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Impacts of M&As on executive compensation of acquiring firms © Virginia Bodolica, 2005
École des Hautes Études Commerciales

Affiliée à l’Université de Montréal
Impacts of Mergers and Acquisitions

on Executive Compensation of Acquiring Firms
Par
Virginia Bodolica
Thèse présentée à la Faculté des études supérieures

en vue de l’obtention du grade de
Philosophiae Doctor (Ph.D)
en administration
Décembre 2005
© Virginia Bodolica, 2005

École des Hautes Études Commerciales

Affiliée à l’Université de Montréal
Cette thèse intitulée :
Impacts of Mergers and Acquisitions

on Executive Compensation of Acquiring Firms
Présentée par
Virginia Bodolica
a été évalué par un jury composé des personnes suivantes :
Président-rapporteur : Louis Hébert
Co-directeurs de recherche : Sylvie St-Onge et Michel Magnan
Membre du jury : Paul André
Examinateur externe : Patrice Roussel
Représentant du doyen de la FES : Linda Rouleau

ABSTRACT
This thesis integrates and examines two highly controversial issues, namely, the
incidences of mergers and acquisitions (M&As) and executive compensation. More
specifically, we analyse the determination of acquiring firms’ executive compensation,
i.e., the direct effect of the magnitude of acquisition premium and method of payment;
the mediating effect of firm performance; and the moderating effect of structural board
independence (SBI).
We assume that Chief Executive Officer (CEO) compensation is more adequately

explained by a combination of agency, political, and institutional perspectives, rather
than relying on a single theoretical framework. This study adopts a longitudinal design
pre-post M&A for Canadian firms that engaged in M&A activities between 1995 and
2001. Data is analyzed for the full sample and the restricted sample (firms having the
same CEO during the seven years under study).
With regard to monetary magnitude of executive compensation components, our key

findings suggest that throughout the years surrounding the M&A transaction,
(1) CEO total compensation increases significantly, despite M&As’ poor record in value
creation for acquiring firms’ shareholders. We may infer that executives undertake
M&As for personal gain, corroborating the managerial welfare perspective.
(2) Firms paying high acquisition premia pay lower salary and short-term bonus, whereas
equity-financed acquisitions translate into lower salary in both samples and short-term
compensation and total compensation in the restricted sample. From an institutional
perspective, this suggests that paying CEOs for just conducting low-premium or cash-
financed M&A deals is a legitimate compensation practice.
(3) M&As with a low (high) acquisition premium and a cash (equity) consideration,
translating into good (poor) performance, lead to higher (lower) short-term bonus and
total compensation in both samples, and stock options and long-term compensation in the
restricted sample. From an agency theory standpoint, tying executive compensation to

firm performance is an effective control mechanism for value creation.
(4) SBI exerts two moderating effects. First, SBI reinforces the negative relation between
the magnitude of control premium and salary in both samples and between equity-
financed deals and short-term compensation in the restricted sample. Second, SBI
reinforces the positive association between stock market returns and short-term bonus
and short-term compensation in both samples (stock options and long-term compensation
in the full sample). Within the political perspective framework, with SBI, directors seem
to possess more power to exert properly their supervision responsibility. Powerful boards
are able to link managerial compensation more closely to firm returns from acquisitions.
With regard to specific contractual compensation arrangements, findings show that

the magnitude of control premium and equity-financed acquisitions reduce the likelihood
of adopting employment contracts, termination clauses, or change of control clauses.
Since payment of higher control premia and equity-financed acquisitions have negative
wealth effects for acquiring stockholders, directors’ decision not to provide CEOs with
compensation protection clauses: is an effective tool to align CEOs and shareholders’
interests (agency theory); is more likely when the board is powerful and independent
from management (political perspective); is easier to justify and to legitimatize in the
eyes of shareholders (institutional perspective).
Key words: Executive Compensation, Mergers and Acquisitions, Acquisition Premium,

Method of Payment, Corporate Governance
SOMMAIRE
Cette thèse analyse les incidences des transactions de fusions et d’acquisitions

d’entreprises (F&A) sur la rémunération des Présidents Directeurs Généraux (PDG) des
sociétés absorbantes prenant en compte divers effets : effet direct du montant et du mode
de paiement de la prime d’acquisition versée aux actionnaires des sociétés acquises; effet
médiateur de la performance des sociétés absorbantes; et l’effet modérateur de
l’indépendance structurelle des conseils d’administration des sociétés absorbantes.
Cette recherche est menée auprès d’un échantillon de sociétés canadiennes qui ont réalisé
des opérations de F&A entre 1995 et 2001. Les données sont analysées en adoptant une
approche longitudinale (avant/après les F&A) pour l’ensemble de l’échantillon
(échantillon « total ») et pour un sous-échantillon composé des sociétés dont le même
PDG est resté à la tête au cours des sept années considérées dans l’étude (« sous-
échantillon même PDG »).
Les résultats de cette recherche, décrits ci-après, appuient que la rémunération des PDG
des sociétés absorbantes peut davantage être comprise en s’appuyant sur les prémisses de
plusieurs perspectives théoriques.
D’abord, la rémunération totale des dirigeants des sociétés absorbantes augmente de

manière significative au cours de la période qui suit le changement de contrôle, en dépit
de l’effet inverse négatif que les F&A ont sur le montant de l’avoir des actionnaires des
entreprises absorbantes. En ligne avec la perspective de l’enrichissement managérial, les
PDG semblent entreprendre des F&A pour retirer des gains personnels.
Ensuite, les sociétés absorbantes qui versent des primes d’acquisition plus élevées aux
actionnaires des sociétés acquises payent des salaires et des primes à court-terme moins
élevés à leur dirigeant, au sein des deux échantillons étudiés. Par ailleurs, les acquisitions
de sociétés financées à travers des échanges d’actions sont associées, au sein des deux
échantillons étudiés, à des salaires moins élevés des PDG et dans le « sous-échantillon
même PDG », à une rémunération à court-terme et à une rémunération totale moins
élevées des PDG. En ligne avec une perspective institutionnelle, il semble légitime de
rémunérer les PDG des sociétés absorbantes pour la conduite de F&A en versant des
primes moins élevées aux actionnaires des sociétés acquises ou, encore, en les finançant
en argent comptant.
De plus, les F&A où l’on verse des primes d’acquisition aux actionnaires des sociétés
acquises moins élevées (plus élevées) et qui sont financées en argent comptant (par
échange d’actions), génèrent une performance plus élevée (moins élevée) des sociétés
absorbantes et sont associées : (A) dans les deux échantillons étudiés, à des primes à
court-terme et une rémunération totale plus élevées (moins élevées) de leur PDG, et (B)
dans le « sous-échantillon même PDG », à des options d’achat d’actions et une
rémunération à long-terme de leur PDG plus élevées (moins élevées). En ligne avec la
théorie de l’agence, lier la rémunération des dirigeants à la performance organisationnelle
semble un mécanisme de contrôle efficace pour la création de la valeur.
Par ailleurs, l’indépendance structurelle des conseils d’administration des sociétés

absorbantes (ISCA) exerce certains effets modérateurs : (A) Dans les deux échantillons
étudiés, l’ISCA accroît de manière significative la relation négative entre d’une part, le
montant de la prime d’acquisition versée aux actionnaires des sociétés acquises et d’autre
part, du salaire accordé aux PDG des sociétés absorbantes ainsi que la relation positive
entre d’une part, la performance boursière des sociétés absorbantes et d’autre part, les
primes à court-terme et la rémunération à court-terme des PDG des sociétés absorbantes
(les options d’achat d’actions et la rémunération à long-terme dans l’échantillon
« total »). (B) Dans le « sous-échantillon même PDG », l’ISCA accroît de manière
significative la relation négative entre les acquisitions de sociétés financées à travers des
échanges d’actions et la rémunération à court-terme des PDG des sociétés absorbantes.
En accord avec la perspective politique, les administrateurs qui possèdent plus de
pouvoir ou qui sont plus indépendants semblent plus capables de lier la rémunération des
dirigeants des sociétés absorbantes aux retours que ces acquisitions génèrent pour les
actionnaires.
Finalement, les résultats montrent qu’une prime d’acquisition élevée versée aux
actionnaires des sociétés acquises ainsi que des opérations de F&A financées à travers
des échanges d’actions, réduisent la fréquence des mécanismes de rémunération suivants
pour les PDG des sociétés absorbantes : contrats d’emploi, clauses de terminaison ou
clauses de changement de contrôle. Comme le versement de primes d’acquisition élevées
aux actionnaires des sociétés acquises et des transactions de F&A financées à travers des
échanges d’actions ont des effets négatifs sur la richesse des actionnaires, la décision des
administrateurs de ne pas inclure de telles clauses contractuelles de protection de la
rémunération pour les PDG des sociétés absorbantes : (A) semble apparaître un outil
efficace pour aligner les intérêts des PDG avec ceux des actionnaires (théorie de
l’agence); (B) semble plus fréquente quand les conseils d’administration sont plus
indépendants du management (perspective politique), et (C) semble apparaître plus facile
à justifier et à légitimer aux yeux des actionnaires (perspective institutionnelle).
Mots clés : rémunération des dirigeants, fusions et acquisitions, prime d’acquisition,

mode de paiement, gouvernance d’entreprise
TABLE OF CONTENTS
Abstract i
Sommaire iii
Table of contents v
List of tables x
List of figures xvi
List of abbreviations xvii
List of appendices xviii
Acknowledgements xix
CHAPTER 1: INTRODUCTION 1
1.1 General research context 1
1.1.1 Merger acquisition transactions 1
(A) M&A frequency and extent 2
(B) M&A motives and performance 3
1.1.2 Executive compensation 5
1.2 Study description 7
1.2.1 Thesis as part of global research program 8
1.2.2 General research design and objectives 9
1.2.3 Research contributions 12
1.2.4 Main outline of the thesis 17
CHAPTER 2: DEFINITIONS AND THEORETICAL PERSPECTIVES 21

2.1 Definitions and descriptions of key terms 21
2.1.1 M&A transactions 21
(A) Types of M&As 21
(B) M&A motives 24
(C) Corporate restructuring strategies other than M&As 26
2.1.2 Executive compensation 27

(A) Executive compensation components 27
(B) Executive compensation determinants 44
2.2 Theoretical perspectives 48
2.2.1 Agency theory 52
2.2.2 Political perspective 61
2.2.3 Institutional theory and symbolic assumptions 68
2.2.4 Links among research questions and theoretical perspectives 73
CHAPTER 3: MODEL DEVELOPMENT 76

3.1 Literature review 76
3.1.1 Review of studies analyzing CEO compensation of firms involved 76
in M&A transactions
(A) Impacts of bidding firms’ executive compensation structure 77
on M&A acquisition decisions and performance
(B) Review of studies analyzing the managerial compensation of 81
acquiring firms before and after M&A completion
3.1.2 Review of studies analyzing M&A performance and its 105
determinants
(A) Studies of financial and operating performance of acquiring 105
firms
(B) Studies analyzing some M&A characteristics as determinants 109
of post-acquisition performance
3.1.3 Synthesis of the results of previous studies related to executive 115
compensation of acquiring firms
(A) Variables influencing CEO compensation of acquirers 115
(B) Major findings of previous studies on acquiring executive 116
compensation
(C) Major limitations of previous studies on CEO compensation 118
of acquirers
3.2 Theoretical model and hypotheses 119
3.2.1 Conceptual model 119
3.2.2 Research hypotheses 125

(A) Links among research questions and hypotheses 125
(B) Links among research questions, hypotheses, and theoretical 131
perspectives
CHAPTER 4: METHODOLOGY 132

4.1 Data Collection 132
4.1.1 Constitution of the sample 132
4.1.2 Gathering research data 134
4.2 Empirical model and methodology 137
4.2.1 Empirical models 137
(A) Monetary CEO compensation components 137
(B) Attributes of CEO compensation contracts 140
4.2.2 Methodology 141
4.3 Variables’ definitions and measures 142
4.3.1 Dependent variables 142
4.3.2 Independent variables 150
4.3.3 Mediating variables 152
4.3.4 Control variables 154
4.3.5 Moderating variables 155
(A) Structural board independence components 155
(B) Composite measure of structural board independence 160
4.3.6 Synthesis of measures used to estimate the research variables 162
CHAPTER 5: RESULTS 164

5.1 Descriptive results 164
5.1.1 Dependent variables 164

5.1.2 Independent variables 177
5.1.3 Mediating and control variables 178
5.1.4 Moderating variable 180
5.1.5 Correlations 181
5.2 Linear regression results 184
5.2.1 Testing the direct effect of transactional characteristics on 184
executive compensation
(A) Direct effect of acquisition premium 187
(B) Direct effect of method of payment 188
5.2.2 Testing the mediating effect of firm performance on the indirect 190
relation between transactional characteristics and CEO
compensation
(A) Indirect effect of acquisition premium 194
(B) Indirect effect of method of payment 203
5.2.3 Testing the moderating effect of structural board independence 211
on the direct link between transactional characteristics and CEO
compensation
(A) Moderating SBI effect on the direct relation between the 215
acquisition premium and CEO compensation
(B) Moderating SBI effect on the direct relation between method 216
of payment and CEO compensation
(C) Additional analysis to verify the relationships hypothesized in 218
3a and 3b
5.2.4 Testing the moderating effect of structural board independence 223
on the relationships between firm performance or size and CEO
compensation
5.3 Logistic regression results 234
5.3.1 Testing the direct effect of transactional characteristics on the 235
adoption frequency of specific attributes of executive
compensation contracts
5.3.2 Testing the effect of firm performance or size on the adoption 238
frequency of specific attributes of executive compensation
contracts before and after the deal

CHAPTER 6: ANALYSIS AND DISCUSSION 246
6.1 Discussion of monetary CEO compensation components 246
6.1.1 Discussion of the pre- versus post-acquisition changes in the 246
monetary magnitude of executive compensation components
6.1.2 Discussion of the direct effect of the magnitude of acquisition 249
premium or method of payment on executive compensation
6.1.3 Discussion of the mediating effect of firm performance on the 256
relationship between the magnitude of acquisition premium or
method of payment and executive compensation
6.1.4 Discussion of the moderating effect of structural board 262
independence on the relationship between the acquisition
premium or method of payment (firm performance or size) and
executive compensation
(A) Discussion of the results related to hypotheses 3a and 3b 263
(B) Discussion of the results related to hypotheses 4a and 4b 268
6.2 Discussion of specific attributes of CEO compensation contracts 274
CHAPTER 7: CONCLUSION 280

7.1 Results’ synthesis and contributions 280
7.1.1 Synthesis of the results 280
7.1.2 Contributions 285
7.2 Study limitations 288
7.3 Future research 289
BIBLIOGRAPHY 292
APPENDICES 315
LIST OF TABLES
Table 1. Mergers and acquisitions’ types 22

Table 2. Theories of merger motives 25
Table 3. Corporate restructuring types other than M&As 26
Table 4. Executive compensation nature and components 28
Table 5. Categorization of executive short-term incentive plans 31
Table 6. Structure of executive long-term incentives 33
Table 7. Some types of executive stock option plans 36
Table 8. Some types of executive stock appreciation rights 39
Table 9. Some types of executive perquisites 43
Table 10. Executive compensation determinants 45
Table 11. Links among research questions and theoretical perspectives 74
Table 12. Synthesis of studies analyzing the impacts of bidders’ executive 78
compensation structure and corporate merger or acquisition decisions
Table 13. Synthesis of study conducted by Lambert and Larcker (1987 83
Table 14. Synthesis of study conducted by Kroll et al. (1990) 85
Table 15. Synthesis of study conducted by Schmidt and Fowler (1990) 88
Table 16. Synthesis of study conducted by Firth (1991) 91
Table 17. Hypothesized links among variables by Kroll et al. (1997) 92
Table 18. Synthesis of study conducted by Kroll et al. (1997) 93
Table 19. Synthesis of study conducted by Avery et al. (1998) 96
Table 20. Synthesis of study conducted by Khorana and Zenner (1998) 98
Table 21. Synthesis of study conducted by Bliss and Rosen (2001) 101
Table 22. Synthesis of study conducted by Wright et al. (2002) 104
Table 23. Synthesis of some studies on M&A’ performance 106
Table 24. Synthesis of studies analyzing the impact of the magnitude of 110
acquisition premia on acquiring firms’ performance
Table 25. Synthesis of studies supporting the means of payment hypothesis 112
Table 26. Synthesis of studies analyzing the executive 117
Table 27. Links among research questions, hypotheses, and theoretical 131
perspectives
Table 28. Some methodological aspects of this thesis 133
Table 29. Comparative analysis of some methodological considerations in 133
studies analyzing the executive compensation of acquiring firms
Table 30. Synthesis of information sources used to collect research data 135
Table 31. Comparative analysis of performance and size measures used in 152
studies analyzing executive compensation of acquiring firms
Table 32. Descriptive statistics for the nine components of the composite 161
measure of structural board independence
Table 33. Recoding conditions related to the variables 162
included in the composite SBI measure
Table 34. Variables’ definitions and measures 163
Table 35. Descriptive statistics for the full sample of compensation data 165
Table 36. Descriptive statistics for the restricted sample of compensation data 168
Table 37. Results of t-test: changes in values of monetary compensation 171
components for both full and restricted samples
Table 38. T-statistic mean difference between the pre- versus post-acquisition 172
period for the full and restricted samples of compensation
components
Table 39. Descriptive statistics of contractual arrangements (full sample) 174
Table 40. Descriptive statistics of contractual arrangements (restricted sample) 175
Table 41. Changes in the contractual arrangements adoptions between years – 175
for both the full and restricted samples
Table 42. Mann-Whitney test between the pre- versus post-acquisition periods 176
for the full and restricted samples of contractual compensation
arrangements
Table 42a. Descriptive statistics of the two independent variables (both 178
samples)
Table 43. Descriptive statistics of size and performance variables (full sample) 179
Table 44. Descriptive statistics of size and performance variables 179
(restricted sample)
Table 45. Descriptive statistics for the composite SBI variable (full sample) 180
Table 46. Descriptive statistics for the composite SBI variable (restricted 180
sample)
Table 47. Correlations between variables used in regression models 181
Table 48. Regression results testing the direct effect of the control premium / 186
method of payment on executive compensation (salary, short-term
bonus, and short-term compensation)
Table 49. Regression results testing the direct effect of the control premium / 186
method of payment on executive compensation (stock options, long-
term compensation, and total compensation)
Table 50. Levels of statistical support for hypothesis 1a 188
Table 51. Levels of statistical support for hypothesis 1b 189
Table 52. Regression results testing the relationship between performance 191
ratings (RET / ROE / ROA) and the acquisition premium or method
of payment
Table 53. Regression results testing the mediating effect of firm performance on 192
the indirect relation between transactional characteristics and
executive compensation (salary, short-term bonus, and short-term
compensation)
Table 54. Regression results testing the mediating effect of firm performance 193
on the indirect relation between transactional characteristics and
executive compensation (stock options, long-term compensation, and
total compensation)
Table 56. Regression results of Ln Salary for low versus high acquisition 197
premia (one day before the deal)
Table 57. Regression results of Ln ST Bonus for low versus high acquisition 198
Table 58. Regression results of Ln ST Bonus for low versus high acquisition 199
premia (20 days before the deal)
Table 59. Regression results of Ln Short Term Compensation for low versus 200
high acquisition premia (one day before the deal)
Table 60. Regression results of Ln Stock Options for low versus high 201
acquisition premia (one day before the deal)
Table 61. Regression results of Ln Long Term Compensation for low versus 202
high acquisition premia (one day before the deal)
Table 62. Regression results of Ln Total Compensation for low versus high 203
Table 64. Regression results of Ln Salary for cash vs. comb. & stock payment 206
Table 65. Regression results of Ln ST Bonus for cash vs. comb. & stock 206
payment
Table 66. Regression results of Ln Short Term Compensation for cash versus 207
combination and stock method of payment
Table 67. Regression results of Ln Stock Options for cash versus combination 208
and stock method of payment
Table 68. Regression results of Ln Long Term Compensation for cash versus 209
Table 69. Regression results of Ln Total Compensation for cash versus 210
Table 70. Regression results testing SBI direct effect on executive 212
compensation (salary, short-term bonus, and short-term
compensation)
Table 71. Regression results testing SBI direct effect on executive 212
compensation (stock options, long-term compensation, and total
compensation)
Table 72. Regression results testing the moderating SBI effect on the direct 213
relation between the control premium and executive compensation
(salary, short-term bonus, and short-term compensation)
Table 73. Regression results testing the moderating SBI effect on the direct 214
relation between the control premium and executive compensation
(stock options, long-term, and total compensation)

