The influence of corporate strategy on the relationship between CEO compensation and financial performance: an Australian study

The objective of this study is to analyse the effects of CEO compensation on financial performance and how that relationship may be moderated by strategy. The turbulent period during and surrounding the Global Financial Crisis (2006-2012) provides an opportunity to assess how well firms adapt to changes in the global markets due to the Global Financial Crisis' extreme economic volatility and instability. As such, this study uses the Global Financial Crisis to enable the inclusion of a turbulent economic period as opposed to one which is more stable to assess the adaptability of firms. Market measures and accounting measures are used as a gauge for financial performance. The study uses agency theory as the basis for describing the relationship between the CEO and the shareholders. It examines the relationship between CEO compensation and financial performance, and the relationship between strategy and financial performance. The study finally examines corporate strategy (as monitoring and adaptability) and its relationship with financial performance, and whether or not corporate strategy moderates the relationship of CEO compensation and financial performance. The results of the study find that CEO compensation has a significant and positive relationship with EPS and that the BONUS variable of CEO compensation has a significant and positive relationship with TobinQ. The study also finds that the strategy hypothesis does not appear to be supported at 5%. It is also found that ADAPT has a weak positive moderation on the relationship between CEOSAL and EPS at p<0.1, which suggests that ADAPT is a weak moderator on the relationship between CEO compensation and EPS. The study’s implication on practice allows directors and management to better assess performance measures and develop and deliver strategies to deal with the highs and lows reflected in economic situations such as was seen in the lead up to, during and following the Global Financial Crisis. Its implication on agency theory sheds light on the typical and topical problems with the principal-agent relationship, being that an off shoot of the Global Financial Crisis has seen shareholders and the public both sceptical and infuriated and insisting on a review of CEO compensation packages and that the selection of the CEO and level of remuneration is in itself a strategic decision.