Executive Compensation and Ownership Structure: Empirical Evidence for Italian Listed Companies

This paper investigates the determinants of executive compensation in Italian listed companies over the period 1995 - 2002. Using a unique database, with yearly data on executive pay and very detailed information on companies' ownership structures, we explore the impact of performance and corporate governance characteristics on Board compensation. We find that the level of board compensation is significantly affected, as expected, by the size of the firm, accounting returns and market valuation. High ownership concentration is associated with lower executive pay, according to the hypothesis that strong ultimate shareholders have higher incentives either to monitor the management, and not to extract private benefits via excessive personal compensation. Quite surprisingly, the wedge between cash flow and voting rights seem to exert a negative impact on the level of compensation; control enhancing devices could increase agency costs, but do not seem to induce the extraction of higher board compensation. Looking at the nature of the ultimate owner, the level of Board compensation is higher for Family firms, and with a lesser extent, for widely held firms; managers of State owned companies receive a significantly lower compensation. Furthermore, within Family firms, executive compensation is higher in founder-controlled corporations, while in firms controlled by descendants board remuneration seems very close to widely held firms. Taking into account the compensation individually perceived by every board member, emerge that Family firms pay higher compensation both for executives and non executive directors. For CEOs, cash compensation seems more related to performance and company valuation than other board positions, while Chairman - often a family member - compensation is less related to ownership concentration and performance characteristics. Within Family firms, directors that are members of the controlling family obtain usually higher compensation, but not for CEO role.