Table 76. Regression results of Ln Salary for the structurally dependent versus 219
the structurally independent board
Table 77. Regression results of Ln ST Bonus for the structurally dependent 220
versus the structurally independent board
Table 78. Regression results of Ln Short Term Compensation for the 220
structurally dependent versus the structurally independent board
Table 79. Regression results of Ln Stock Options for the structurally dependent 221
Table 80. Regression results of Ln Long Term Compensation for the 222
Table 81. Regression results of Ln Total Compensation for the structurally 223
dependent versus the structurally independent board
Table 82. Regression results (including performance ratings) 224
testing the direct effect of SBI on CEO compensation
Table 83. Regression results (including performance ratings) 225
(stock options, long-term compensation, and total compensation)
Table 84. Regression results of Ln Salary for the structurally dependent 227
Table 85. Regression results of Ln ST Bonus for the structurally dependent 228
Table 86. Regression results of Ln Short Term Compensation for the 230
Table 87. Regression results of Ln Stock Options for the structurally dependent 231
Table 88. Regression results of Ln Long Term Compensation for the 232
Table 89. Regression results of Ln Total Compensation for the structurally 233
Table 92. Logistic regression results testing the direct effect of acquisition 235
premium/method of payment on employment agreement adoption
Table 93. Logistic regression results testing the direct effect of the acquisition 236
premium/method of payment on termination clause adoption
premium/method of payment on the change of control clause
adoption
premium/method of payment on new LTIP adoption
Table 96. Logistic regression results testing the pre- versus post-acquisition 239
differences in employment agreement association with firm
performance and size
differences in termination clause association with firm performance
and size
differences in change of control clause association with firm
performance and size
differences in the new LTIP association with firm performance and
size
Table 100. Summary of research findings 243
Table 101. T-statistic mean difference between the pre- versus post-acquisition 248
period of firm performance ratings for the full and restricted samples
LIST OF FIGURES
Figure 1. Canadian M&A market activity (1997 - June 2003) 2

Figure 2. Global research program: relationships between 7
executive compensation and M&A transactions
Figure 3. Thesis structure 17
Figure 4. Sources of CEO-board power 63
Figure 5. Variables influencing executive compensation of acquiring firms 116
Figure 6. General research design 121
Figure 7. Determinants of executive compensation (monetary magnitude of 124
compensation components) of acquiring firms
Figure 8. Changes in the magnitude of executive compensation components 143
LIST OF ABBREVIATIONS
ACTREM Actual Remuneration

CAR Cumulative Abnormal Returns
CEO Chief Executive Officer
COB Chairman of the Board
COMP Compensation
DSU Differed Share Units
EBC Equity Based Compensation
EVA Economic Value Added
LTIP Long Term Incentive Plans
M&As Mergers and Acquisitions
MC Manager-Controlled firms
NYSE New York Stock Exchange
OC Owner-Controlled firms
OM Owner-Manager-Controlled firms
PERF Performance
PREREM Predicted Remuneration
PSU Performance Share Units
R&D Research and Development
REM Remuneration
RET Stock Market Returns
ROA Return on Assets
ROCE Return on Common Equity
ROE Return on Equity
RSH Returns to Shareholders
SAR Stock Appreciation Rights
SBI Structural Board Independence
SDC Securities Data Corporation
SEC Securities and Exchange Commission
SERP Supplemental Executive Retirement Plan
SIC Standard Industrial Classification
TSX Toronto Stock Exchange
U.K. United Kingdom
U.S. United States
VIF Variance Inflation Factor
LIST OF APPENDICES
Appendix 1: Merger waves 315

Appendix 2: Canadian top ten deals 2003* 316
Appendix 3: Executive compensation updates 317
Appendix 4: Relationships between target’s executive compensation and M&A 319
transactions
Appendix 5: Antitakeover measures 325

Appendix 6: Motives for divestitures 327
Appendix 7: Some determinants of acquisition premium 328
Appendix 8: List of M&A transactions included in the sample 334
Appendix 9: Possible calculations of post- versus pre-acquisition period 338
changes in executive compensation levels
ACKNOWLEDGEMENTS
This doctoral thesis is the culmination of several years of very exiting and challenging,
intellectual work. Being a doctoral student in the joint Ph.D. program at HEC Montreal
has been one of the most wonderful experiences of my life – emotionally intense and
extremely rewarding, from both a professional and personal point of view. I have learned
a great deal about a topic that I had previously only partially mastered. I have met
wonderful people and learned to discover another culture I knew very little about
(including the weather!). Also, coming to this new continent has meant that I have found
the man (the right one!) who became my husband, best friend, and colleague. He, too, is
a Ph.D. candidate.
Many people and institutions have played a vital role throughout my thesis work, and I
would like to express to them my deep gratitude. Thank you, to those who gave me their
moral support, who stood by me all these long years, who offered me words of
encouragement on a daily basis, and who were there through the joys of accomplishment
and the days of hard struggle as well. None of these pages would ever have been possible
without all of you.
Special thanks go to my husband, Martin, who has always been there for me, who has
always found solutions to problems that seemed to elude me, whose confidence in me
has been unwavering, and who has managed to see the best in me. His staying awake
through my long nights of intense work simply to keep me company, his excellent and
inspired cooking, and his energy and sense of humour that have shone so brightly in
those moments of darkness – invaluable! Thank you, my darling, for all the love you
have offered and continue to offer me!
From the bottom of my heart, I would particularly like to thank all the members of my
extraordinary family who I had to leave so far away in my home country, Moldova, to
come to Montreal. Even though we are separated by so many thousands of kilometres, I
have always felt your presence in my mind and heart. Your unconditional love, support,
and encouragement have given me the energy to continue. I am very grateful to my Dad
for his determination and strength of character in guiding and pushing me to study
abroad, so that I could gain the international experience I always dreamed of. And to my
Mom, for her wonderful words of understanding and her gentleness during the most
difficult times of my doctoral studies. My beloved sister Gabi, my brother-in-law Igor,
and the sweetest and most beautiful niece in the world, Nicole – you have all been such a
great source of emotional strength for me.
I would like to express my deep gratitude to those people who through their expert
knowledge, research experience, and professionalism have made this thesis possible. I
am forever indebted to two extraordinary professors, Professor Sylvie St-Onge (HEC
Montreal) and Professor Michel Magnan (Concordia University), who have been the
ideal co-advisors for me. A magnificent couple, both in their professional and personal
lives, their supervision and suggestions were inspiring and encouraging at all stages of
my research. Through all these years, and despite their tight schedules, they have always
found the time to meet and discuss my research with me, offer me their insights, and
answer emails in the thousands! I admit to being a very impatient student much of the
time, and making frequent appeals to their wisdom on weekends and evenings, too.
Thank you so much, Sylvie and Michel, for helping me to discover the rich and verdant
lands of compensation management! Thank you also for your financial support.
I would like to acknowledge the assistance I have received from Paul André (University
of Edinburgh), a committee member who has been present from the very beginning, and
who has shared with me his knowledge and expertise. His help with the building of my
huge database and his comments on my different research lines were always very
perceptive, particularly in the yearly stages of my thesis.
Special thanks go to the wonderful team of professors and administrative assistants from
the Industrial Relations Department at the Université du Québec en Outaouais (UQO). I
am very grateful to all of you for your vote of confidence in hiring me, for having given
me the time I needed to concentrate on my thesis, and for your understanding and
constant emotional support – over these last and very stressful months most of all.
I am grateful to the Agence de la Francophonie for the sixteen month-grant at the very
difficult beginning of my overseas Ph.D. studies. I am also particularly grateful to the
leaders of the Ph.D. program at HEC Montreal for their financial contributions to my
research, for the ‘excellence’ and ‘advancement’ scholarships they have given me. To the
administrations of both HEC Montreal and ENAP Montreal – thank you for the
opportunity to teach several courses in the Management and Human Resources
Departments in my third language, me a Rumanian / Russian bilingual. And last but not
least, thanks to Lise Cloutier-Delage, a Ph.D. program assistant, who has helped me
solve any and all administrative problems, making all the necessary arrangements for the
smooth running of the committee.
CHAPTER 1: INTRODUCTION
This research project focuses on two highly controversial issues, namely, the incidences
of mergers and acquisitions (M&As) and executive compensation of acquiring firms.
Corporate restructuring strategies are currently at the centre of heated debate, and myriad
leading topics related to mergers and acquisitions figure prominently among central
public and corporate policy issues. Theoreticians and practitioners continue to pay
careful attention to the considerable rewards garnered by West European and North
American executives, witness the almost daily articles in major newspapers on this
subject. Two kinds of links have been explored in the literature concerning the
relationship between M&A activities and executive compensation: the first considers
executive compensation as one among other determinants of M&A characteristics; the
second examines the impacts of M&A characteristics on executive compensation. It
should also be noted that these relationships have received scant attention in previous
studies. This is, perhaps, because linking these two controversial subjects under one
research program has been regarded as far too ambitious and likely to yield unpredictable
results. There is, therefore, only limited evidence on the links between M&A transactions
and executive compensation – from both target and acquiring firms’ perspectives.
Following, are two sections as part of the introduction to this thesis. In Section 1.1, the
general research context is presented, exploring the latest evolutions in the two related
fields of study: M&A transactions and executive compensation. In Section 1.2, the main
points of research are described, introducing the rationale and study objectives. Critical
issues of this thesis are also highlighted and the expected contributions to the
advancement of the general field of investigation identified.
1.1 GENERAL RESEARCH CONTEXT
1.1.1 Merger and acquisition transactions
As this investigation is carried out in the M&A context, it is worth presenting a number
of updates on these complex phenomena. We start by providing recent data on M&A
frequency and extent, and continue by introducing the motives behind M&As and their
success rates.
(A) M&A frequency and extent
M&As are an important socio-economic phenomenon, emerging close to the end of the
19th century and becoming a dominant growth strategy for many organizations. The
statistical data on M&As reveal that the ‘fifth merger wave’ (see appendix 1) produced
the greatest impact, not only according to the sums of money involved but also the
number of actors implicated – managers, employees, clients, and other corporate
stakeholders. In Canada, Abitibi-Price and Stone-Consolidated merged in 1997 to
become Abitibi-Consolidated, the world’s largest newsprint maker, with revenues of
CAN$4.1 billion (Belcourt and McBey, 2000). Due to the M&A economic magnitude
and frequency, some authors have even suggested that the 1990s might be remembered
as the “mega merger mania” decade (Hitt et al., 2001). For example, the evidence shows
that in 2000, particularly the first half, all previously registered records were beaten (see
figure 1). In Canada that year, almost two firms per day were involved in M&A
transactions, while in the United States (U.S.) that figure was placed at an average of ten
M&As per day (Bécotte, 2002).
Figure 1. Canadian M&A market activity (1997 - June 2003)

The year 2000 began with the largest merger transaction in U.S. history, between
American Online and Time Warner, for a total value of US$164 billion – an amount that
was later revised to US$123 billion at its June approval date (André et al., 2000). That
year also registered the most important operation involving a Canadian firm, when
Vivendi, headquartered in France, announced a megadeal of CAN$42 billion to merge
with Canada’s Seagram (Bécotte, 2002). With some 1.297 transactions and a total value
of CAN$226 billion announced in Canada in 2000 (Crosbie & Co., 2001), M&A socio-
economic implications could be considerable in terms of wealth moves between
corporate partners. Therefore, depending on the success or failure of acquisition strategy,
M&As can either enrich or impoverish acquiring firms’ shareholders.
Following a peak in 2000, M&A activity in Canada declined significantly over the two
subsequent years, with the total value of transactions in 2002 dropping by 59%,
compared to 2000 (Crosbie & Co., 2003). Canadian deal numbers were down by 42%,
from 774 in the first half of 2002, to 447 in the first half of 2003. The total value of
Canadian transactions stood at US$17 billion for the first half of 2003, compared to the
US$32 billion worth of deals closed during the first half of 2002, representing a 47%
reduction (Dealogic, 2003). This indicates a very important slowdown in relation to the
U.S., where the total value of completed deals dropped by only 7% from the first half of
2002 to the first half of 2003. The shortage of mega-deals (in excess of $1 billion)
accounted for much of decline in the overall Canadian numbers over this period (Crosbie
& Co., 2003). For the first quarter of 2003, there were only three mega-transactions
(representing CAN$4 billion), down from five mega-deals in the last quarter of 2002
(representing CAN$17 billion).
(B) M&A motives and performance
Despite the overall market decline registered during the last three years, in terms of
number of announced deals and total dollar value of transactions, M&A figures remain
impressive (for values of Canadian top ten deals completed during the first half of 2003
and those announced in 2003 see appendix 2). From an industry perspective, the energy
services sector (oil, gas, utilities, and mining) continues to be the most active in Canada.
Without any doubt, M&A operations are currently one of the most prevalent business
strategies (Hitt et al., 2001). For an explanation of this remarkable interest in M&A, most
observers argue that firms can be pushed by both micro- and macroeconomic
motivations (Bécotte, 2002). Specialized literature offers several possible theories, with
no single theoretical approach able to render a full account. These M&A theories are
based on criteria such as differential efficiency gains; economies of scale and/or scope;
financial and/or operating synergistic gains; inefficient target firm’s management; fiscal
advantages; information gains; resolution of agency problems; managerial opportunism;
undervalued target company; free cash flow hypothesis; strategic realignment to
changing environments; market power or antitrust considerations; redistribution from
labor; and pension fund reversions (Shleifer and Vishny, 1991; Weston et al., 1998;
Derhy, 1999; Gaughan, 1999; L’Her and Magnan, 2000).
Whether corporate shareholders receive any wealth gains from M&A transactions is a
question that needs to be addressed. The bulk of empirical studies on post-acquisition
performance explicitly show that, despite their popularity, many M&As do not produce
the expected financial benefits for the acquiring company. One study by McKinsey &
Co. found that only 23% of examined acquisitions were successful, with other studies
showing that 30%-45% of M&A are later sold, often at prices producing a loss on the
investment (Hitt et al., 2001). Other researches go further, establishing that most M&As
ultimately fail (Harshbarger, 1990; Cartwright and Cooper, 1996). M&As involving
related businesses fare better than acquisitions of businesses unrelated to the parent
business (Gaughan, 1999), and novice M&A management teams perform as poorly as do
experienced teams. Presuming that the risk is greater with acquisitions in the service
sector than in manufacturing, and that the merger of two large firms generates more
problems than when a large firm absorbs a smaller one, Belcourt and McBey (2000)
conclude that the success rates vary according to sector and firm size. Without posing a
problem per se, the organization’s familiarity with M&A activities is another influential
factor in the success of a firms’ integration.
M&A transactions are likely to show numerous integration difficulties during their
implementation period. As Pouliot (2000) observes, depending on the theoretical
perspective adopted, various integration problems could be put forward as causes of

