Does the Level of Executive Compensation Affect a Firm’s Reputation
Asian Tax Journal Vol. 24 No. 4 (2023), pp. 73-101
Abstract
A high level of compensation can work as an incentive to induce executives to improve a firm’s performance or reputation. On the contrary, it may reflect their opportunistic behavior and rent extraction. In this regard, most of previous studies have investigated the impact of compensation on financial performance, but recent studies have focused on its the relationship with non－financial performance as well. Therefore, based on this research stream, among non－financial performance proxies, this study examines the executive compensation by focusing on firm reputation. Specifically, this study investigates the effect of the average or the sum of executives’compensation levels on the reputation of the firm. The institutional setting in Korea gives a good opportunity to examine executives’ compensations as individual executives’ compensation information began to be disclosed in the annual report since 2013. For the corporate reputation proxies, we use the following two：KMAC’s ‘All star 30’ and BSTI’s ‘100 Top Brand’. As a result of analyzing listed firms from 2015 to 2021, we observe a significant and positive relationship between executive compensation and corporate reputation. The results are consistent in both cases when the average compensation of executives or the total amount of compensation are used. These results are interpreted as the higher the level of compensation of executives leads to the higher corporate reputation. In additional tests, we find that using the CEO compensation reveals the similar results. Moreover, using KMAC and BSTI separately induce the consistent results. Finally, we use propensity score matched sample and document the consistent results. This study contributes in the following ways. First, the relationship between corporate reputation and executive compensation fills gap in literature since there is a lack of empirical findings verifying the impact of executive compensation on non－financial performance indicators. This study also provides implications for institutions that evaluate and disclose corporate reputation. Finally, the disclosure of executive compensation may lead to executives’ efforts to enhance the reputation of the firm and thereby present the validity of the regulation. Therefore, it is expected to provide implications for policy makers who regulate the disclosure system.
Keywords
- Executive compensation disclosure
- executive compensation
- CEO compensation
- reputation of firm
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