***
p<0.01, **p<0,05, *p<0.1
Yes
Yes
2,918
1,878
50