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Aligning CEO Compensation with Shareholder Interest

Aligning CEO Compensation with Shareholder Interest

Among the lasting impacts of the financial crisis of 2008 was a marked change in the way insurance industry CEOs were compensated. Stock options skyrocketed. Performance incentives were increasingly tied to measures of rapid recovery. And automatic cash bonuses were sharply reduced as the drive for economic revitalization hit center stage.

These were among the findings of an interdisciplinary study by FIU Business finance and international business professors, indicating how a crisis can shift emphasis from fixed compensation to performancebased incentives.

"We found that the shift in executive compensation was a response to the crisis," said Deanne Butchey, a teaching professor of finance and one of the study's researchers.

"We also found that when the CEO held a dual role, acting as also the chairman of the board, (s)he was better able to influence salary, bonuses and long-term incentives. This influence declined in the post-crisis period."

Forthcoming in Managerial Finance, the study looked at CEO compensation packages to determine whether total compensation, including salary, bonus structure and longterm incentive plan, were positively related to the insurance firms' post-crisis financial performance.

Total CEO compensation was positively related to return on assets (ROA) and firm size both before and after the financial crisis, the study found. However, after the recession, the financial focus shifted to performance.

The average size of cash bonuses was reduced by two-thirds. By contrast, stock award and non-equity incentives doubled, and option awards increased almost 70% compared to the pre-crisis period, tying CEO compensation more closely to activities that will help the company recover quickly.

The researchers compared annual data from 2001 to 2016 for 73 insurance companies and 134 CEOs at publicly traded, shareholderowned insurance companies in the property and casualty and life and health sectors.

"The new compensation structure improves the alignment of executives' compensation with shareholder interest. Firms will see an improvement in value creation as CEOs own an increasingly large portion of the company through stock ownership programs," said Butchey. "It also impacts the CEO, because as they become increasingly focused on the target, they know where to focus their energies."

The research was co-authored with Jerry Haar, professor of international business at FIU Business, along with Rafiqul Bhuyan of Le Moyne College and Bakhtear Talukdar of the University of Wisconsin–Whitewater.