M&A unsatisfactory results. These problems can be linked to the difficulties in achieving
strategic alignment, perturbation of organizational political systems, differences in
organizational cultures, or individual characteristics of members of the firms involved.
Obviously, M&As are intricate and multifaceted; some authors recommend the use of
integrative strategic, organizational, and human resources theories in order to better
understand them (Larsson and Finkelstein, 1999). In the light of these lamentable M&A
results, it becomes legitimate to question the real motives behind corporate managers’
willingness to undertake these complex operations.
1.1.2 Executive compensation
Since executive compensation represents the main field of investigation in this thesis, we
thought it advisable to present the latest developments in this field, highlighting the
aspects that provide for so much controversy.
The interest in executive rewards and their determinants is not a recent phenomenon; it
constitutes the central subject of investigation for thousands of theoretical and empirical
studies conducted since the 1930s. The way to approach this subject has since evolved,
together with changes observed in the substance, composition and magnitude of
executive compensation packages. Beginning in the early 1980s, concerns about
overcompensation of American Chief Executive Officers (CEOs) were being voiced by
way of a continuing series of front-page discussions in top business-oriented newspapers
and magazines (Henderson, 1997). The abundant and devastating nature of the attacks
levied at extremely high managerial compensation packages (Crystal, 1991; Fay, 2003)
have colored an arduous debate as to whether CEOs are really worth what they are paid.
A consensus on this issue is far from being reached.
Changes in the legal framework have also fed the debate, paving the way for more
sound-based opinions on the subject. In Canada, on October 31, 1993, the Ontario
Securities Commission approved Regulation 638 regarding the compulsory disclosure of
compensation of the five highest-paid managers of companies listed on the Toronto
Stock Exchange. Much earlier, by means of its Companies Acts of 1948 and 1967, the
United Kingdom (U.K.) established a requirement of public disclosure of the annual

compensation given to highest-paid manager and provided for this information to be
included in the Annual Report and Accounts sent to shareholders (Firth, 1991). In the
U.S., some important legislative reforms dating back to the establishment of the
Securities and Exchange Commission (SEC) in 1934 have been undertaken in order to
better control CEO compensation (Long, 1998). In France, however, disclosure of
compensation for top executives and board members of listed companies has long been
considered an invasion of privacy, and disclosure only became mandatory in May 2001
(Karp and Wallmeyer, 2004).
Some authors underline the poor association between managerial compensation and
organizational performance (Jensen and Murphy, 1990; Grover and Reingold, 1999).
Analysts report that, despite drops in 2002 and 2001, since 1990, average CEO
compensation has still grown faster than other indicators of corporate health, such as
stock prices and corporate profits (Anderson et al., 2003). Others highlight the growing
gap between executive wages and those of company workers (Byrne, 1996; Anderson et
al., 2003). According to statistical data, the CEO-to-Worker wage ratio, after peaking at
531 to 1 in 2000, has fallen back to 1997 levels (see appendix 3). In 2002, it stood at 282
times the average worker’s salary, representing a ratio which is nearly seven times as
large as the 1982 ratio of 42 to 1. The recent results show that the August 2003 Executive
Compensation Index stood at 137.1, compared to 129.9 for the previous year (Kendall,
2003). Thus, for the first eight months of 2003, both the average base salary and average
cash bonus paid to the 45 managers tracked in the survey registered a 5.5% increase over
2002 levels.
On the one hand, an increasing number of theoreticians and practitioners suggest that a
law limiting CEO compensation would not be excessive at all, as it would call for a
greater and more responsible implication of shareholders in managerial pay-setting
decisions (Augustin-Normand, 2003). What continuously shocks the public is that
managers are growing wealthy at the expense of shareholders. According to Fortune
Magazine, the CEOs of 25 companies whose stock prices showed a decrease of more
than 75% between January 1999 and May 2002, earned approximately US$23 billion
over the same period. A large majority of people find these results unjustified, with 74%
of Americans saying to have lost confidence in the CEOs of large companies. They
believe to be self-evident that “if shareholders suffer [when the firm’s share value
decreases], managers have to suffer too” (Fay, 2003).
On the other hand, top management and board members who approve executive pay
packages take the defense of CEO compensation. Some argue that these rewards
recognize the ability, efficiency, and loyalty of CEOs whose efforts contribute to their
firms’ success (Dessler et al., 1999). Indeed, the executive labor market demands that
substantial amounts be offered in terms of compensation in order to attract and retain the
best candidates (Milkovich and Rabin, 1991). Others justify executive pay to
stakeholders by demonstrating its link with firm performance (Agrawal et al., 1991; Hall
and Liebman, 1998). In defense of Canadian managers, some compensation consultants
justify the continual increase in CEO pay by emphasizing the necessity to keep pace with
ever increasing competition from their foreign homologues, and especially from
American executives (Leclerc, 2002). For instance, in 1996, Canadian CEOs earned, on
average, 50% of what American CEOs did, 96% of the average Japanese CEOs’
earnings, and 89% of what British CEOs were paid (Dessler et al., 1999). In 2000, a
comparison study carried out by Towers Perrin (2001) reported that the compensation
paid to Canadian managers improved its ranking among the 25 countries surveyed, rising
to fourth place in this employee category.
1.2 STUDY DESCRIPTION
After this presentation of the general context of this investigation, we present the main
objectives of this thesis. This section is structured as follows. First, we position our study
within a wider research program on CEO compensation in the context of change in
corporate control. Second, we provide details on the general research design and study
rationales. Third, we describe the theoretical, methodological, and practical contributions
this thesis makes to the general field of inquiry.
1.2.1 Thesis as part of a global research program
This thesis represents one constitutive part of a global research program examining
executive compensation of Canadian firms involved in M&A operations. All possible
links that can be established between M&As and CEO compensation of both target and
bidding firms, and which are analyzed by the global program, are represented in figure 2.
More specifically, this program, developed jointly in 2001 by Michel Magnan (John
Molson School of Business, Concordia University), Paul André (University of
Edinburgh), and Sylvie St-Onge (HEC Montreal) includes five different projects.
Figure 2. Global research program: relationships between

executive compensation and M&A transactions
BEFORE transaction TAKEOVER AFTER transaction
Bidder’s executive d* Acquirer’s executive

compensation: compensation:
Components Components
Magnitude Transaction Magnitude
Performance indices A characteristics: D Performance indices
Changes • Transaction type Changes
• Financing
• Success
Target’s executive
compensation: • Attitude
B • Control premium C
Components Operating
Magnitude and financial
Performance indices
performance
Changes
Source: adapted from Magnan et al. (2001)
1. Impacts of M&As on executive compensation of acquiring firms (arrows A and

D). This research project constitutes the main purpose of this thesis. In fact, it is better
represented by the arrow d*, which renders a full account of the longitudinal design
ante-post M&A adopted in this research to investigate the effects of M&As on
executive compensation of acquiring firms both before and after the transaction.
2. Impacts of M&As on executive compensation of target firms (arrow B). This

project has already been completed in 2003 by Karine Houle (former M.Sc. student at
HEC Montreal), who wrote her master’s paper on this subject. For a summary of her
work and other literature written on executive compensation of target firms, see
appendix 4.
3. Impacts of executive compensation of both acquiring and target firms on M&A

characteristics (arrows A and B).
4. Impacts of executive compensation on organizational performance in the post-

acquisition period (arrow C). This project is presently in progress by Alexander
Mersereau, a professor in the HEC Montreal accounting department.
5. Executive compensation in companies involved in operations of change in control

other than M&As.
1.2.2 General research design and objectives
Different motives have been advanced in the literature aiming to explain M&A activities.
Among the most often cited are: expansion objectives, diversification, synergistic
benefits, and financial and tax motives (Weston et al., 1998; Gaughan, 1999). While
economic gains represent a viable explanatory rationale, some authors suggest that
managers engage in acquisition behavior for their own personal motives (Roll, 1986).
For instance, from the agency theory standpoint, it is expected that CEOs, as utility
maximizers, sometimes serve their own interests at the expense of those of shareholders,
giving rise to agency problems. Evidence of these problems can be found in excessive
rewards, executive perquisites, or in aggressive but unprofitable growth strategies, which
Trautwein (1990) called “empire building”. To alleviate problems linked to managerial
self-maximizing behavior, the rules of a good corporate governance suggest that devising
appropriate executive compensation contracts (e.g., which increase the ownership stake
of executives) may be one means of motivating good behavior among CEOs.
Little research has been done so far analyzing the role of CEO compensation in M&A
transactions. Jensen and Ruback (1983) call for additional research on executive pay
following acquisition activities. In a discussion of important unresolved research issues,
these authors specifically inquire as to how acquiring managers’ rewards relate to the
stock price effects of acquisition outcomes. Finkelstein and Hambrick (1988) also
suggest that the link between compensation and diversification activity could be an
important area for researchers to explore. Indeed, the extent to which executive
compensation strategies practiced in firms may drive diversification activity, and
partially explain the unsatisfactory results from these deals, remains an interesting
question to consider.
This research project contributes to the literature by jointly integrating and examining
two highly controversial topics. The emphasis is on analyzing the relation between
M&A-related characteristics – magnitude of acquisition premium and method of
payment – and the compensation of acquiring firms’ executives. More specifically, we
consider this relation in two ways. First, we assess how M&A transactions relate to the
monetary magnitude of CEO compensation components (short-term compensation:
salary, short-term bonus, other short-term compensation; long-term compensation: stock
options, restricted stock awards, long-term payouts; total compensation). Second, we
ascertain if M&A activity relates to specific attributes of CEO compensation contracts
(adoption of employment contract, termination clause, change of control clause, and new
long-term incentive plans).
Our analysis of the monetary magnitude of CEO compensation components is guided

by four distinct research questions. During the three years preceding and following the
change in control transaction,
(1.1) Are there any significant changes in the monetary magnitude of different
compensation components of acquiring companies’ executives?
(1.2) What are the impacts of the magnitude of acquisition premium or method of
payment on executive compensation following M&A transactions?
(1.3) What are the effects of firm performance on the relationships between the
magnitude of acquisition premium or method of payment and the CEO compensation of
acquiring firms?
(1.4) What are the effects of structural board independence on the relationships between
the magnitude of acquisition premium or method of payment (firm performance or size)
and the executive compensation of acquiring companies?
We also attempt to make an exploratory analysis of the specific attributes of executive

compensation contracts, analysis that is guided by three distinct research questions.
During the three years preceding and following the change in control transaction,
(2.1) Are there any significant changes in the structure of executive compensation
contracts of acquiring firms?
(2.2) Are deal-specific characteristics (magnitude of acquisition premium or method of

payment) influencing the frequency of the specific attributes of executive compensation
contracts adoption?
(2.3) Is the frequency of specific attributes of executive compensation contracts adoption

influenced by firm performance or size and is the impact of these independent variables
changing between the pre- and post-acquisition periods?
From the methodological point of view, this study adopts a longitudinal design pre-post
M&A for a group of Canadian firms that engaged in M&A activities between 1995 and
2001. For each M&A transaction, the time horizon under investigation is seven years,
i.e., three years pre-M&A, the year of M&A, and three years post-M&A. Three sets of
research data are collected: data on executive compensation (mainly from companies’
proxy statements available on Sedar database), on acquirers’ financial characteristics
(generally from the Compustat database), and on M&A transactions (mostly from
Thompson Financial Securities Data). These data are analyzed separately for the full
sample (all sample firms) and the restricted sample (firms having the same CEO during
the seven years under study) using multivariate regression analyses.
Furthermore, we develop an integrative conceptual framework in this thesis, based on

recent publications in the field of executive compensation (Zajac and Westphal, 1997;
Magnan et al., 1998; Magnan et al., 2000; St-Onge et al., 2001). More precisely, we
consider that CEO compensation in companies involved in M&A activities can be more
adequately analyzed by a combination of three different theoretical approaches: agency
theory (e.g., executive compensation as a mechanism of executives and shareholders
interests’ alignment); political perspective (e.g., CEO compensation as result of power
games within companies); and institutional perspective (e.g., executive compensation
as result of imitating the legitimized compensation practices). Therefore, different
explanatory factors and determinants stemming jointly from all these theoretical
perspectives are assembled in order to explain the research findings.
1.2.3 Research contributions
This research aims to bring several contributions of a methodological, theoretical, and

practical nature to the debate, encompassing executive compensation in the context of
uncertainty brought by the market for corporate control.
¾ Methodological contributions
The methodological contributions to this field of inquiry originate through the use of
various methodological insights, such as the study of a sample of Canadian acquiring
companies. Previous research concentrated mainly on American takeovers (Lambert and
Larcker, 1987; Kroll et al., 1990; Schmidt and Fowler, 1990; Kroll et al., 1997; Avery et
al., 1998; Khorana and Zenner, 1998; Bliss and Rosen, 2001, Wright et al., 2002) and,
occasionally, British transactions (Firth, 1991). Most studies have demonstrated the
profound difference between countries in terms of the institutional contexts in which
corporate governance relationships are embedded (Daniels and Morck, 1995; Bishop,
1994; Roe, 1993). Therefore, several particularities of the Canadian institutional context,
as opposed to the American model, make it attractive for future research.
For example, the corporate governance systems of the U.S. and the U.K. depend upon
high levels of ownership dispersion and liquid equity markets as effective means of
monitoring and disciplining management (Guillén, 2000). In Canada, corporations are

rather characterized by concentrated ownership structures, being generally controlled
either by single shareholders, or families with an ownership stake sometimes exceeding
86% (Gedajlovic and Shapiro, 1998). More than 24% of Canadian corporations have two
types of voting shares, while in the U.S. this drops to 5% and lower. As a consequence of
these differences, a board of directors in the United States is generally comprised of
executives and outside directors with no ownership stake in the company. In Canada,
boards tend to have significant shareholder representation, and the positions of CEO and
chairman are often split (Daniels and Morck, 1995).
Although Canadian securities rules and regulations are similar to those in the U.S. and
U.K., shareholders’ power in terms of their control over boards of directors is generally
higher in Canada. Moreover, the U.S. has established a solid tradition on executive
compensation disclosure which dates back to 1934, while the equivalent regulation in
Canada only came into force in 1993. Despite an active market for corporate control in
the U.S., federal antitrust regulation has traditionally restricted horizontal merger activity
(Montgomery and Wilson, 1986). In contrast, while taking a much more laissez-faire
position on horizontal mergers, the Canadian government may subject mergers involving
foreign entities in the takeover of domestic concerns to a special review, thereby
constraining the market for corporate control (Gedajlovic and Shapiro, 1998). Since the
U.S. and the U.K. are relying more heavily than Canada on equity – and to a lesser extent
on debt – as external sources of funding, their disclosure rules are more severe (Milgrom
and Roberts, 1992). Given the particularities of this small open economy, the
applicability in the Canadian context of previous research findings made in American
and British national frameworks is very questionable (Eckbo and Thorburn, 2000; St-
Onge et al., 2001).
The effects on executive compensation of some transactional characteristics such as the

magnitude of control premium (high or low) and the method of payment (cash- or stock-
financed) are also analyzed in this thesis. To our knowledge, this is the first investigation
concentrating in a systematic and detailed manner on these types of explanatory factors
of CEO compensation of acquiring firms. Another methodological insight resides in a
fact that this research is the first one in which structural board independence, first
developed by Westphal (1998), is used as a moderating variable in the context of change
in corporate control. This thesis also makes use of a mediating variable (firm
performance) in the analysis of the indirect effect of acquisition premium or method of
payment on executive compensation of acquiring firms. Few previous studies in our field
of interest have used this kind of variable in their analyses.
Our literature review reveals that the majority of currently published articles examine
managerial compensation in companies that undertook M&A activities during the 1980s.
This investigation gathered data on operations of change in corporate control that
occurred in the second half of the 1990s. Takeovers are characterized by cyclical activity,
where high levels of mergers are followed by periods of relatively fewer merger
transactions. These merger waves (see appendix 1) are also pushed by different,
distinguishing logics. For example, mergers that took place during the 1980s, and which
are associated with the fourth merger wave, are characterized by greater specialization,
while M&As from the 1990s associated with the fifth merger wave are characterized by
transactions that are more strategic. Moreover, the pertinence of the previous studies’
findings could be questioned not only in the light of changes in merger characteristics,
but also with regard to the modifications in executive compensation contracts throughout
the last decade (especially due to a greater visibility of executive pay, as result of the
Regulation 638 amendment on mandated disclosure of CEO compensation).
This research examines two kinds of executive compensation components: the monetary
magnitude of compensated components and the specific attributes of CEO compensation
contracts, both before and after the M&A transactions. This thesis is particularly
exhaustive in terms of the study of executive compensation components – such as salary,
short-term bonus, short-term compensation (represents the sum of salary, short-term
bonus and other short-term compensation), stock options, long-term compensation
(represents the sum of stock options, restricted stock awards and long-term payouts), and
total compensation. In previous studies, the analysis has tended to be limited to those
components of executive compensation that are readily assignable to a particular period,
such as short-term compensation (salary and short-term bonus).
¾ Theoretical contributions
On the theoretical level, specialized literature advances more models in order to explain
the initiation of takeovers. However, these models are situated more on the
organizational level, thus skipping the main individual actors involved and their
motivations. Moreover, most research done on CEO compensation of acquiring firms has
been carried out using the agency theory as its basic reference framework (Lambert and
Larcker, 1987; Kroll et al., 1997; Avery et al., 1998; Bliss and Rosen, 2001, Wright et
al., 2002), disregarding the explanatory power of other theoretical approaches. Even
though perspectives qualified as political (St-Onge et al., 2001), institutional (Gélinas,
2001) and symbolic (Zajac and Westphal, 1995) have increasingly gained popularity
among researchers, their use is still limited in the existing literature in our field of
investigation.
Taking into consideration that theoretical approaches other than agency theory can also
bring useful insights to the field of CEO compensation in the context of M&As, this
research privileges the development and use of an integrative multi-theoretical
framework. Therefore, in order to explain our research findings, we develop an
integrative conceptual framework, mobilizing explanatory factors stemming from such
theoretical approaches as the agency theory, political and institutional perspectives. This
integration of various theories into a single, theoretical model allows for the development
of multiple and diversified research hypotheses, aiming to encompass all aspects of the
phenomenon under study and leading to a more comprehensive understanding. Due to its
integrative theoretical approach to a better understanding of the real motives behind the
undertaking of M&A transactions by top management teams, and because it represents
one of the first studies to deal with this issue in a Canadian context – this thesis is in the
position of bringing a real theoretical contribution to the existing literature.
¾ Practical contributions
With this study, we also attempt to make some practical contributions, given that M&A
transactions constitute business decisions with socio-economic implications important
not only for corporate stakeholders but for the whole of society as well. However, the
real motives behind the actions of top managers – the initiators of these complex
operations – remain somewhat unclear. So, at the practical level, the results from this
investigation could possibly encourage shareholders to reconsider the demands they
place on their boards of directors or compensation committees in terms of executive
compensation, and also to revise the corporate governance practices in their companies.
Examples of failures in governance systems, usually expressed through the
ineffectiveness of the board of directors, lack of transparency, and widespread senior
management malfeasance, are far too common.
We need only recall December 2, 2001, when Enron Corporation declared bankruptcy,
due entirely to the opportunistic behavior of its managers and the inability of owners to
bring this behavior under control. This was a catastrophic event – generating job losses in
the thousands, incurring the loss of millions of dollars of employee superannuation
funds, and causing losses borne by Enron’s shareholders, creditors and analysts (Arnold
and De Lange, 2004). The case of Hollinger International is another example of
corporate governance failure. There, the board of directors, packed with Conrad Black’s
friends, has been accused of authorizing the payment of excessive compensation to
senior officials (Heinzl, 2004) and approving the CEO’s proposed transactions, all
without adequate information and debate (McFarland, 2004). Another event that called
into question the whole issue of CEO compensation packages occurred in September
2003, when former New York Stock Exchange CEO and chairman Richard Grasso was
forced to resign after it was revealed that he had amassed as much as US$240 million in
severance pay (Gray, 2004). The investigations revealed that when Grasso’s
compensation package was approved, most board members weren’t even present.
Other current North-American and European cases have exploded into the news, drawing
the attention of corporate shareholders and regulators. Despite the acquittal in July 2004
of Deutsche Bank AG’s CEO Josef Ackermann on criminal charges stemming from his
approval of US$70 million in bonuses paid to former Mannesmann AG executives and
board members – during the hostile takeover of Mannesmann by Vodafone Group PLC
in 2000 – the judge’s comments in the ruling raised questions about the propriety of the
payments to Mannesmann executives. Another litigious case represents the merger of
Bank One Corp. and J.P. Morgan Chase & Co. This deal ended up in action suit charges
that William Harrison, J.P. Morgan’s CEO, in order to keep the job at the combined
company, agreed to pay a 14% premium (worth US$7 billion) to Bank One Corp., whose
CEO, Jamie Dimon, in turn offered to sell his company for no premium at all – if he was
immediately given the top job (Shearer, 2004).
These cases illustrating the weaknesses of corporate governance structures continue to

