CEO Compensation and Company Performance Compensation for CEO has always been an area of debate in policy circles and management decision making. Higher compensation can be justified if highly paid CEOs in the long term are able to drive better Returns to Shareholder (as measured by the ROI on the stock prices). In this assignment, we examine this linkage between compensation and company performance statistically using the tools of descriptive statistics and inference t-tests. CEO compensation is generally benchmarked to the peers within the same industry group. In this exercise we ignore the industry difference and market conditions across industries and solely study the compensation and company performance as indicated by the return on the stock. We also study the issue of outliers. The data in sample1.xls contains the data on compensation and returns on the stock for 194 companies – 1 yr , 2yr, 3 yr and five year. In the second file Sample2.xls, the compensation outliers data records have been removed on both sides of tails so that we are left with 150 Companies/CEO which are then grouped into six groups – Group 1 has the higher average compensation then Group 2 and so on. From the sample 1 file, examine if there is linkage between compensation and performance. Does the relationship between compensation and performance improve as longer periods are considered? Study correlations and variations. Compare variability of 1 year return with the 3 year and 5 year return. (Hint: use Coefficient of variation) Study the same relationships between compensation and performance for sample 2 file also for each of the groups. Does the relationship metrics improve? Can you conclusively comment on compensation and performance as you study this relationship across multiple levels? You want to establish confidence levels (90%) on compensation assuming the normal distribution for compensation as well as the expected returns – Which test is more suitable Z or t-test? Establish these levels for each of the groups in sample2 file. Once you have determined compensation, you now want to establish benchmark on desired return. If you represent the recruitment team, you want to pay the prospective CEO towards the lower side of the band while negotiating for the highest ROI (higher Confidence limit of Return). Compute these benchmarks at 90% confidence level. Compute these benchmarks compensation confidence intervals for 95% confidence levels also. Which one would you prefer for your negotiations – higher confidence or lower confidence? After merging the groups, re-estimate confidence intervals of compensation, 5 year return and 3 year return and prepare final recommendations on benchmark compensation range and return expectation that needs to be negotiated with the prospective CEO

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1 Relationship between compensation and performance i To study the relation between compensation and performance we first calculate the correlation matrix and see how better they related to one anothe... View the full answer