Tracing the links between executive compensation structure and firm performance: evidence from the Brazilian market

• Date: 23 October 2020
• DOI: https://doi.org/10.1108/CG-05-2020-0199
• Pages: 1393-1408
• Published date: 23 October 2020
• Author: Alexandre Dias,Victor Vieira,Bruno Figlioli
• Subject Matter: Strategy,Corporate governance

Tracing the links between executive

compensation structure and firm

performance: evidence from the

Brazilian market

Alexandre Dias, Victor Vieira and Bruno Figlioli

Abstract

Purpose –This study aims to investigatehow different executive compensationstructures were related

to the performanceof firms.

Design/methodology/approach –This study was based on a sample of companies with the highest

standards of corporate governance listed on the Brazilian Stock Exchange. We adopted the multiple

correspondence analysisfollowed by the hierarchical cluster analysisto propose a typology defined by

fixed andvariable components of the executivecompensation and multiple firm performanceindicators.

Findings –The analysis producedthree clusters, which were submitted to robustness tests,highlighting

that companies used thecompensatory incentives in striking distinct waysas governance mechanisms.

The study found a positive relationship between the performance of companies and the variable

incentives of executive compensation, especially the long-term incentive, as well as a negative

relationshipbetween the performance of firms and the fixedcomponent of the compensation structure.

Research limitations/implications –This research, whosesample was based on an emerging market,

adds empiricalevidence to the literature. However, future studiesare invited to address the relationships

between executive compensation structures and firm performance in other markets, as well as to

examinethese relationships in companies withdistinct levels of governance.

Practical implications –This study provides insightson how the incentive structure can be adopted as

an efficientgovernance mechanism, especiallyfor companies in emerging markets.

Originality/value –The main noveltyof this paper is that the methodological strategyused here enabled

the authors to discriminate distinct executive compensation structures and establish a relationship

betweenthese compensation structures anddifferent types of performance indicators.

Keywords Firm performance, Corporate governance, Executive compensation, Emerging markets

Paper type Research paper

1. Introduction

Although executive compensation can be interpreted as the result of ideal hiring in a

competitive market of managerial talents, it can also be affected by the managerial power

(Frydman and Jenter, 2010). Compensation should be designed through critical incentives

to increase the shareholder value and to discourage opportunistic behavior that can induce

executives to act for their benefit. Therefore, compensation instruments are notably relevant

in solving agency problems where ownership and control are considered different

dimensions (Al Farooque et al., 2019).

The relationship between total CEO compensation and organizational performance has

been widely examined in the literature (Abdalkrim, 2019;Sheikh et al.,2018;Carter

Alexandre Dias is based at

the School of Economics,

Business Administration

and Accounting, University

of Sa

˜o Paulo, Ribeira

˜o

Preto, Brazil. Victor Vieira is

based at the School of

Economics, Federal

University of Minas Gerais,

Belo Horizonte, Brazil.

Bruno Figlioli is based at

the School of Economics,

Business Administration

and Accounting, University

of Sa

˜o Paulo, Ribeira

˜o

Preto, Brazil.

Received 30 May 2020

Revised 15 September 2020

Accepted 1 October 2020

DOI 10.1108/CG-05-2020-0199 VOL. 20 NO. 7 2020, pp. 1393-1408, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1393

et al.,2016). However, the total chief executive officer (CEO) compensation is considered

an unsatisfactory proxy in the investigation of its effects on the economic performanceof the

firm once companies may not have the same compensation structure, although they may

report similar amounts in terms of their executives’ compensation packages (Mehran,

1995). In this sense, Ozcan (2011) examined the link between firm performance and

different components of executive compensation in the UK. Pereira and Esperanc¸a (2015)

analyzed the determinants of variable compensation for Portuguese executives. Beavers

(2018) investigated how the adoption of inside debits in executive compensation impacted

the firm’s debt structure. The evidence emphasizes that there are variations in the efficiency

with which incentives ofthe compensation structure are used as governance instruments.

Even if these studies improve considerably our understanding of the

compensation–performance relationship, the literature is still scarce in providing evidence

on how the executive compensation structure is connected to the firm performance.

Moreover, despite the evidence demonstrate a positive association between levels of

governance, firm performance and executive compensation (Al Farooque et al.,2019),

there are still many unknowns regarding the compensation–performance relationship in

companies with strong governance. This gap is an opportunity to examine differences

regarding the compensatory contracts in companies oriented to the control and monitoring

of their executives, as well as to comprehend how these differences are linked to the

performance of these companies.

This study examines the association between distinct executive compensation structures

and the performance of firms with high standards of corporate governance. More

specifically, this study answers the following question: how do firms with high governance

standards differ in terms of their executive compensation structures, and how these

compensation structures are related to their performance? By addressing this research

problem, we could assess how different components of the compensation structure –

defined in fixed and variable components –were related to the performance of firms and

examine how companies with high standards of corporate governance responded to

agency conflicts through their executive compensation structures. The sample of the study

consisted of 100 companies listed in the Brazilian Stock Exchange (Bovespa) from which

data on different components of the statutory board’s compensation were added to the

performance data of firms. The Brazilian landscape is particularly interesting because the

country represents an emerging economy that integrates one of the main international

investment routes in Latin America; on the other hand, it has low rates of economic growth

and social development. Different from developed markets, Brazil is characterized by a

high concentration of voting capital of companies, and low levels of legal enforcement and

property rights (Gallego and Larrain, 2012;Chong and L

opez-de-Silanes, 2007). The

central agency conflict in the Brazilian scenario occurs between majority and minority

shareholders (Chong and L

opez-de-Silanes, 2007). These idiosyncrasies affect resource

allocation, public policies and the distribution of income and political influence in a

particular way (Morck et al.,2005).

We adopted the multiple correspondence analysis (MCA) followed by the hierarchical

cluster analysis (HCA) to address the researchproblem. This strategy allowed us to add our

contribution to the literature by characterizing distinct types of compensatory structures,

relating them to multiple indicators of performance. The results demonstrated that

companies brought forward variations regarding their compensation structures, even

though sharing similar commitments with respect to the monitoring and surveillance of

management acts. These compensatory structures were related to distinct levels of the

companies’ performance.

This paper is structured as follows. The literaturebackground is presented in Section 2. The

database and the empirical methodology are presented in Section 3. In Section 4, we

present the typology that relates the executive compensation structures to the indicators of

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