demonstrate the need for informed and active capital investors, principally shareholders,
who can and should be involved in the critical organizational and transactional decisions
of their corporations. Indeed, in direct response to the Enron Collapse and the effort to
prevent such market catastrophes from happening in the future, the U.S. Congress
enacted legislation in 2002 (the Sarbanes-Oxley Act), making a number of improvements
in the frameworks related to corporate responsibility, audit independence and financial
disclosure. They also demanded the allocation of additional resources to the Securities
Exchange Commission (Chingos, 2004). In Canada, legislative efforts in the field of
corporate governance are still under way, and a version of the Sarbanes-Oxley Act (Law
198) passed its first Senate Finance Committee reading (Des Roberts, 2004).
1.2.4 Main outline of the thesis
This study is structured around consecutive stages of research development. For

conceptual reasons, it is organized into seven chapters and 17 sections (as shown in
figure 3). The remained of this thesis is organized as follows. The second chapter
(Definitions and theoretical perspectives), the richest in theoretical content, is divided
into two sections. Operations of change in corporate control and executive compensation
represent both complex areas of investigation, requiring extensive knowledge and
understanding of specialized terminology and concepts. A number of definitions and
descriptions of various key terms used in this study and referring to merger types and
other corporate restructurings and to components of executive pay are provided in section
2.1. Further, since many authors have argued for an interdisciplinary and complementary
approach to research, a description of different theoretical perspectives – economic,
political, and institutional – and an analysis of their contributions to the study of

acquiring executive compensation issues is offered in section 2.2.
Figure 3. Thesis structure
IMPACTS OF MERGERS AND ACQUISITIONS ON EXECUTIVE COMPENSATION OF ACQUIRING FIRMS
CHAPTER 1: INTRODUCTION
1.1 GENERAL CONTEXT
1.2 STUDY DESCRIPTION
CHAPTER 2: DEFINITIONS AND THEORETICAL PERSPECTIVES

2.1 DEFINITION AND DESCRIPTION OF KEY TERMS
2.2 THEORETICAL PERSPECTIVES
CHAPTER 3: MODEL DEVELOPMENT

3.1 LITERATURE REVIEW
3.2 THEORETICAL MODEL AND HYPOTHESES
CHAPTER 4: METHODOLOGY
4.1 DATA COLLECTION
4.2 EMPIRICAL MODEL AND METHODOLOGY
4.3 VARIABLES’ DEFINITIONS AND MEASURES
CHAPTER 5: RESULTS
5.1 DESCRIPTIVE RESULTS
5.2 LINEAR REGRESSION RESULTS
5.3 LOGISTIC REGRESSION RESULTS
CHAPTER 6: ANALYSIS AND DISCUSSION

6.1 MONETARY CEO COMPENSATION COMPONENTS
6.2 SPECIFIC ATTRIBUTES OF COMPENSATION CONTRACTS
CHAPTER 7: CONCLUSION
7.1 RESULTS’ SYNTHESIS AND CONTRIBUTIONS
7.2 STUDY LIMITATIONS
7.3 FUTURE RESEARCH
The third chapter aims to describe the consecutive stages of our model development,
starting with a detailed literature review. Section 3.1 endeavors to provide insights into
the various research strands linking corporate merger and acquisition activities with
executive compensation. It is important to underline that the focus of this review is on

articles discussing the models and approaches that will provide the foundations of my
own analysis. Therefore, this review should not be considered as a complete review of all
M&A and compensation management literature. It should be viewed, rather, as an
exhaustive investigation into previous research on executive compensation of acquirers,
and a selective examination of some articles judged to be relevant to the study of
acquiring executive compensation, both before and after the transaction completion.
Section 3.2 encompasses the detailed description of the theoretical model and research
hypotheses. The conceptual framework is based on a literature review which highlights
the different areas of interest for the present study. The main conceptual conclusions
drawn from the literature review are pinpointed, establishing some possible relationships
and identifying some variables determining executive pay of acquiring firms. Further, the
same section introduces several core research hypotheses. In order to justify their
soundness, the underlying assumption on which each of the hypotheses relies is
discussed through a brief literature review.
Throughout its three constitutive sections, the fourth chapter offers an in-depth
description of the research methodology. Section 4.1 concentrates on the characteristics
of acquiring companies, including issues related to the sampling design and methods of
data collection. Section 4.2 is dedicated to the description of the empirical model and
methodology used for data analysis. Section 4.3 provides detailed definitions and
descriptions of the measurements of the following five groups of research variables:
dependent, independent, mediating, control, and moderating.
The fifth chapter reports the results obtained in this study. In other words, this chapter is
designed to provide a detailed presentation of the statistical analysis of data, permitting
the mere identification of research hypotheses that are confirmed or rejected. We start by
reporting the descriptive results related to the changes in the magnitude and structure of
CEO compensation components between the pre- and post-acquisition periods (section
5.1); continue by presenting the linear regression findings with respect to the magnitude
of compensation components (section 5.2); and conclude the chapter with logistic
regression results related to the specific attributes of executive compensation contracts

(section 5.3). In the sixth chapter, these empirical findings concerning both the monetary
magnitude of executive compensation components (section 6.1) and the specific
attributes of CEO compensation contracts (section 6.2) are analyzed in relation to the
research questions and hypotheses, and discussed in the light of various theoretical
perspectives and previous research results.
Finally, the seventh chapter offers some concluding remarks. In section 7.1, research
findings and their contributions to the general field of investigation are summarized. In
section 7.2, possible limitations of this thesis are highlighted, while in section 7.3, some
orientations for future research are suggested.
CHAPTER 2: DEFINITIONS AND THEORETICAL PERSPECTIVES
The main focus of this chapter is the definition of frequently used M&A- and
compensation-related terms. Then, further attention is given to the introduction and
description of three theoretical perspectives – economic, political, and institutional –
used to explain the research findings.
2.1 DEFINITIONS AND DESCRIPTIONS OF KEY TERMS
Both operations of change in corporate control and executive compensation represent

complex areas of investigation, requiring extensive knowledge and understanding of
specialized terminology and concepts. This section provides some basic information
describing the key terms used in this thesis, first – concerning mergers and acquisitions,
and second – covering the area of executive compensation.
2.1.1 M&A transactions
In this part we proceed as follows. First, we provide definitions of M&As transactions

from economic, legal, and accounting points of view. Second, we develop on company’s
motives for engaging in M&A activities. Third, we conclude by identifying the corporate
restructuring strategies other than M&As that are not covered in this thesis.
(A) Types of M&As
The words “merger,” “acquisition,” and “takeover” are frequently used by the press and
in specialized literature, but the distinctions among them are often unclear. These terms
tend to be used interchangeably by the public with more or less the same meaning,
referring to transactions of change in property and/or control. André and L’Her (2000)
suggest that the root of this confusion lies in the fact that different economic, accounting,
legal, and fiscal aspects are mixed up in a unique whole, that is, a transaction of change
in corporate control. For some terminological clarifications, see table 1.
According to Gaughan (1999), a merger is “a combination of two corporations in which

only one corporation survives and the merged corporation goes out of existence”, while
an acquisition is “a purchase of an entire company or a controlling interest in a

company”. Weston et al. (1998) also gives a general definition of mergers, differentiating
them from tender offers. Thus, these authors define a merger as a “negotiated deal
between friendly parties who mutually agree to combine their companies, respecting
some technical and legal requirements”, while in a tender offer, one firm usually makes
an offer directly to the shareholders of another firm to sell their shares at a given price. In
general, Weston et al. (1998) consider mergers and tender offers to be two different
forms of takeover, a far vaguer term (Gaughan, 1999), that sometimes refers only to
hostile transactions and at other times both unfriendly and friendly operations (Belcourt
and McBey, 2000).
Table 1. Mergers and acquisitions’ types
Acquisition Takeover
Merger Tender offer
Field Mergers and Acquisitions’ types
Economics Horizontal merger Vertical merger Conglomerate merger
Financial Managerial
Law Statutory merger Subsidiary merger Consolidation
Accounting Acquisition of assets Acquisition of stock Merger-absorption;
(takeover) Amalgamation
Within these broader groups of transactions, some specific categories are provided by
M&A literature, depending on the disciplines in which these terms are applied. From an
economic standpoint, mergers are often classified as horizontal, vertical, or conglomerate
in nature. In a horizontal merger, two competitors operating in the same kind of
business activity combine in order to increase market power (Weston et al., 1998). In a
vertical merger, a combination of companies with a buyer-seller relationship aims to
achieve synergies of controlling all the factors affecting a firm’s success (Gaughan,
1999). When companies aren’t competitors or in a buyer-seller relationship, but are
simply different businesses competing in different markets, a conglomerate merger
takes place (Belcourt and McBey, 2000). In this last category, Weston et al. (1998)
distinguish two types of conglomerate firms: the financial conglomerate supplies
funding to its operating entities, exercises their control and takes all their financial risks
but without participating in operating decisions, while the managerial conglomerate,

beside assuming financial responsibility and control, also provides staff services and
managerial counsel to each segment of its operations.
In the legal framework, different M&A-related terminology is used. In the statutory

merger, the acquiring firm assumes the assets and liabilities of the merged company, the
transaction being governed by the statutory provisions of the state in which the parties to
the merger are chartered (Weston et al., 1998). Gaughan (1999) differentiates this type of
merger from a subsidiary merger of two firms where the target organization becomes a
subsidiary of the parent company. Furthermore, a merger also differs from a
consolidation, which is a business combination of two or more companies that are
subsequently dissolved to form an entirely new company that continues to operate
(Belcourt and McBey, 2000). Another distinguishing aspect is company size. In general,
where there is a significant difference in size of joining companies, merger is the more
appropriate term; when the combining firms are approximately the same size, the term
consolidation applies (Gaughan, 1999).
André and L’Her (2000) propose another categorization of M&As mainly used in
accounting. According to these authors, there are three mechanisms for taking control of
corporations: acquisition of assets, acquisition of stock (takeover), and merger-
absorption. The acquisition of assets is an operation whereby a company acquires a part
or a totality of assets of the selling firm in exchange for cash, assets or shares of the
acquiring company. One of the most important advantages of this type of transaction is
the possibility to buy only the desired assets and to assume only some eventual liabilities
(André and L’Her, 2000). Moreover, the approval procedure is relatively simple, since
the operation of acquisition of assets frequently requires no approval from shareholders
of acquiring company, but only a majority vote from target firm’s stockholders.
An acquisition of stock or a takeover refers to a purchase of a sufficient block of shares

representing more than 50% of voting rights, which allows the bidding company to
exercise control over the board of directors of the newly acquired firm and to obtain the
power to undertake strategic planning of this firm (André and L’Her, 2000). To finance
this kind of transaction, the acquiror can offer an amount paid in cash or assets and/or its
own shares with voting rights. In a takeover bid, the acquiring company typically seeks
the approval of the target’s management and board of directors, but makes an offer
directly to shareholders of the target firm (Weston et al., 1998). These bids, usually
qualified as one of the most common ways hostile takeovers are implemented (Gaughan,
1999), may include different kinds of provisions.
According to Weston et al. (1998), there are conditional tender offers (contingent on
obtaining 50% of the shares of the target), restricted or unconditional offers (specifying
the number/percentage of shares the bidder will take), and unrestricted or “any-or-all”
offers (being both unconditional and unrestricted). The bidder obtaining 50% or more of
the shares of the target is equivalent to having received shareholder approval. Once the
tender offer is received, the board of directors of the target firm issues and mails to its
shareholders a detailed document summarizing its position in respect to this offer, the
measures to be taken in response to the bid, and the reasons explaining its approval or
rejection (André and L’Her, 2000). Whenever a target manager disagrees with the
decisions taken by the board, he may communicate to company’s shareholders his
opinions regarding the tender offer using similar information documents.
A merger-absorption is the incorporation by the acquiring firm of all assets and

liabilities of the selling firm which no longer exist. With amalgamation, a newly created
entity absorbs two or more merging firms which are subsequently dissolved (André and
L’Her, 2000). The procedure is relatively simple, since the property titles are
automatically transferred to the acquiring (or newly formed) company, which is also
responsible for the actual and eventual liabilities of all merged firms. The mechanisms of
approval are, however, more complex, taking into consideration that the transaction has
to be approved by more than two thirds, or even three quarters, of the shareholders in all
of the involved companies.
(B) M&A motives
An exhaustive classification of merger motives is proposed by Trautwein (1990), based

on the following categories: merger seen as rational choice, as process outcome, and as a
macroeconomic phenomenon (see table 2). Under the efficiency theory, mergers are the
result of a rational decision-making process where bidder’s shareholders benefit from the
financial, operational, and managerial synergies created by the transaction (Weston and
Chung, 1983; Jensen, 1986). The monopoly theory explains M&A activity as an effort to
increase company’s market power through different kinds of advantages (for example,
cross-subsidizing of products, simultaneously limiting competition in more than one
market, deterring potential entrants from firm’s markets), that have been referred to as
competitor interrelationships (Porter, 1985) or collusive synergies (Chatterjee, 1986).
The basic hypothesis of the raider theory implies that the M&A main effect consists of
wealth transfers from the stockholders of the companies the rider bids for (Holderness
and Sheehan, 1985).
Table 2. Theories of merger motives

Merger Net gains through synergies Efficiency theory
Merger benefits Wealth transfers from customers Monopoly theory
as bidder's Wealth transfers from target's shareholders Raider theory
shareholders
rational Net gains through private information Valuation theory
choice Merger benefits managers Management
welfare theory
Merger as process outcome Process theory
Merger as macroeconomic phenomenon Disturbance theory
Source: adapted from Trautwein (1990)
With the valuation theory, takeovers occur when bidders’ managers have better
information about the target’s value than the stock market which, being informationally
inefficient undervalues it (Steiner, 1975; Ravenscraft and Scherer, 1987). According to
the management welfare theory, M&As are seen as an attempt to increase executives’
personal wealth either by maximizing their potential benefits or by diminishing the risk
associated with their employment positions (Rhoades, 1983; Black, 1989). The process
theory describes the merger decision not as rational choice, but as the outcome of a
decision process which is governed by individuals’ limited information processing
capabilities (Simon, 1957), organizational routines (Cyert and March, 1963) and the
political power of the actors involved (Pettigrew, 1977). As for the disturbance theory, it
aims to explain merger waves as the result of economic disturbances which increase the
general level of uncertainty, thereby changing the ordering of individual expectations
(Gort, 1969).
The last theory refers to macroeconomic M&A motives, which generally relate to
regulation dimensions and economic cycles manifested through different merger waves.
Studying in depth the last two merger waves in the U.S. context, L’Her and Magnan
(2000) identify three structural factors which lead to a better understanding of these
waves: the first is linked to the modifications in regulatory and legal context, the second
to the redefinition of organizational control (which is closely linked to the agency
theory), and the third to the revolutionary changes made in the debt market.
(C) Corporate restructuring strategies other than M&As
There are many other corporate restructuring strategies not covered by this thesis (see
table 3). According to Gaughan (1999), the term “corporate restructuring” commonly
refers to asset sell-offs, even though it also incorporates other forms such as work
restructuring (e.g., corporate downsizing) and financial restructuring (modifications in
the firm’s capital structure, such as adding debt and thereby increasing financial
leverage). There are several forms of sell-offs. Some result in a pure reorganization of
assets (e.g., divestitures), while others result in new ownership relationships (e.g., spin-
offs, split-ups, equity carve-outs, split-offs).
Table 3. Corporate restructuring types other than M&As
Corporate restructurings
Work restr. Financial restr. Other restr. Asset sell-offs
Downsizing Leveraged Management Divestiture Spin-off Split-up Equity Split-off
buyout buyout carve-out
Divestitures, which represent the sale of a segment of a firm to an outside party, have
played a major role in M&As; during the 1990s, approximately 40% of acquisitions
represented divestitures by other companies (Weston et al., 1998). Therefore, these
authors suggest that, like M&As in general, the explanations for divestitures are multiple
and diverse (see appendix 6). In a spin-off, a company distributes on a pro rata basis all
the shares it owns in a division of the firm that is sold off to its own shareholders. Spin-
offs are distinguished from equity carve-outs, which refer to the sale of an equity
interest in a subsidiary to outsiders in order to bring in a cash infusion to the parent firm,
without loss of control.
Other types of sell-offs include split-offs, transactions in which some parent company
shareholders exchange the shares they hold in the company for shares in a subsidiary,
and split-ups, wherein the parent company spins off all of its component parts to its
shareholders and ceases to exist (Weston et al., 1998; Gaughan, 1999). Finally, this thesis
also excludes such operations as leveraged buyout, a going-private transaction where
the buyer uses debt to finance the acquisition of a company, and management buyout,
where the buyer of the formerly public firm is the manager of the entity.
2.1.2 Executive compensation
In this subsection we proceed as follows. We start by describing the whole set of

