Executive Remuneration and the Payout Decision

Philipp Geiler · Luc D. R. Renneboog

51 citations0/0 files storedCorporate Governance An International Review

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Corporate Finance and Governance Financial Markets and Investment Strategies Corporate Taxation and Avoidance

Abstract

Abstract Manuscript Type Empirical Research Question/Issue This paper investigates whether corporate payout policies (dividends, share repurchases, a combination of dividends and share repurchases, and full earnings retention) are set by CEOs who intend to maximize their personal wealth. Research Findings/Insights For all listed UK companies we study whether the payout channel choice is affected by investor sentiment, taxation, major shareholder ownership, and in particular the CEO's compensation package. The payout choice has an immediate effect on the value of the CEO's stock options and restricted stock, as anticipated dividends drive down the value of his equity‐based pay (if it is not dividend‐protected), and share repurchases have a positive impact on pay. By means of a quantile regression approach and nested logit models, we find that CEOs adopt a payout policy that increases the value of their equity‐based pay. Theoretical/Academic Implications Traditional research shows that corporate payout policies cater to shareholder clienteles who have preferences for specific types of payout induced by e.g. differences in taxation on dividends and capital gains, or market sentiment. We demonstrate that it is a CEO's personal wealth as reflected by his compensation package rather than shareholder preferences that has the strongest impact on the payout policy. Practitioner/Policy Implications This research encourages firms/remuneration consultants to make top management's remuneration packages ‘dividend‐neutral’, in other words to remove the negative impact of the dividends on pay such that the payout and payout channel choice will not be influenced by the CEO's wealth. In addition, this research encourages shareholders to contemplate whether the payout is beneficial for them and to vote on the proposed payout policy at the annual general meetings.

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References

1996Agency costs of free cash flow, corporate finance, and takeovers 1961Dividend Policy, Growth, and the Valuation of Shares 2001Boys will be Boys: Gender, Overconfidence, and Common Stock Investment 2005CEO Overconfidence and Corporate Investment 2001Disappearing dividends: changing firm characteristics or lower propensity to pay?1984Specification Tests for the Multinomial Logit Model 2005Payout policy in the 21st century 1998Volume, Volatility, Price, and Profit When All Traders Are Above Average

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