CEO Pay-performance Sensitivity in KOSPI and KOSDAQ Firms

It is important to adjust both the level and the sensitivity of CEO payments with respect to firm performance in order to elicit managerial efforts and solve the agency problem. In our panel data analysis over the period 2004-2017 on both KOSDAQ and KOSPI firms, CEO pays are positively and significantly related with the firm accounting performance in both markets. Although the average CEO pay is significantly higher for KOSPI firms and KOSDAQ firms are more susceptible to factors that reduce CEO compensation, such as leverage and risk, the mean decomposition results suggest that CEOs of KOSDAQ firms are actually overpaid considering their firm performance and other firm characteristics. Overall, the distribution of CEO pay is more dispersed and the pay performance sensitivity is higher for KOSPI firms. Therefore, care should be taken in extending results based on KOSPI samples to KOSDAQ firms, or vise versa. Not to mention that the credit ratings of the KOSPI firms are more sound, the degree of information asymmetry is less severe for the KOSPI firms. Our results suggest that the pay performance relation is weaker (stronger) among the lower (higher) credit rated firms and that the information asymmetry may weaken the pay performance sensitivity because the managerial efforts are difficult to be verified upon contract.