executive compensation components which includes: base salary, short-term incentives,
long-term incentives, benefits, and perquisites. Then, we talk about the main executive
compensation determinants identified in the literature.
(A) Executive compensation components
There are so many forms of executive compensation, and they are so complex, that a
detailed analysis of CEO compensation contracts is appealing. When talking about
compensation the tendency is to think principally about pecuniary rewards, disregarding
that these extrinsic forms of compensation yield an incomplete picture of the utility
executives derive from their work. It is worth mentioning that CEOs receive various non-
financial rewards, which may have greater meaning for the manager than monetary
income (Finkelstein and Hambrick, 1988). Some intrinsic types of compensation such as
power, challenge, prestige, and honorific symbols might compete with financial rewards
in their importance to executives. However, since the main focus of this thesis constitutes
the financial compensation of managers, only this form of compensation is further

analyzed.
Table 4. Executive compensation nature and components

compensation Fixed Base salary
compensation
components
Direct
Extrinsic Variable Short-term incentives
nature
(financial) Long-term incentives
Indirect Benefits, perquisites
Intrinsic Prestige, challenge, power, honorific symbols
Financial compensation refers to all forms of rewards going to managers and arising
from their employment, and it has two main elements (see table 4). There are direct
financial payments such as salaries, incentives, and bonuses; and there are indirect
payments in the form of financial benefits, like life insurance and vacations, and some
perquisites (Dessler et al., 1999). In turn, there are essentially two ways to assign direct
financial payments to executives: on a fixed basis, such as base salary which
fundamentally remains unchanged during the first years of a CEO’s employment period
(excepting some inflation adjustments), and on variable basis, where the rewards are tied
to some performance indicators and vary in accordance with changes registered in these
indicators in the short and/or long run. Thus, although there is substantial heterogeneity
in compensation practices across firms, industries, and countries, there are five basic
components of most executive compensation packages that are constantly identified in
the specialized literature: (i) base salary, (ii) short-term incentives or bonuses, (iii) long-
term incentives, (iv) benefits, and (v) perquisites (Dessler et al., 1999; Milkovich and
Newman, 2002).
(i) Base salary
Base salary is the cornerstone of CEO compensation, since it is on this element that the
others are layered (Dessler et al., 1999). Indeed, target bonuses are expressed as a
percentage of base salary, and option grants as a multiple of base salary, while the
benefits and perquisites are normally awarded in some proportion to the executive’s base
pay (Murphy, 1998). The base salary represents a fixed amount of money the company is
committed to disburse annually to its managers, whatever the circumstances.
Base salaries for CEOs are typically determined through competitive benchmarking,
based on general industry salary surveys and supplemented by detailed analyses of
selected industry or market peers (Murphy, 1998). To facilitate the comparisons between
firms, these surveys typically adjust for company size (which is measured using firm
revenues or market capitalization), either through size groupings or through simple log-
linear regressions of logarithm of salary on logarithm of size. However, it should be
underlined that these size adjustments in the survey instruments have two important
implications for understanding the trends in CEO pay. On the one hand, they reinforce
the traditionally observed relation between compensation and firm size (Rosen, 1992).
On the other hand, size adjustments do not contain relevant criteria for predicting
managers’ earning levels, such as age, experience, education, performance, skill
requirements, and job complexity − criteria which are more reflected in discretionary
adjustments in the target percentiles made by compensation committees (Murphy, 1998).
Throughout the last three decades, the relative importance of base salary in executives’
total compensation has diminished significantly – from 60% to 40% and 38% − during
the 1970s, 80s and the beginning of the 1990s respectively (Milkovich and Newman,
2002). As reported by Murphy (1998), the same tendency was observed between 1992
and 1996, in different industries. Thus, for firms operating in the mining and
manufacturing industries, the CEO’s base salary represented 38% of total compensation
in 1992, while it decreased to 27% in 1996. The comparable figures for financial services
are 35% and 21%; for utilities − 56% and 40%; and for other industries − 41% and 28%.
Gomez-Mejia et al. (1995) suggest that this declining weight of base salaries in total pay
could be explained by the combination of three factors. First, the ever increasing
proportion of variable components in executive compensation contacts, such as bonuses
and especially long-term incentives, undermine the relative significance of the base
wage. For example, the 2002 third highest-paid American CEO, Irwin M. Jacobs at
Qualcomm, received US$63.3 million in total compensation, including US$61.4 million
from exercising options and a base salary of only US$950,000 (Lavelle, 2003)
representing 1.5% of his total compensation.
Second, the decrease in inflation rates over time made the justification of substantial
increases in executives’ base salaries more difficult for compensation committees. Third,
the wave of restructuring and rationalization of business activities, frequently resulting in
flattening of organizational structures, called for the implementation of pay systems more
adapted to the new firms’ configurations. Indeed, in companies with few hierarchical
levels there is less need to create pay differences that mirror the status distinctions, but
much more need for knowledge- and competency-based pay. Therefore, broadbanding,
which often radically reduces the number of grades in the firm (Rynes and Gerhart,
2000), was largely adopted as a system for determining the executives’ base salary,
living thus more space for recognition of CEO’s competencies, performance and
experience. In this context, the general increase in executive total pay is largely due to
the variable elements of compensation, which are generally more complex to evaluate
but are more credible in the eyes of public and shareholders (Gélinas, 2001).
(ii) Short-term incentives
Short-term incentives are designed to reward managers for attaining short-term goals and
objectives within a given period, normally not exceeding one year (Dessler et al., 1999).
Annual bonus plans are the most popular short-term incentives (over 80% of Canadian
firms have such plans,) which aim to motivate short-term performance of managers and
are tied to company profitability. Unlike base salaries, which rarely decline with reduced
performance, short-term incentive bonuses can easily result in an increase or decrease of
25% or more in total pay relative to the previous year (Dessler et al., 1999). In other
words, as reported by Henderson (1997), when some major corporations have had a good
year, short-term bonuses have ranged from 50% to ten or more times the base salary, by
recognizing some kind of financial indicators (e.g., an increase in the value of stock or an
improvement in economic indicators, such as a return on equity).
Short-term incentives can take on a variety of forms. Gomez-Mejia et al. (1995) identify
three types of short-term incentives. 1) Goal driven incentive is a bonus based on the
attainment of some previously specified financial or accounting standards. 2) Formula-
driven arrangements, where the bonus grants are conditional to the simultaneous
achievement of multiple objectives, attempt to reduce the risk that managers will
concentrate on implementing exclusively those objectives which are more profitable to
themselves. 3) Discretionary bonuses are not based on any specific performance
measures and are granted to executives in an informal manner, according to the perceived
attainment of global organizational results.
In his article on executive compensation, Murphy (1998) offers a systematic description

of bonus plans based on the most comprehensive data on annual incentive plans
available. He proposes a categorization of executive bonus plans in terms of three basic
components: performance measures, performance standards, and the structure of the
pay-performance relation (see table 5). Under a typical plan, no bonus is paid until a
threshold performance is achieved, a target bonus is paid for attaining the performance
standard, and there is typically a cap on bonuses paid. The range between threshold and
cap is labeled the “incentive zone”, where the incremental improvements in performance
correspond to incremental improvements in bonuses.
Table 5. Categorization of executive short-term incentive plans
Executive bonus plans

Performance measures Performance standards Pay-for-performance structures
- financial measures (e.g., net/ - budget standards - 80/120 payout plan
pre-tax income, EVA) - prior-year standards - modified sum-of-targets approach
- non-financial measures (e.g., - discretionary standards - formula-based plan
operational/strategic objectives - peer group standards - discretionary plan
- timeless standards
- cost of capital standards
Murphy (1998) finds that less than half of the companies studied use a single
performance measure in their incentive plan, while most firms use two or more
measures. In some cases, the multiple measures are additive, and in others, multiplicative
– in which the bonus paid on one performance measure might be increased or
diminished, depending on the realization of another measure. Companies use a variety of

financial and non-financial performance measures in their annual bonus plans. Among
financial measures, there is at least one measure of accounting profits including
revenues, net income, pre-tax income, operating profits, or economic value added (EVA).
Among the most common non-financial measures used are individual performance,
customer satisfaction, and operational and/or strategic objectives.
Then, for each accounting-based performance measure, a specific performance

standard is determined among a large variety of possible standards. Budget standards
include plans based on performance measured against the company’s annual budget
goals. Prior-years standards include plans based on year-to-year growth or
improvement, while discretionary standards refer to plans where the performance targets
are set subjectively by the board of directors following a review of the company’s
business plan. Peer group standards are defined as performance indices measured
relative to other firms in the industry, while timeless standards are relative to a fixed
standard. Finally, the cost of capital standards include performance standards based on
the company’s cost of capital.
Regarding the pay-for-performance structures, Murphy (1998) suggests that payouts

from bonus plans are determined according to different methods. Overall, 38% of sample
firms he examined used a 80/120 payout plan, where the bonus is paid when
performance is inscribed within the limits ranging from 80% to 120% of the performance
standard. The next most common type of plan, used by 31% of companies, is the
modified sum-of-targets approach, where the sum of target bonuses assigned to
individual participants defines a target bonus pool, which is modified, at the year-end, up
or down depending on whether actual performance exceeds or falls short of the
performance standard. The two remaining payout methods include the formula-based
plan, where the bonus pool is based on a combination of target bonuses and individual
performance, and the discretionary plan, where the board determines the magnitude of
the firm’s bonus pool, according to a subjective assessment of organizational or
individual performance based on a variety of financial and non-financial criteria.
(iii) Long-term incentives
Long-term incentives are aimed at rewarding top management for the firm’s long-term
prosperity, such as increased market share or value of company stock, by incorporating a
long-term perspective into executive decisions. If only a short-term criteria are used, a
CEO could concentrate exclusively on strategies which might be profitable in the short-
run (e.g., reducing maintenance costs), but which do not contribute to the firm’s long-
term success. Therefore, long-term incentives, which are possibly the major wealth-
building opportunity available to CEOs (Henderson, 1997), are primarily intended to
encourage managers to stay with the firm in the long-run and to contribute to its long-
term growth, by giving them the possibility to acquire stock or some combination of
money and stock that relates to the improved firm performance (Dessler et al., 1999).
Analyzing trends in the use of different components of CEO compensation during the
last three decades, Milkovich and Newman (2002) remark that American companies are
placing more and more emphasis on long-term incentives at the expense of base salary.
Thus, the relative importance of long-term incentives in executive’s total compensation
has increased significantly from 15% to 34% and 68% during the 70s, 80s and the
beginning of 90s, respectively. This trend experienced the same evolution in the
Canadian context where, in the middle of 90s, 40% of firms listed on Toronto Stock
Exchange used long-term plans in order to reward their managers. This figure adds up to
70% for companies accounting more than CAN$1 billion in terms of net revenue
(Rakatosoa, 1999).
Table 6. Structure of executive long-term incentives

Components Characteristics
Stock purchase plans Require an investment by the
Stock option plans recipient
Restricted stock awards Require little/no investment
Phantom stock plans Do not require investment on the
Stock appreciation rights part of the recipient
Performance units Involve some kind of goal
Long-term performance bonuses attainment
There are various types of long-term incentives which can be grouped according to their
principal common features (see table 6). One of the most comprehensive descriptions of
these incentives is provided by Thériault and St-Onge (2000), who classify them in three
different categories: market-based, accounting-based, and hybrid long-term incentives. In
the market-based category, such incentives as stock option plans, stock purchase plans,
and restricted stock awards could be used to compensate executives in relation with the
value of shares exchanged on the capital market. As Henderson (1997) affirms, the
beautiful part of these incentives is that the cost of the award to the recipient may range
from zero to the fair-market value of the stock at the time of the award or at the time of
the exercise of an option. The accounting-based category refers to those programs which
provide for rewards based on financial measures and includes stock appreciation rights,
phantom stock, performance units, and long-term performance bonuses (Thériault and St-
Onge, 2000). The hybrid long-term category represents a combination of the first two
categories, wherein the incentives offered to managers are based on both the market
value and financial results of the company.
Stock purchase plans
According to Thériault and St-Onge (2000), the stock purchase plan gives the manager
the possibility to acquire, under advantageous conditions, a certain number of the
company’s shares during a short-term period (one to two months) at a specific price
(fixed or variable), and according to a particular type of payment (fixed or variable).
Stock purchase plans grant the recipients immediate ownership, enabling them to pay
capital gains on all appreciation (Henderson, 1997). Under this plan, even though
executives provide some kind of direct payment in return for these shares, they often do
not have to pay the full market price. There are many incentives companies may offer to
stimulate managers’ share purchases including some type of subsidized or discounted
price, or a matching program where for each acquired share the firm provides an
additional share (Long, 1998). Sometimes, the company can offer an amount between
25% and 85% of the share’s purchase price, depending on the firm’s profits, while when
the given percentage is not linked to company’s profitability the plan takes the form of an
employee savings program (Thériault and St-Onge, 2000). In some cases, the firm pays
the brokerage fees; in others, it provides low or no-interest loans for stock acquisitions.
In many cases, the convenience of payroll deduction is offered (Long, 1998).
The most remarkable fact about stock ownership programs is that they are increasingly
addressed to all company employees. In the U.S., a study conducted by the National
Association of Stock Plan Professionals showed that more than 55% of 380 sample-firms
with between 110 and 110,000 employees had a certain type of broad-based or non-
selective stock purchase plan (Sussman, 1997). While a survey made by the Conference
Board of Canada in 1995 reported that about 54% of Canadian firms had a stock
purchase plan, and that more than 80% of them were broad-based plans (Isaac, 1995).
Stock option plans
Stock options are contracts which give the recipient the right to purchase a specific
number of shares of company stock at a pre-specified exercise price during a given
period – generally from 5 to 10 years (St-Onge et al., 1996). Stock options differ from
stock purchase plans in that they are offered over a longer time period (Henderson,
1997). Assuming that the price of the stock will go up rather than go down over the
coming years, the executive hopes to profit by buying shares in the future but at today’s
price. Since company’s stock price depends to a significant extent on such considerations
as general economic conditions and investor sentiment, but is also affected relative to the
overall stock market by the firm’s profitability and growth, to the extent the executive
can influence these factors the stock option can be an incentive (Dessler et al., 1999).
Providing a direct link between executive rewards and share-price appreciation, Murphy
(1998) notes that stock options incentives do not mimic the incentives from stock
ownership, for several reasons. First, since options reward only the increases in the stock
price and not total shareholder returns (which include dividends), CEOs holding options
have incentives to avoid dividends and to favor share repurchases. Second, since the
value of options increases with stock-price volatility, managers holding options have
incentives to engage in riskier investments. Finally, options lose incentive value once the
stock price drops sufficiently below the exercise price, which the executive has little
chance of exercising (Murphy, 1998).
The parameters of an option contract suggest a multitude of design possibilities (see

table 7). Interestingly, some types, such as replacement and reload options, frequently
contribute to the diminishment of performance-compensation link (Thériault and St-
Onge, 2000). Replacement options are previously granted options that are reissued at
lower exercise prices following large declines in the firm’s stock price (Murphy, 1998).
The main feature of this practice is that it does not contribute to the alignment of interests
of options’ holders and shareholders, because it attributes to the former an amount of
money as the latter experiences a loss (Thériault and St-Onge, 2000). Reload options are
new options granted to replace shares used to finance the exercise of existing options.
While these additional options incite CEOs’ ownership behavior, their granting has
nothing to do with performance. Another practice is to guarantee to the holders the best
price possible for their options. If a holder didn’t exercise his option when the stock price
was at its highest level, the firm reimburses the loss.
Table 7. Some types of executive stock option plans
Executive stock options

