CEO Compensation in Publicly-Traded Companies

The goal of this study is to examine the factors that have effected the trend in CEO salary levels in companies traded on the Tel Aviv Stock Exchange during the last 15 years. To this end, use is made of the largest sample of personal and salary data gathered so far in Israel on CEOs in publicly-traded companies. The main finding is that CEO salaries are positively correlated with the size of the firm's assets and its performance (on the stock exchange and according to its financial statements). At the same time, it was found that the sensitivity of salaries to firm performance has declined over the years, to the point where during the last five years of the sample period firm performance did not explain CEO salaries. Furthermore, the CEO is compensated for the firm's relative performance, such that if the firm's profit is low relative to other firms in the same industry, the CEO's salary will decline and vice versa. In addition, the elasticity of the CEO's salary with respect to a company's performance is not dependent on its size: there is no difference in elasticity between large and small companies. With respect to the business cycle, it was found that the sensitivity of salaries to firm performance was in fact higher during recession years. It was also found that CEOs are not compensated for the firm's long-term performance but only its short-term performance (up to a two-year lag). This study also examines, for the first time, the phenomenon of Co-CEOs. Salary gaps between two CEOs in the same company during the same period were found. The gaps are dependent on the holdings of the CEOs, their seniority, their education and their functions on the Board of Directors. Another area examined in the study is the correlation between the turnover of CEOs and firm's performance. It was found that a decline in performance as reflected in the firm's financial statements increases the probability of replacement. In contrast, performance on the stock market operates in the opposite direction, such that a CEO will prefer to leave a company at its "peak" in order to present enhanced personal achievements to the next company he will be managing.