Does Geographical Location Matter for Managerial Compensation Design?

• In Event: Shareholder Rights, Corporate Boards and Compensation

Abstract

This paper examines the role of the geographical location of firms in relation to managements’ pay-for-performance sensitivity and risk taking behavior measured by the corporate headquarters’ proximity to shareholders. We find that managers in remotely located firms typically have a lower level of pay-for-performance sensitivity in their executive compensation packages, and make less risky business decisions. This geographical impact on pay-for-performance is mitigated by presence of institutional investors. Overall, the evidence suggests that firms encountered with higher agency costs and greater information asymmetry due to geographical barriers have lower pay-for-performance sensitivity than others, implying management entrenchment.

Authors

• Jing Zhang, McGill University

• Jieun Chung, Concordia University