Replacement options Reload options Another option design
- previous options - new options to replace - to guarantee the best
reissued at lower price the exercised ones price for the options
The stock option is by far the most popular long-term incentive plan in North America
(Dessler et al., 1999), representing between 110% and 300% of executives’ annual
salaries (St-Onge et al., 2001). During the early 1990s, stock options replaced base
salaries as the single largest component of CEO pay in all sectors, except utilities
(Murphy, 1998). Option grants in manufacturing firms from the U.S. swelled from 27%
of total pay in 1992 to 36% in 1996. The comparable figures for the financial services
sector are 26% and 33%, and 22% and 36% for other industries; while for utilities they
represent only 11% and 17% (Murphy, 1998). However, large American banks have
recently scaled back their use of options: in 2003 they comprised 32% of CEOs’ total
compensation, down from 45% in 2002 (Conrad, 2004).
In Canada, 94% of the 300 largest firms listed on the Toronto Stock Exchange have stock
option plans, representing one third of the total pay package received by managers, at a
value of about CAN$600,000 (Thériault and St-Onge, 2000). To understand this

prevalence of stock option plans, St-Onge et al. (2001) conducted 18 semi-structured
interviews with senior executives from medium and large-size Canadian companies.
Their responses indicate that the use of stock options is multifaceted, being designed not
only as an alignment tool of shareholders’ and managers’ interests, but also as a means of
attracting and retaining key personnel, and facilitating the payment of high levels of
executive compensation.
Restricted stock awards
With restricted stock plans, shares are usually awarded to the executive without cost or at
a reduced price, but with certain restrictions that are imposed by the employer
(Milkovich and Newman, 2002). The grants are restricted in the sense that shares thus
obtained may not be sold before a specified date or during a certain period of time –
usually four or five years. However, once the restricted stock is granted, its holders can
start receiving dividends and exercising their voting right (Thériault and St-Onge, 2000).
Furthermore, as Murphy (1998) observes, there are other possible advantages of
restricted stock awards, such as favorable tax treatment (CEOs do not pay taxes on the
shares until the restrictions expire) and accounting treatment (the cost is amortized over
the vesting period and recorded as the grant-date stock price even if prices have increased
since the grant). Finally, Thériault and St-Onge (2000) conclude that while aligning the
interests of persons concerned to those of shareholders, this type of incentive can
encourage the holders to stay in the company or incite some new comers (compensating
the loss of certain advantages, such as retirement advantages).
According to Murphy (1998), approximately 28% of the S&P 500 firms granted
restricted stock to their managers in 1996. These awards accounted for an average of
6.1% of total pay and 22% of compensation for executives receiving grants. As for the
industry specificity, Kole (1997) shows that restricted stock grants are more common in
R&D-intensive firms – chemicals, machinery, and producer companies – rather than in
non-R&D firms – metals, and food and consumer enterprises. For instance, in the
American banking industry, the use of restricted stock increased to 23% of CEO pay
packages in 2003, up from 12% in 2002 (Conrad, 2004). In Canada, restricted stock
awards are also quite common, especially in companies constituting the stock index TSE
150, where around 33% of executives’ total compensation (an amount equal to
CAN$600,000) is based on this kind of long-term incentive (Thériault and St-Onge,
2000).
Phantom stock plans
Milkovich and Newman (2002) define phantom stock plans as cash or stock awards
which are determined by the increase in stock price at a fixed future date. These plans
gained popularity in the 1970s, the major reason for their development being the
difficulty some managers had in obtaining the funds necessary to exercise stock options
(Henderson, 1997). Under these plans CEOs are granted not shares, but a certain number
of artificial units that are similar to shares of company stock. Then, at some future time,
managers receive, usually in cash, an amount which is equal to the price of the stock at
the time, or the appreciated value of the “phantom” stock they owned from the time of
the grant to that predetermined future date (Long, 1998). The value of the units may also
include the value of all declared dividends earned by the equivalent shares during the
waiting period (Henderson, 1997). The actual payment value is established by some
predetermined formula that relates to either the market or some non-market value of the
stock, and then is taxed as ordinary income. As opposed to the stock options, the
phantom stock plans do not require investment on the recipient’s part and there is no
minimum obligatory retention period imposed on CEOs (Thériault and St-Onge, 2000).
Stock appreciation rights
Stock appreciation rights (SAR) are defined as cash or stock awards determined by an
increase in stock price during any time chosen by the executive in the option period,
starting from the time of the option grant to the previously determined time of option
expiration (Milkovich and Newman, 2002). These rights are usually combined with stock
options, but they do not require executive financing. Thus, the managers are first
allocated a number of shares of company stock, although they do not actually receive any
shares. If these shares appreciate over time within a given period, executives will receive
as a bonus the number of actual company shares that this appreciation will purchase, or
their equivalent in cash, or even some combination of stock and cash (Long, 1998). Then,
the gains thus obtained by executives are taxed as ordinary income.
Table 8. Some types of executive stock appreciation rights
Executive stock appreciation rights

Tandem plan Additive SAR Freestanding SAR
- plan which is linked in - provides award rights in - similar to phantom
tandem with option plan addition to stock option stock plan
Henderson (1997) provides a more comprehensive classification of stock appreciation

rights, suggesting that they may take three distinct forms: tandem plan, additive and
freestanding SAR (see table 8). An SAR linked in tandem with a stock option plan
allows the recipient to receive a stipulated payment in cash, stock, or a combination of
the two in lieu of all or a designated part of the option. The amount of the option covered
by the SAR may be a certain percentage of the option shares. The SAR value may be
limited either to the appreciated value of the stock option, or to the full value of the stock
at the time the option can be exercised (and all dividends earned since the option grant).
An additive SAR provides award rights in addition to a stock option, since when an
option is exercised, the recipient receives an SAR payment in addition to the stock grant.
The freestanding SAR is similar to the previously described phantom stock plan.
Performance units
The need to tie executive compensation more clearly to the firm’s performance, while
building in more risk, has led many companies to institute performance plans (Dessler et
al., 1999). Performance units are plans which permit to receive units whose payment is
contingent on financial performance measured against objectives set at the beginning of a
multi-year period – generally from three to five years (St-Onge et al., 1996). These grants
are similar to annual bonuses, but the measurement period is longer than one year.
Dessler et al. (1999) specify, however, that in Canada, the performance unit plans are
usually limited to three years due to income tax rules. Thus, as in a phantom stock plan,
the grant is made in a number of artificial units, with each unit usually being the
equivalent of one share of company stock. The actual dollar payout of these units is equal
to the value of the stock at some future date, indicated in the plan (Henderson, 1997).
In other words, although the unit awards are made at the time of the grant, they will
acquire a cash value only at the end of a stipulated period and only upon the meeting of
assigned financial goals. For example, the value of 1,000 performance units, each unit
equivalent to US$60, will be paid to the manager in three years if the company succeeds
in maintaining a 15% growth rate in earnings per share. If this rate is approximately 14%,
only 90% of the value of 1,000 units will be paid; if it is 11% or less, no payment will be
awarded to the units holders (Thériault and St-Onge, 2000). These plans do not require
executive financing, and the gains obtained by executives are taxed as ordinary income
(Milkovich and Newman, 2002).
Long-term performance bonuses
Long-term performance bonuses usually reserved for top management are more likely to
be used in companies whose shares are not traded on the Stock Exchange, and in public
organizations (Thériault and St-Onge, 2000). Long-term performance bonuses are
administered in much the same as the short-term bonus awards given to corporate
executives. The major difference is that the receipt of the award (cash payment) is
usually three years or more into the future. The size of the bonus is based on multi-year
achievement of the predetermined financial targets – such as a three-year cycle average
increase in the value of stock, return on equity, earnings per share, or sales growth
(Henderson, 1997). It is common to find that both short- and long-term bonus plans
include three levels of performance: 1) threshold, 2) target, and 3) maximum.
Achievement of a particular level of performance will determine the size of a bonus that
may vary from 5% to 75% of the executive’s salary.
(iv) Benefits
Benefits are defined as all the indirect financial payments an executive receives for
continuing his/her employment with the company (Dessler et al., 1999). There are two
special benefits for top executives that are commonly identified in the literature as
Supplemental executive retirement plans (SERP) and a “Key executive” life

insurance policy (Milkovich and Newman, 2002; Chingos, 2004). As an extra level of
retirement saving for executives, supplemental retirement plans (or “top hat” plans) are
designed to help offset contribution caps of regular retirement plans, which prevent
highly paid executives from saving the same percentage of their income for retirement as
do other employees. The supplemental executive retirement plans are fairly common in
Canada. According to a 2002 survey by Morneau Sobeco, a pension consultancy in
Toronto, about 71% of companies with revenue between CAN$500 million and CAN$1
billion had some form of SERP (Gray, 2004). SERP are widely popular in the U.S.
context, where 92% of banks, 98% of manufacturing companies and 5% of high-tech
firms under study offer some kind of SERP to their executives (Conrad, 2004).
Unlike employees’ pension plans that are tightly regulated and funded and whose costs
are disclosed to shareholders, executive pension plans are unregulated, largely unfunded,
and their costs generally lumped in with the company’s overall pension expenses (Gray,
2004). Initially, executive pension benefits were calculated by multiplying a portion of
their base pay by their number of years at the company. However, executives have fast
developed different ways to increase the value of their pensions (Labrèche, 2004). Over
the past decade, top executives have seen the costs and payouts of their pension benefits
increase substantially. Probably the best-known example is Richard Grasso, former CEO
of the New York Stock Exchange, who by the date of his resignation had accumulated
nearly US$190 million in pension and severance benefits (Gray, 2004).
Many executive pension plans have begun taking bonus and other compensation into
consideration; CEOs are even able to choose the best bonus years to be included in their
pensionable earnings. For instance, the Canadian Imperial Bank of Commerce retirement
plan takes into consideration the average of the best five years of bonuses during a ten-
year period prior to retirement. Furthermore, some plans allow CEOs to credit
themselves with additional years of service. Thus, while Michael Sabia, CEO of BCE
Inc., had worked for BCE and its affiliated companies less than five years, he was
credited with 21.5 years of service towards his BCE pension (Labrèche, 2004). Other
executives, such as Derek Burney, CEO of CAE Inc., and Robert Prichard, CEO of
Torstar, earned 1.5 years of credit toward their pensions for every actual year they work.
The difficulty with these plans is that they are usually an unfunded liability, which helps
to obscure the true cost of the plan. Companies often fund plans only when the executive
retires or when there is a change in firm control, and then it can come as a shock to
shareholders. For many firms the costs of these plans represent a threatening
multimillion-dollar liability for unsuspecting shareholders. In Canada, because of this,
Manulife Financial Corp. and the Association for the Protection of Quebec Savers and
Investors, started to submit shareholder proposals calling for either more disclosure on
executive pensions or for such pension plans to be cancelled entirely. In the United
States, AK Steel, Delta Airlines, and Verizon Communications have all removed pension
gains (or losses) from their calculation of CEO pay (Gray, 2004).
In the case of a “key executive” life insurance policy, the company pays the premiums,
and when the executive retires, he gets the cash value of the policy – including the
appreciation – in a lump sum. If he dies before retiring, the company gets back what it
has contributed in premiums, and the spouse receives the remainder of the settlement. In
the United States, these benefits have become less attractive as a result of the Tax Reform
Act of 1986, because the interest on premium loans over US$50,000 per executive is no
longer deductible (Milkovich and Newman, 2002).
(v) Perquisites
Since perquisites are usually only given to a select number of CEOs in order to satisfy
several types of managerial needs, Milkovich and Newman (2002) suppose that
prerequisites have the same genesis as the expression “rank has its privileges”.
Executive perquisites can range from the substantial to the almost insignificant (see table
9). Dessler et al. (1999) classify the multitude of popular perks as follows: management
loans, which typically enable CEOs to use their stock options; severance packages or
salary guarantees, also known as golden parachutes; financial counseling, in order to
handle top management investment programs; and relocation benefits, often including
subsidized mortgages, the purchase of the manager’s current house, and payment for the
actual move. Milkovich and Newman (2002) categorize the potpourri of other executive
perks into three groups: internal, external and personal perks. Internal perks include
luxury offices, special parking, and executive dining rooms. External perks may come
as company cars, planes and yachts, payments of hotel, club memberships, or physical
fitness programs. Personal perks refer to legal services, tax assistance, free home
repairs, personal use of company property, and subsidized children’s education.
Table 9. Some types of executive perquisites

Executive perquisites
Management Severance Financial Relocation Other
loans packages counseling benefits perquisites
- enable the use - golden - handle managers’ - subsidized - luxury offices, special
of stock options parachutes investments mortgages parking, hotel payments
One important executive perquisite usually included in the severance package of CEO
pay is the golden parachute, not without interest for the purposes of this research. A
severance package specifies awards to be provided if the manager is required to leave the
organization under specific circumstances. According to Subramaniam (2001), a golden
parachute “is a contract between a firm and its manager that provides for compensation
to be paid to the manager following any change in control, even such as an acquisition,
and payable in the event that the manager leaves the employ of the surviving entity for
any reason, be it voluntary or involuntary”. These clauses also aim to make the
transaction of change in control less attractive by being more expensive for bidders
(Henderson, 1997). The terms of golden parachute contracts vary significantly, but
generally they guarantee the contract holder a continuation of base pay and bonus for one
to five years, the immediate vesting of any stock options, insurance coverage, availability
of outplacement assistance and acceleration of pension plan qualifications (Patterson,
2002).
Golden parachutes are offered exclusively to top executives; generally no more than five
key officials receive such protection. Silver [tin] parachutes, however, are offered to a
wider range of managers, including middle management, and are sometimes designed to
protect all company employees (Henderson, 1997). Golden parachutes are conditional to
a change in control (Lambert and Larcker, 1985) and they do not require shareholder
approval to be adopted, but necessitate only an agreement between the manager and the
board of directors (Subramaniam, 2001).
Introduced in the late 1970s, golden parachutes for target CEOs are common on the U.S.
M&A scene (Henderson, 1997), but have only recently emerged in a number of
European takeovers (Raghavan and Sims, 2000). In Canada, Cooke and Duffy (2002)
report that in 2001, 43% of firms had change-in-control agreements, representing a
modest percentage when compared to 71% of American companies. In the United States,
this type of severance contract became increasingly used, even by the largest Fortune 500
firms, as M&A activity intensified in the 1980s. Some extreme cases of golden
parachutes have created a stir among the public and often viewed as “rewards for failure”
(Weston et al., 1998).
As a result, a new tax law, the Deficit Reduction Act, has been passed by the U.S.
Congress in 1984 in order to impose some restrictions on golden parachutes use. This
law provides for a 20% income tax on parachute payments in excess of three times the
recipient’s average annual compensation over the five years prior to takeover
(Henderson, 1997). However, in order to offset these limits American employers have
started to use “gross-ups,” whereby money is added to cover income and excise taxes on
the payout, enriching significantly the value of a golden parachute agreement. According
to the Mercer study of 350 large U.S. industrial and service companies, 64% of firms had
change-in-control arrangements including at least one executive “gross-up” in 1998,
compared to 46% in 1994 (Patterson, 2002).
(B) Executive compensation determinants
Given the huge amounts distributed at top management levels, questions about executive
pay abound. In the specialized literature, notwithstanding a unanimous recognition of
their complexity, there is substantial disagreement regarding the determinants of
executive pay. Finkelstein and Hambrick (1988, 1989) establish two major sets of CEO
compensation determinants (see table 10): 1) market factors such as firms size,
corporate performance, corporate complexity and human capital (e.g., manager’s
investment in education and experience), and 2) political factors, such as CEO power
(e.g., managerial tenure, CEO holdings or a CEO’s family holdings) and board vigilance
(e.g., stock owned by outside directors).
Table 10. Executive compensation determinants
Types of compensable factors

Market factors Political factors
Firm Corporate Firm Human CEO power Board
size Performance complexity capital Structural Ownership Expert Prestige power
Concerning political factors, it should be noted that both CEO power and board vigilance
are developed later in greater detail by the same authors. First, Finkelstein (1992) alone
analyzes a top manager’s power factor as being composed of four different kinds of
power: structural, ownership, expert, and prestige. Then, Hambrick and Finkelstein
(1995) together incorporate the board vigilance factor into the study of the moderating
effect of the ownership structure of the firm on CEO compensation raises. In two
contrasting ownership configurations, the externally-controlled firm (in which a non-
manager owns a significant portion of the stock and shareholder vigilance is presumed to
be greater) and the management-controlled firm (which has no single major
shareholder), the decisions regarding executive compensation are expected to differ. The
study findings show that executives in externally-controlled companies are penalized
sharply for performance declines, compared to their homologues from management-
controlled firms where CEO compensation is essentially based on corporate size and
competitors’ compensation practices (Hambrick and Finkelstein, 1995). Other authors
focus more attention on the substantive nature of managers’ jobs, arguing that executives
are paid for the level of information processing that their jobs demand (Henderson and
Fredrickson, 1996).
Taking into consideration all these compensable factors, the most contested question
addressed by scholars is whether managerial compensation is more closely tied to
organizational performance or company size. The findings are mixed, but generally
suggest that CEOs are rewarded to some extent for both. Actually, early studies in this
field (Cosh, 1975) tend to focus on linking executive compensation solely to firms’ size
and profits. Subsequent studies by American researchers (Murphy, 1986) and British
ones (Main, 1991) find that both human capital and firm-specific factors also impact on
managerial compensation. These researches thereby imply that earlier models may have
suffered from an omitted variable problem, which may have exaggerated the size and
significance of company performance and size variables (Keasey and Wright, 1997).
As far as the sensitivity of CEO compensation to performance is concerned, different

paths have been taken to investigate this relationship. Some studies concentrate on
documenting the direct link between these two variables (Coughlan and Schmidt, 1985;
Murphy, 1985; Leonard, 1990); others examine whether executives are terminated
following poor performance (Weisbach, 1988; Warner et al., 1988) or whether managers
are paid for performance measured relative to the market or industry (Antle and Smith,
1986; Gibbons and Murphy, 1990).
On the one hand, Murphy (1985) analyses compensation and performance data for 501
executives, representing 73 Fortune 500 corporations. Using time-series analysis over an
18-year period and primarily raw rates of stock returns as the performance measures, he
finds that managerial compensation is strongly related to firm performance. Coughlan
and Schmidt (1985), using firms listed in Forbes annual reports of executive
compensation, analyze CEO compensation and abnormal stock returns for 249
corporations over a three-year performance period. They find a significant positive
relationship between the rates of change in CEO compensation and stock price
performance, even after controlling for growth in sales. Taken together, these two studies
provide evidence that the rewards given to top managers are consistent with rewards to
shareholders. It is important to note that in each study, a substantial portion of the
managerial compensation variance remains unexplained.
On the other hand, Benston (1985) examines performance and compensation data for 29
conglomerates over a six-year period. Using raw stock returns as a performance measure,
he finds no association between performance and managers’ direct compensation. He

notes that direct pay represents a small portion of CEOs’ wealth, which mainly consists
of executives’ holdings of company stock and stock options. Kerr and Bettis (1987)
analyze rewards and performance data for 78 companies obtained from Business Week’s
annual surveys of executive compensation. Using the cumulative abnormal stock returns
as their performance measure, they find no significant relationship between CEO
compensation and performance, even after controlling for overall market movements.
Furthermore, Gomez-Mejia et al. (1987) study data for 71 large manufacturing firms
listed in Business Week’s annual surveys of executive compensation for the years 1979-
1982. They use multiple indices, consisting of both accounting and stock price measures,
to develop factors for firm performance. Their regression models include a dummy
variable to distinguish between owner-controlled and management-controlled firms. The
authors report that performance is a significant predictor of managerial compensation for
owner-controlled companies, while size is a significant predictor for management-
controlled firms. These findings indicate that the degree of external ownership may
influence the association between CEO compensation, firm performance, and
organization size. Finally, in a study of firms from the leisure industry, Finkelstein and
Hambrick (1989) find their performance measures, that is, raw rates of return on equity,
to be significantly and positively related to total cash compensation. In their salary/bonus
breakdown analysis they conclude that return on equity is unrelated to salary but
significantly and positively related to bonus.
It can be clearly stated that results concerning the studies on CEO pay to performance
sensitivity vary widely. Methodological research-related aspects, such as sample
selection (Finkelstein and Hambrick, 1989), measurement of managerial pay (Murphy,
1985) and measurement of firm performance (Jensen and Murphy, 1990) all play a role.
Most empirical studies confirm the existence of a positive relationship between
performance and executive pay (Murphy, 1985; Agrawal et al., 1991; Barkema and
Gomez-Mejia, 1998), highlighting, however, that performance is only a weak
explanatory factor of managerial compensation. Coughlan and Schmidt (1985), for
instance, are able to explain only 5.4% of the variation in CEO compensation when this
variable is regressed on cumulative abnormal stock returns. Whereas in Jensen and

