The effect of incentives offered to top executives

The effect of incentives offered to top executives and the CG culture on performance of listed companies in KSA. Dr Necati Aydin Dr Hayat Khan Mr Ibrahim Alsughair Project funded by CMA

Outline CG and Incentives: Why? Approach in the Literature Approach of the paper Results

The Principal-agent problem Context: A principal (employer) hires an agent to complete a task in a noisy environment Problem: Effort exerted by the agent is costly and the principal does not observe the effort exerted by the agent (monitoring problem) Rent seeking behavior Adverse Selection: Moral Hazard: The agent may not work in the best interest of the principal Solutions: The principal may know the “type” of the agent ? ? ? ?

Solution Optimal incentives Corporate Governance • Design incentive schemes which induce the agent to work in the best interest of the principal • Good governance • Structures, Policies, Processes and PRACTICES which promote and protect the best interest of STAKEHOLDERS Research questions • How do these affect performance • Incentives: Do they work? • CG: Is it worth putting an effort (CG compliance vs CG culture)

Literature review Performance variables ROA, ROE, ROS, Tobins. Q CG variables Bo. D = Characteristics of the Board of Directors, PDT = Public Disclosure and Transparency SHR = Shareholders’ rights STH = Stakeholder’s rights Incentives Base salary (generosity of incentives) Bonus pay (Short term vs long term) Stock option Contract length/job tenue

Impact on performance? Unique dataset Incentives data Conducted a survey with the help of CMA (limited sample) CG data: Alfaisal’s CGI data for the FY 2017 Performance data: Bloomberg (2016 -2018) Test different versions of the following model Performance = f(CG, incentives, controls)+noise

Incentive survey Job Tenure Age range

Incentive survey Job Tenure Age range

Base salary Bonus pay LT or Retention bonus

Result (CG) ROE Controls: gdp growth, inflation, size ROE Between (3 years avg of performance) Controls: size

Results ROE (CG+Incentives) Controls: gdp growth, inflation, size

Results (CG) ROA Controls: gdp growth, inflation, size ROA Between (3 years avg of performance) Controls: size

Results ROA (CG + Incentives)

Preliminary Results Summary Limitations of the study and way forward