The core of the current Performance Evaluation system of public institutions based on principal agent theory can be seen as an attempt to maximize institutional efficiency through a performance-contingent compensation scheme. However, despite the importance of the leader in such institutions, schola...
The core of the current Performance Evaluation system of public institutions based on principal agent theory can be seen as an attempt to maximize institutional efficiency through a performance-contingent compensation scheme. However, despite the importance of the leader in such institutions, scholarly research on CEO compensation is practically nonexistent. This research attempts to answer various questions related to CEO compensation, and the following is the analysis of the results. 1. Sensitivity Analysis of CEO compensation in Public Institutions The main reason for analyzing the relationship between various forms of detailed management performance measures and compensation is that it is expected that agents will allocate more effort when highly performance-sensitive evaluation system is given more weight(Datar et al., 2001); if the owner does not designate a balanced means of performance measurement, agents will allocate more resources to work that has a higher expectation of compensation while neglecting work with less compensation (Holmstrom and Milgrom, 1991). The first implication of the analysis is that when an institution’s management performance measurement distinguishes between individual performance and institutional performance, total CEO compensation significantly increases only when individual performance increases by one unit. The second implication is that when management performance measurement distinguishes input-related performance and output-related performance in the management process, CEO compensation fluctuates based on both measures, but increases at a higher rate when input-related performance increases by one unit. Third, when current institutional performance measures distinguishes public performance and corporate performance, CEO compensation only reacts to corporate performance. Fourth, when accounting performance distinguishes profitability and financial solvency, CEO compensation only reacts to profitability. 2. Correlation between Management Performance and CEO compensation in Public Institutions During the research period, it was confirmed that CEO compensation based on current public institutional management performance fluctuated through external factors as prescribed by legislation. However, the research also demonstrated that CEO compensation based on the previous year’s institutional performance was not contributing to improving the institution’s current or future performance. Furthermore, annual increase or decrease in institutional performance did not correlate with the increase or decrease in CEO compensation. 3. Relationship between CEO compensation Disparity and Management Performance When discussing the relationship between CEO compensation Disparity and organizational performance in private enterprises, there are two varying positions: some argue that disparity in compensation has a positive effect on improving performance, while others argue that it has a negative effect. This research analyzed the disparity of compensation by distinguishing inter-organizational disparity and intra-organizational disparity. The results indicated that regardless of the form of organizational performance, inter-organizational compensation disparity had a positive effect on improving the next year’s management performance. On the other hand, intra-organizational compensation disparity had differing effects on management performance that depended on the form of organizational performance. In general, intra-organizational disparity had a negative effect for institutional performance measurement systems, while it had a positive effect on individual performance measurement systems. 4. Variables that Affect CEO compensation and Management Performance in Public Institutions Even if a performance-contingent compensation scheme is established, agency problems persist because of hidden information and hidden action issues. In general, extrinsic situational variables affect compensation based on factors other than performance, and the impossibility of observing such factors is explained by governance structure, which in this research refers to an institution’s characteristics and corporate governance. The first implication of the analysis was that base salary was higher for quasi-governmental institutions, while total compensation was higher for public institutions. Second, when material size was used as the indicator for the institution’s complexity, CEO compensation was higher for institutions with higher complexity. Third, when government subsidy was used to estimate the degree of the owner’s power and influence, CEO compensation was lower for institutions with a high level of government control. Fourth, when the percentage of outside-directors was used as a proxy indicator of corporate governance, the percentage had a limiting effect on CEO compensation while also having a negative effect on the institution’s management performance.
The core of the current Performance Evaluation system of public institutions based on principal agent theory can be seen as an attempt to maximize institutional efficiency through a performance-contingent compensation scheme. However, despite the importance of the leader in such institutions, scholarly research on CEO compensation is practically nonexistent. This research attempts to answer various questions related to CEO compensation, and the following is the analysis of the results. 1. Sensitivity Analysis of CEO compensation in Public Institutions The main reason for analyzing the relationship between various forms of detailed management performance measures and compensation is that it is expected that agents will allocate more effort when highly performance-sensitive evaluation system is given more weight(Datar et al., 2001); if the owner does not designate a balanced means of performance measurement, agents will allocate more resources to work that has a higher expectation of compensation while neglecting work with less compensation (Holmstrom and Milgrom, 1991). The first implication of the analysis is that when an institution’s management performance measurement distinguishes between individual performance and institutional performance, total CEO compensation significantly increases only when individual performance increases by one unit. The second implication is that when management performance measurement distinguishes input-related performance and output-related performance in the management process, CEO compensation fluctuates based on both measures, but increases at a higher rate when input-related performance increases by one unit. Third, when current institutional performance measures distinguishes public performance and corporate performance, CEO compensation only reacts to corporate performance. Fourth, when accounting performance distinguishes profitability and financial solvency, CEO compensation only reacts to profitability. 2. Correlation between Management Performance and CEO compensation in Public Institutions During the research period, it was confirmed that CEO compensation based on current public institutional management performance fluctuated through external factors as prescribed by legislation. However, the research also demonstrated that CEO compensation based on the previous year’s institutional performance was not contributing to improving the institution’s current or future performance. Furthermore, annual increase or decrease in institutional performance did not correlate with the increase or decrease in CEO compensation. 3. Relationship between CEO compensation Disparity and Management Performance When discussing the relationship between CEO compensation Disparity and organizational performance in private enterprises, there are two varying positions: some argue that disparity in compensation has a positive effect on improving performance, while others argue that it has a negative effect. This research analyzed the disparity of compensation by distinguishing inter-organizational disparity and intra-organizational disparity. The results indicated that regardless of the form of organizational performance, inter-organizational compensation disparity had a positive effect on improving the next year’s management performance. On the other hand, intra-organizational compensation disparity had differing effects on management performance that depended on the form of organizational performance. In general, intra-organizational disparity had a negative effect for institutional performance measurement systems, while it had a positive effect on individual performance measurement systems. 4. Variables that Affect CEO compensation and Management Performance in Public Institutions Even if a performance-contingent compensation scheme is established, agency problems persist because of hidden information and hidden action issues. In general, extrinsic situational variables affect compensation based on factors other than performance, and the impossibility of observing such factors is explained by governance structure, which in this research refers to an institution’s characteristics and corporate governance. The first implication of the analysis was that base salary was higher for quasi-governmental institutions, while total compensation was higher for public institutions. Second, when material size was used as the indicator for the institution’s complexity, CEO compensation was higher for institutions with higher complexity. Third, when government subsidy was used to estimate the degree of the owner’s power and influence, CEO compensation was lower for institutions with a high level of government control. Fourth, when the percentage of outside-directors was used as a proxy indicator of corporate governance, the percentage had a limiting effect on CEO compensation while also having a negative effect on the institution’s management performance.
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