Murphy’s (1990) study, changes in shareholders wealth explain only 2% of managerial
cash pay and 3% of the CEO total compensation.
The traditional wisdom is that a top manager’s compensation is closely tied to the size of
the firm (Fox, 1983; Baker et al., 1988). The main reasons for this association are the
greater expertise demands on CEOs, greater corporate ability to pay, and the fact that
there are more hierarchical levels in large firms than in small ones (Fox, 1983). A global
analysis of executive pay studies shows that firm size accounts for 54% of differences in
pay, while various performance indicators explain only 5% of pay variance (Tosi et al.,
1998). What comes out from this brief overview is that managerial compensation cannot
be fully explained by any single or even a few variables and, therefore, greater
understanding and clarification of CEO pay determinants is needed through a wide array
of theoretical, measurement and analytic advances (Hambrick and Finkelstein, 1995).
2.2 THEORETICAL PERSPECTIVES
The following section is organized as follows. We start by highlighting the importance of

an interdisciplinary and complementary approach to research in our field of investigation.
Since CEO compensation in the M&A context is directly related to the study of corporate
governance issues, we continue by describing this term and its mechanisms, and by
adding to the current debate surrounding governance issues in North American
corporations. Then, we concentrate explicitly on the in-depth descriptions of different
theoretical perspectives – economic, political, and institutional – in order to explain how
each of these approaches has been used in the study of CEO compensation within the
market for corporate control. We conclude by synthesizing the insights of each of these
theoretical perspectives with respect to our research questions.
¾ Importance of an integrative theoretical framework
Little research has been done so far to explore the strategic role that CEO compensation
plays in the initiation and conduct of M&A operations, either in their success or in their
failure. Moreover, executive compensation in the context of change in corporate control

has traditionally been studied from an economic standpoint, based on the agency theory,
while the explanatory power of other theoretical perspectives was ignored. The failure of
empirical studies to consistently demonstrate a significant compensation-performance
sensibility has increasingly led researchers to investigate the non-economic and more
behaviorally oriented explanations of executive compensation (Jensen and Murphy,
1990). Having recourse to political, social, institutional, and sometimes psychological
perspectives, it is possible to shed more light on many important features of CEO
compensation landscape that have long been seen as puzzling by investigators working
within the economic model.
Magnan et al. (1998) suggest that executive compensation has three implications for the
members of the board of directors: economic, political, and symbolic. On an economic
level, CEO compensation is used as an instrument for creating value for shareholders by
the improvement of organizational performance. On a political level, managerial
compensation is a political transaction resulting from a power struggle between managers
and the board members whose real monitoring power is thus undermined (Finkelstein
and Hambrick, 1989). On a symbolic level, there is need to justify decisions concerning
executive pay in such a way that they appear fair and effective in the eyes of all
organizational stakeholders (Zajac and Westphal, 1995). Even though the multiplicity of
theoretical perspectives increases the complexity of analysis, the relative importance of
each of them in understanding the CEO compensation could not be neglected. Therefore,
the approach privileged in this thesis builds upon the explanatory power of each of these
perspectives through the development of an integrative conceptual framework.
¾ Study of corporate governance issues
Building from the agency theory’s basic premise of separation of ownership and control,
Pfeffer and Salancik (1978) and Walsh and Seward (1990) argue that arising conflicts of
interest create the need for effective corporate governance. Core et al.’s (1999) study
results move in the same direction, suggesting that firms with weaker governance
structures have greater agency problems and perform worse, while CEOs of these firms
receive greater compensation. Despite the considerable debate about what actually
constitutes corporate governance, it is generally agreed that it is concerned with correctly
motivating executive behavior towards improving corporate performance via the direct
supervision of management, and ensuring the accountability of executives to
shareholders and other stakeholders (Keasey and Wright, 1997).
Economists have identified a number of governance mechanisms, both internal and

external for aligning CEOs’ interests with those of investors, such as: executive
compensation contracts, equity ownership by managers, equity ownership by institutional
shareholders and other blockholders, outside members on the board of directors, and
external takeovers (Mayers et al., 1997). Shleifer and Vishny (1997) further specify that a
solution to self-interested behavior of managers is to grant them highly contingent, long-
term incentive contracts which can take a variety of forms, including share ownership,
stock options, or a threat of dismissal if firm performance is low.
Internal governance occurs when a board of directors, as representative of the company’s

shareholders, actively seeks to protect their interests (Chatterjee et al., 2003). An active
board monitors top managers and influences their decisions through counseling activities
as well as determining executive compensation (Johnson et al., 1996). For instance, some
researchers try to show in their empirical studies that the composition of their
compensation packages affects CEOs business decisions and the performance of their
firms (Gaver and Gaver, 1995; Core et al., 1999), and that changes in CEO pay structure
could become a lever of organizational strategic change (Simons, 1995). In extreme
situations, a board of directors could terminate the contract of a top manager and select a
new one. However, not all boards are independent enough from the CEO to effectively
govern top management activities, resulting in management entrenchment (Walsh and
Seward, 1990). For instance, executives may use their de facto power to pack their
boards with friends (Bainbridge, 1993), thus undermining the effectiveness of boards’
controlling and monitoring functions. Williamson (1984) hypothesizes that the board of
directors’ composition depends on the relative importance of alternate governance
mechanisms.
If internal governance is inadequate, external governance mechanisms can play an

important role in realigning the interests of managers and investors, when sufficient
equity is owned by outside, non-management shareholders (Chatterjee et al., 2003).
Fama and Jensen (1983) argue that outside directors perform an important monitoring
function. According to Denis et al. (1997), external governance occurs partially as a
result of the market for corporate control, when large or well-organized external
shareholders influence directors to replace incompetent managers, or as they organize to
elect a new board of directors. They explain that an active market means that if publicly
held assets are being managed in a sub-optimal fashion, the market will work to correct
this problem by transferring control to the hands of more effective CEOs. Therefore,
from a broad economic or societal perspective, corporate takeovers may also be viewed
as an external governance mechanism, since they result in transfer of ownership – and
management control – to a market participant that believes the acquired assets will
become more valuable under different management.
Recently, specific events in the corporate world have led to attempts to regulate
management and board behavior. In the U.S., for instance, the Sarbanes-Oxley Act,
enacted on July 30, 2002, created a number of constraints with respect to companies with
reporting obligations under the Federal Securities Laws of the United States (Chingos,
2004). In Canada, for the third consecutive year, the corporate governance and board
composition ranking is revealed in the Report on business extensive annual review of
Canadian corporate governance practices (McFarland and Church, 2004). Manulife
Financial Corp. finished in the top spot among companies on the S&P/TSX composite
index, scoring 95 out of 100 in the 2004 survey. There was a three-way tie for second
place, with the Bank of Montreal, Finning International Inc., and Suncor Energy Inc. all
scoring 94. The report states that these best-ranked companies have made significant
shifts in the makeup of their boards and key committees. They have appointed far more
independent directors, have held private meetings with no management present, and have
separated the jobs of CEO and board chairman. Some of the 218 surveyed companies,
however, continue to make few improvements to their corporate governance practices,
despite shareholder interest and market pressures. 11% of the companies included in the
report failed to receive a passing grade for their corporate governance, scoring lower than
50 marks out of 100. The three lowest ranked companies are CoolBrands International
Inc., Sino-Forest Corp. and Hummingbird Ltd., scoring 28, 38, and 38 respectively, out
of 100. Finally, none of the surveyed companies reported that they are finished with
governance reforms, and many say there is still plenty of work to be done, particularly in
the area of executive compensation and improved disclosure.
2.2.1 Agency theory
In the following subsections we, first, describe the agency theory and its basic postulates,
second, explain how this theory has been used in prior research on CEO compensation in
the M&A context, and third, report the agency implications for our research.
• General description
Stemming from the assumption of separation of ownership and control (Berle and
Means, 1932; Shleifer and Vishny, 1997), the agency theory refers to the relationship in
which one party, called the principals (shareholders), delegates the decision-making
responsibility of managing the firm to another, called the agents (executives), who are
expected to use their specialized skills and company’s resources to generate the highest
possible returns for the principals (Tosi et Gomez-Mejia, 1994). Eisenhardt (1989)
suggests that the agency theory is based on three main postulates. The first postulate
states that there is a potential divergence of interest between the principal and the agent
able to pursue conflicting objectives. Indeed, shareholders seek to increase their wealth
and the firm’s value, while CEOs can take advantage of their positions as decision-
makers for self-serving purposes at the expense of equity holders. Jensen and Meckling
(1976) develop a number of aspects of the divergence of interests between principals and
their agents. For example, in a case of executives’ partial ownership (e.g., when
managers own only a fraction of the total common stock of the company), CEOs have a
greater propensity to work less vigorously and to acquire more perquisites than if they
had to bear all of the costs.
The second postulate describes the existence of an information asymmetry which makes
it difficult for the equity holders to monitor the activities of executives. Principals have
limited information concerning the decisions and actions of agents and their personal
preferences and intentions, and are unaware of the complexity of the CEO’s activities,
making situations of capital dispersal problematic (Gomez-Mejia and Balkin, 1992),
(Eisenhardt, 1989). The third postulate states that managers, as rational agents, seek to
maximize their utility and have, at the same time, an aversion to risk and effort (El
Akremi et al., 2001). Principals may be risk neutral, because they can diversify their risk
across firms and other investments. Further, Byrd et al. (1998) present another postulate
as potential source of agency conflicts – temporal horizon – where executives are
characterized as having a shorter decision-making horizon than shareholders, since they
are primarily interested in the cash flows and earnings. Shareholders, on the other hand,
are interested most in the future value of cash flows and earnings in the very long-term.
As far as shareholders are concerned, by delegating decision-making power to

executives, they also assume the risk of an adverse selection of CEOs, and a moral risk of
possible opportunism on the managers’ part (El Akremi et al., 2001). Since in a context
of conflict of interest, the fundamental preoccupation of the principal becomes the
control of the agent’s actions (Tosi et al., 2000), agency problems arise because contracts
between the two parties in a situation of exchange cannot be written and enforced
without costs. Weston et al. (1998) suggest that, in order to deal with agency problems,
some expenditures, called agency costs, are required, including: 1) costs of structuring a
set of contracts between the parties involved, 2) costs of monitoring the behavior of
agents by principals, 3) costs of bonding to guarantee that executives will make optimal
decisions or that shareholders will be compensated for the consequences of sub-optimal
decisions, 4) residual loss, that is, the welfare loss experienced by principals, arising
from the divergence between agents’ actions and those necessary to maximize principals’
welfare.
In other words, the agency theory focuses on both the organizational and market
mechanisms that facilitate conflict of interest management between capital owners and
top executives. Some authors propose two groups of solutions (or a complex balance
between the two) for shareholders to efficiently control agency problems: 1) develop a
system of supervision to constrain agents’ actions so that these serve the interests of the
owners (Fama, 1980); 2) adopt compensation programs based on performance measures
which thus protect the shareholders’ wealth (Gomez-Mejia and Wiseman, 1997; Tosi et
al., 2000). Each group further includes different kinds of control mechanisms. For
example, in their paper, Agrawal and Knoeber (1996) identify seven mechanisms to
control agency problems – shareholdings of managers, shareholding of institutions,
shareholding of large blockholders, use of outside directors, debt financing, the
managerial labor market, and the market for corporate control.
Gaughan (1999) notes that when profits fall too much, shareholders may opt for a
managers’ removal, but this process often requires a proxy fight that may be very costly
with uncertain results. More usual is for owners to delegate control functions to a board
of directors (who retains approval rights on important matters such as mergers and new
stock issues) when designing monitoring systems to keep track of management’s
performance (Fama and Jensen, 1983). When the board is composed of several members
of management, it is also possible to ensure the directors fulfill their policing mission by
increasing the percentage of outside directors and/or to have recourse to concentrated
shareholdings by institutions and blockholders (Gaughan, 1999). Agrawal and Knoeber
(1996) argue that the use of dept financing can improve firm performance by inducing
monitoring by lenders. The labor market for managers may also mitigate the agency
problem, since it can motivate executives to attend to their reputations among
prospective employers by setting wage levels based on performance reputation (Fama,
1980). Weston et al. (1998) further sustain that the stock market gives rise to an external
monitoring device, because stock prices summarize the implications of decisions made
by managers. Low stock prices exert pressure on executives to change their behavior and
to stay in line with shareholders’ interests (Fama and Jensen, 1983).
In spite of all these mechanisms, Eisenhardt (1989) contends that supervision of CEO
behavior becomes very costly and difficult in situations where their activities are non-
programmable and the information asymmetry is extensive. Furthermore, in the case of
large corporations with widely dispersed ownership, individual owners do not have
sufficient incentive to expand the substantial resources required to monitor the behavior
of managers. Given the difficulty of directly observing an executive’s effort or behavior,
Jensen and Meckling (1976) suggest that monitoring primarily occur through the use of
pay practices. Compensation arrangements may also reduce agency costs, linking
rewards to performance and creating profit incentives for managers through such devises
as bonuses and stock options (Fama, 1980). Therefore, establishing a pay package which
permits a better alignment of shareholders’ and managers’ interests becomes the most
visible control mechanism, particularly because it induces a form of self-control by the
agent (Tosi and Gomez-Mejia, 1994; Bloom and Milkovich, 1998).
Shareholders then expect directors to impose compensation conditions on executives that

would incite them to improve organizational performance and contribute to
organizational strategic objectives. This perspective is used in almost all studies that
analyze the performance-CEO compensation link (Jensen and Murphy, 1990; Tosi and
Gomez-Mejia, 1994; Magnan and St-Onge, 1997). According to Jensen and Murphy
(1990), the choice of an optimal pay program means creating a right balance between
basic pay linked to behavior, and incentive pay linked to performance. This needs to be
accomplished without transferring too much risk through the variability of the
compensation paid to the CEO. Gomez-Mejia and Balkin (1992) suggest that linking
agents’ rewards with principals’ interests supposes: 1) splitting compensation into fixed
and variable pay, 2) having recourse to different forms of short-term and long-term
incentives, 3) fixing performance objectives which determine the attribution of
incentives, 4) choosing measures of performance, such as share value, profits, and
profitability indicators.
The control that owners exert by means of compensation presumes that such components
as performance-contingent, variable, at risk, and long-term compensation permit the
alignment of shareholders’ interests with those of managers (El Akremi et al., 2001).
Performance-contingent compensation, also called “compensation-performance”
sensitivity, is based on a reinforcement of the link between CEO compensation and firm
profitability (Gomez-Mejia and Wiseman, 1997). Variable compensation, besides
strengthening contingency with performance, also diversifies short-term and long-term
incentives, which could motivate the agent to act in the interests of the principals
(Gomez-Mejia and Balkin, 1992). It also permits part of the risk to be transferred to the
manager’s charge, obliging him to take responsibility for the consequences of his actions
and to minimize the decisions which are detrimental for shareholders’ enrichment (Tosi
et al., 2000; Wiseman and Gomez-Mejia, 1998). Appealing to the long-term incentives
seeks to reinforce the elements of uncertainty in compensation, lengthen CEOs’ decision-
making horizon, and increase their identification with company’s durability. This would
then effectively limit opportunistic behavior and non-optimal use of firm resources
(Jensen and Meckling, 1976; Zajac and Westphal, 1995).
• Agency problems in the context of the market for corporate control
Cotter and Zenner (1994) suggest that corporate takeovers present a unique opportunity
to investigate the conflicts of interests examined by Jensen and Meckling (1976). When
all previously described organizational mechanisms are not sufficient to control agency
problems, the market for corporate takeovers can provide an external control device of
last resort (Jensen, 1998). This kind of control is regarded by many scholars as the single
most important external factor in encouraging good managerial performance (Dahya et
Powell, 1998). This theory was first articulated by Manne (1965), who views takeovers
as useful mechanisms in disciplining managers into acting in the interest of shareholders.
A takeover threat is greater when a firm’s performance falls down either because of
inefficiency or because of agency problems, allowing for a transfer of control of the
decision processes from the target to the prospective new management teams. This
shareholder wealth maximization theory is also linked to the improved management
hypothesis, whereby mergers are motivated by a belief that the bidder’s management can
better manage the target’s resources, the value of which would rise under its control
(Gaughan, 1999).
In contrast to this view – that mergers occur as a solution to control agency problems –
some authors consider takeovers as manifestations of agency problems of inefficient,
external investments by key officials (Weston et al., 1998). The central assumption of
this managerial welfare theory, which was first developed by Mueller (1969), is that
executive compensation is primarily a function of firm size. The significantly positive

