Corporate governance, firm performance and executive pay: A comparison of defense and non-defense firms

Abstract

This study analyses pay-performance relationship and pay structure of executives and tests whether the pay structure of CEOs differs across firms in the defense and non-defense sector using econometric methodology. The empirical results based on ordinary least squares, Probit and Tobit methods show that on an average, executives in the defense firms earn more than their counterparts in the non-defense sector. However, when we control for governance structure, firm performance and other characteristics, the difference in executives’ remuneration vanishes. The important determinants of executive pay are the legal system, firm performance measured by Return on Assets (ROA), whether the CEO is also Chairman of the board, and size of the firm. The estimates of the determinants of restricted stock awards showed that firm performance, governance and other characteristics significantly influence the likelihood of obtaining restricted stock awards and also the value of the stock award.