relationship between executive compensation and organization size provides top
management with an incentive for growth which may be achieved through merger or
acquisition transactions (Schmidt and Fowler, 1990). From this perspective, even if there
is no expected gain for shareholders, CEOs will engage in such activity purely for self-
serving purposes (Gaughan, 1999). According to Combs and Skill (2003), managers may
gain a number of advantages by tying their compensation to company size. First, they
have considerable control over the size of the firm through their control of takeover
activity (Kroll et al., 1990). Second, because firm size is less variable than performance,
managers can reduce variety in their pay (Kroll et al., 1993). Third, CEOs can more
easily justify higher salaries and other perks, since larger firms imply more hierarchical
levels and greater complexity of top executive jobs (Gomez-Mejia et al., 1987).
Several empirical papers examine the validity of these two competing hypotheses for the
change in corporate control context for both target and bidding firms. Interestingly, the
alignment of executive interests with those of shareholders differs according to the type
of incentives offered to managers. From the target firm standpoint, CEOs’ reactions to a
takeover bid generally depend on the tradeoff between their potential gains, resulting
from equity ownership in the firm combined with golden parachute payments, and their
possible losses of compensation, perquisites, and control (Cotter and Zenner, 1994). For
instance, Morck et al. (1988a) examine the relationship between a firm’s value measured
by Tobin’s q (the market value of all of a company’s securities divided by the
replacement costs of all assets) as the dependant variable, and managerial ownership, in a
sample of 371 of Fortune 500 firms in 1980. They found that Tobin’s q rises as CEOs’
shareholding stakes rise, and that it applies to ownership percentages between 0% and
5% as well as to those above 25%. This positive relationship for all ownership
percentages, except the intermediate range of 5% to 25%, provides some support for the
shareholder wealth maximization hypothesis, since higher shareholding implies greater
entrenchment which in turn, is shown to be associated with higher securities values.
In other words, Morck et al. (1988a) find a negative relationship between the proportion
of stock held by target management and the likelihood of takeover resistance. This result
suggests that the ownership component of target executive compensation is an effective

tool for interests’ alignment. This finding, implying greater takeover acceptance when
executive ownership stakes in the firm are higher, was initially provided by a Walkling
and Long (1984) study. It was then supported by subsequent investigations by D’Aveni
and Kesner (1993), Shivdasani (1993), Song and Walkling (1993), Buchholtz and
Ribbens (1994), Cotter and Zenner (1994), and Houle (2003).
In fact, in the context of change in control, the most important source of agency conflicts
resides in the imposition of high levels of risks to target managers (Jensen and Ruback,
1983; Buchholtz and Ribbens, 1994). In the case of 253 firms which were takeover
targets between 1958 and 1984, Martin and McConnell (1991) find a departure rate for
target CEOs of 60.9% in the two-year period following the first bid. They also argue that
hostile takeovers are disciplinary in nature, since they tend to be directed at poorly
performing firms (as measured by stock market performance). Similar turnover rates are
confirmed by Agrawal and Walkling (1994) for a larger sample of 800 tender offers,
where it is reported that target managers who lose their jobs generally fail to find another
senior executive position within three years after the bid. Dahya and Powell (1998) show
that hostile takeovers are associated with a greater degree of both CEO and top team
forced departure rates compared to that of friendly deals.
Management may also try to take various actions to prevent hostile changes in control of
their company. Dann and DeAngelo (1988) show that when CEOs respond to a hostile
takeover bid with defensive changes in asset and ownership structure, shareholder wealth
declines by about 2% or 3%. A study by Malatesta and Walking (1988a) considered the
effect the announcement of the adoption of a poison pill would have on 132 firms
between 1982 and 1986. They find that poison pills defenses appear to reduce
stockholder wealth, since firms that have adopted these measures generate significant
abnormal negative stock returns (−0.915%) during a two-day window around the
announcement date. These results provide some support for the managerial entrenchment
hypothesis, in that the companies adopting pills tend to have below-average financial
performance. However, managers of these firms are less affected by the decrease in stock
prices, given that it also found that CEOs hold significantly less company stock
themselves. These statistically significant stock price declines are confirmed by Ryngaert
(1988) in the study of 380 firms that adopted poison pills between 1982 and 1986.
Given the increasing adoption of golden parachutes, scholars have sought to understand
whether these agreements resolve agency problems. Many authors (Knoeber, 1986;
Jensen, 1988) view golden parachutes as optimal contracting devices that help reduce
conflicts of interests between managers and shareholders. Golden parachutes would then
make CEOs more willing to support takeover offers beneficial to the shareholders
(Weston et al., 1998). Gaughan (1999) believes that properly constructed golden
parachutes would leave management with sufficient incentives to negotiate higher
takeover premiums for shareholders, thus increasing shareholder wealth. The empirical
study by Lambert and Larcker (1985) provides some support for the alignment
hypothesis, since they find that stock prices rise 3% when companies announce the
adoption of golden parachutes. Machlin et al.’s (1993) study provides a basis for the
market’s positive stock price response. In a sample of 146 firms that adopted golden
parachutes between 1975 and 1988, the authors show that the number of multiple
takeover offers is significantly greater for firms with golden parachutes, the size of which
has been found to be positively related to the magnitude of the takeover premium.
However, increasing numbers of researchers (Shleifer and Vishny, 1988; Evans et al.,
1997; Subramaniam 2001) provide empirical evidence for an alternative view of golden
parachutes. That is, that golden parachutes serve only to entrench management at the
expense of shareholders. Using a sample of 169 successful acquisitions of NYSE targets
from 1981 through 1989, Subramaniam (2001) documents that the bidder excess return is
independent of the existence of golden parachutes in targets, which do not of themselves,
reduce managerial resistance to takeovers. This finding is also consistent with data
collected by Subramaniam and Daley (2000), who find that targets with golden
parachutes over-invest in physical capital in the years preceding a change in control,
while the investment activity of the combined entity in the post-takeover period reverses
that over-investment. Trying to conciliate the two competing views, Jensen (1988)
suggests that a golden parachute has to reach its optimal value in order to be able to
incite executives to undertake shareholder wealth maximization strategies.
As far as bidding companies are concerned, several authors inquire how the
compensation of acquiring managers relates to the stock price effects of acquisition
outcomes. In a highly uncertain context, where it is difficult for the board of directors to
orient managerial decisions, the recourse to variable compensation is more important. As
an active market for corporate control increases the uncertainty, the variable components
of executive compensation of acquiring companies should also increase significantly
during the period which precedes the takeover (Lambert and Larcker, 1987), in the same
way as it was suggested for target firms (Agrawal et Walking, 1994; Agrawal et
Knoeber, 1998). For example, Shleifer and Vishny (1988) presume that equity based
executive compensation “should have the effect of reducing the non-value-maximizing
behavior of [acquiring] managers”. Indeed, Lewellen et al. (1985), Tehranian et al.
(1987), and Khorana and Zenner (1998) report that bidding managers tend to act more in
the interests of shareholders when they have large personal stockholding in the firm.
Further, Tehranian et al. (1987), and Travlos and Waegelein (1992) find that the best
mechanism to resolve the horizon problem involves rewarding managers with long-term
performance plans.
• Conclusions and agency implications for our research
The agency theory explains how relationships can best be organized when one party
(principal) determines what another party (agent) performs. Agency problems are created
when shareholders hire managers that are motivated by self-interest and, therefore, do not
always make decisions that are in the shareholders’ best interests. The four potential
sources of agency conflicts are: divergence of interests, differential aversion to risk and
effort, information asymmetry, and differential time horizon. Since executives are
characterized as self-interest seekers, such mechanisms as incentive compensation and
board monitoring are seen as safeguards against managerial opportunism.
Agency theory insights could be useful with respect to our research question (1.3) which
examines the effects of firm performance on the relationship between the magnitude of
acquisition premium or method of payment and executive compensation of acquiring
firms. For instance, in light of the agency theory, when compensation plans are designed
in such a way as to align CEOs’ and shareholders’ interests, it is legitimate to expect a

decreased firm performance to have a negative effect on managerial compensation.
Therefore, when applying agency insights it is possible to hypothesize that the magnitude
of acquisition premium or equity-financed transactions will have an indirect and negative
impact on executive compensation as deteriorated firm performance (due to a high
control premium or stock-financed transactions) translates into a reduction in CEO
compensation levels.
Similarly, agency theory could also be insightful concerning our research question (2.2),
which analyses the effects of the magnitude of acquisition premium or method of
payment on the frequency of the specific attributes of executive compensation contracts
adoption. Since the payment of higher control premia and equity-financed acquisitions
have negative wealth effects for stockholders, the directors’ decision not to provide
CEOs with compensation protection clauses (e.g., employment agreement, termination
clause, change of control clause) when they undertake such deals can be seen as an
effective tool to align CEOs and shareholders’ interests.
2.2.2 Political perspective
We describe, hereinafter, the basic postulates of the political perspective, explain how
this theoretical approach has been used in the literature studying CEO compensation in
the context of changes in corporate control, and highlight the political implications for
our research.
Organization theorists have long recognized the significance of political processes and
power in organizational action (Pfeffer and Salancik, 1978; Pfeffer, 1981). They have
paved the way to the political perspective that has increasingly gained importance in the
literature on executive compensation (Zajac et Westphal, 1997; Magnan et al., 1998,
2000). Assuming that managers are self-interested rationalists preferring to be paid more
than less, this approach suggests that CEOs’ capacity to obtain more compensation is
limited by their power. Lambert et al. (1993) define managerial power as “the ability of
managers to influence or exert their will or desires on the remuneration decisions made
by the board of directors, or perhaps the compensation committee of the board”. This
way, executive pay practices constitute the result of a complex interplay between CEO
power and board power, where each part is characterized by self-maximizing behavior.
Seen from a political perspective, an important limitation of the agency theory is that it
does not integrate the power games between the actors of company management and
those of firm control (Finkelstein and Hambrick, 1989; Westphal, 1998). According to
Jensen and Murphy (1990), it is the ignorance of political issues that could explain the
weak explanatory power of the principal-agent model in the analysis of the CEO
compensation-performance sensibility. Furthermore, the agency theory is based on an
assimilation of the interests of the shareholders and board members, where the latter
exert control over top executives and determine their compensation level, thus
representing and protecting the interests of the former. The political perspective calls into
question not only the similarity of interests of board members and shareholders but also
the real power of the board of directors in the choice of level and composition of
managerial compensation (Finkelstein and Hambrick, 1989).
At least two arguments are mobilized in the literature to question the congruence of
shareholders’ and board members’ interests. First, an existing internal political context in
companies can increase the dependence of board members on a management team, to
whom they are indebted for their nomination, their compensation, the granting of service
or business contracts with their firms (Magnan et al., 2000). Therefore, board members
can comply with executives’ preferences with regard to compensation and other
governance arrangements (Pfeffer, 1981). Second, as Westphal and Zajac (1997) argue,
decisions concerning managerial pay can be marked by norms of reciprocity, social
exchange and mutual support. Indeed, the importance of demographic homogeneity
between board members and executives in terms of social origin, education and career
path leads to business relations between the two (El Akremi et al., 2001). In other words,
social rules of elitist cohesion can induce board members to make decisions which
maximize managerial compensation and reduce links with firm performance.
Debate has raged over the past decade over the failures of corporate boards of directors
to meet their responsibilities of monitoring and controlling executive decision-making on
behalf of shareholders, calling for serious board reform (Westphal, 1998). These
corporate governance reforms are currently under way in both corporate America
(Chingos, 2004) and Canada (McFarland and Church, 2004). This is understandable
when the decision-making processes and procedures of the boards of directors are
considered to be fundamentally political, since they deal with the conflicting interests of
different actors, such as managers, shareholders and corporate stakeholders (Leighton
and Thain, 1997). Calling into question the real power of board members in terms of
CEO compensation-related matters is thus based on the existence of relations of power
and political agreements which can favor the interests of the executives to the detriment
of those of the shareholders.
The interplay between CEO power and board power is influenced by different structural
and demographic factors (Finkelstein and Hambrick, 1989; Finkelstein, 1992; Barkema
and Pennings, 1998). Recognizing the multidimensional nature of power, Finkelstein
(1992) identifies the following four power elements relevant to key executives: structural
power, ownership power, expert power and prestige power. Barkema and Pennings
(1998) categorize these various dimensions of managerial power in different groups,
suggesting that power is inferred from overt manifestations such as ownership structure
and covert sources such as CEOs’ social capital (see figure 4).
Figure 4. Sources of CEO-board power

CEO Power Board Power
Ownership structure: Board structure:
Overt power CEO shareholdings Inside/outside directors
CEO’s family holdings Majority shareholders
Demographic characteristics: Demographic characteristics:
Covert power CEO tenure, prestige Directors’ tenure, prestige
CEO expertise Directors’ experience
The most visible type of CEO power expected to affect compensation is the executives’
shareholdings in the firm, or ownership power (Perrow, 1970; Salancik and Pfeffer,
1980). A top manager who has significant personal equity holdings in a firm is likely to
be more powerful, being able to control not only operating decisions but board decisions
as well. Thus, managers with ownership power are in a position to determine their own
compensation level and structure (Finkelstein, 1992). Furthermore, as Finkelstein and
Hambrick (1989) suggest, executive power will also be an increasing function of the
holdings of other CEO family members, since a stronger family position in the firm
strengthens manager’s position too.
Another type of power – structural power – is brought by a manager’s formal position in

the corporation, where the hierarchical authority allows CEOs to manage and control the
behavior of their subordinates (Finkelstein, 1992). Since some important bases of power
require time to take effect, a CEO’s tenure with the firm may also be a particularly
relevant source of power, giving them greater opportunities to constitute the board of
directors of more loyal, sympathetic, and friendly appointees (Finkelstein and Hambrick,
1989; Westphal and Zajac, 1995). For example, external members nominated by the
CEO may be less willing to constrain the level of executive pay than board members who
are actively involved in the management of the firm (Lambert et al., 1993). Even when
changes in the board structure are made to increase its independence from management,
CEOs respond to this loss of the structural sources of their power by engaging in
ingratiation and persuasion behavior towards directors (Westphal, 1998). In this way,
influence behavior, which serves to offset the effect of greater board independence on
CEO compensation policy, actually represents another power source for executives. The
creation of a personal mystique or patriarchy, with the unquestioned obedience and
loyalty it tends to inspire, is likely to occur over time as a manager’s power becomes
institutionalized (Pfeffer, 1981).
The balance of power can be favorable to top executives who possess certain personal
and social characteristics, such as competence, membership in a network, and cultivation
of their roots in the firm by means of social status, experience and personal alliances
(Barkema and Pennings, 1988; Finkelstein and Hambrick, 1989). According to
Finkelstein’s classification (1992), these last sources of CEO power are called expert and
prestige power. Power tends to accrue when a top executive has a greater ability to cope
with environmental contingencies, particularly when a manager’s relevant expertise is in

an area of critical strategic importance to the organization. Finally, executives can also
amass power within an organization by using their personal prestige or status in the
institutional environment and among stakeholders (Finkelstein, 1992).
The interplay between managerial and board power also depends on the attributes of the
board of directors, such as the relative proportions of internal and external board
members, their autonomy, their length of service on the board, and other demographic
characteristics (Daily et al., 1998; Westphal, 1998). Gaughan (1999) defines the board of
directors as a “body of individuals who have been elected by the stockholders to oversee
the actions of management and to recommend actions to stockholders”. Many boards are
composed of the inside board, which is made up of members of management, and the
outside board, which refers to those directors who do not have direct managerial
responsibilities for the firm’s daily operations. Since the formal function of the board is
to represent the shareholders’ interests, board members can also create uncertainty for a
top management team. In this sense, considerable research has examined whether the
ratio of inside to outside directors diminishes board effectiveness in protecting the
interests of shareholders (Zajac and Westphal, 1997).
According to David et al. (1998), the balance of power turns unfavorable for managers
under structural board independence, thus improving the role of pay as a means of
control. For instance, boards composed of significant numbers of outside directors are
considered as having much more power to limit managerial discretion than those with a
significant number of inside directors who are subordinate to, and therefore dependent
on, the CEO (Westphal, 1998). Finkelstein and Hambrick (1989) go on to suggest that, in
some cases, the presence of majority shareholders and institutional investors on the board
influences managerial compensation in line with shareholders’ interests by suppressing
CEO compensation levels. In other cases, vigilant directors, in their own attempt to
induce managerial actions aimed at maximizing shareholder wealth, try to tightly link
executive pay to the firm’s performance and to increase CEOs’ long-term incentives.
Moreover, the power of the board members is also a function of other characteristics,
such as their professional and business experience, their tenure within the board, their
compensation, their status, or the level of information asymmetry (Westphal, 1998;

Magnan et al., 2000).
• Political perspective in the study of CEO compensation in the M&A context
The political perspective, applied to a M&A context, allows for a better understanding
and forecasting of managers’ decisions regarding M&As, as well as the underlying role
that executive compensation can play (Gomez-Mejia et al., 1987). From the target firms’
standpoint, according to the influence they can exert over a board of directors, target
executives are expected to improve their compensation conditions via the adoption of
golden parachute arrangements, and this before a transaction of change in control takes
place (Wade et al., 1990).
As far as acquiring firms are concerned, since M&A operations increase the size and
number of hierarchical levels in organizations, it is presumed that acquiring managers
make a greater personal investment in human capital (e.g., education, expertise and
experience) which in turn increases their power (Becker, 1964). A recent analysis by
Tosi et al. (2000) shows that more than 40% of variance in executive pay can be
explained by firm size, while organizational performance explains only 5% of this
variance. To the extent managers of acquiring companies can engage in influence
behavior towards directors, it is expected that executives managing the acquiring firms
improve significantly their compensation conditions, and that they modify the pay
components in such way as to maximize their enrichment (Schmidt and Fowler, 1990;
Bliss and Rosen, 2001).
Furthermore, in a sample of 171 acquisitions in the period between 1993 and 1998,
Wright et al. (2002) analyze the moderating role of board members’ monitoring in
executive compensation of acquiring firms. Their findings report that in firms with active
and vigilant monitors, changes in managerial rewards are influenced by returns of
acquisitions; while in companies where external monitoring is weak, increases in firm
size due to acquisitions explain CEO compensation changes.
• Conclusions and political implications for our research
Executive pay practices constitute the result of a complex political interplay between
CEO power and board power, both exhibiting self-maximizing behavior. The political
perspective calls into question the real power of the board of directors regarding the
choice of levels and the composition of CEO compensation. The existence of political
agreements can favor the interests of executives, to the detriment of the shareholders’
interests. The balance of power can be favorable to either party, depending on the
attributes of both the board of directors and executives – such as the board and ownership
structures and demographic characteristics.
Insights from the political perspective could be useful with respect to our research
question (1.4), which examines the moderating effects of structural board independence
on the relationships between: 1) the magnitude of acquisition premium or method of
payment and executive compensation of acquiring firms, and 2) the firm performance or
size and acquiring executives’ compensation. Since the balance of power under structural
board independence becomes unfavourable for managers, the independent board exerts
greater power of control over managers’ potential self-interested behaviour (such as
undertaking personally beneficial strategies that are not value maximizing for their firm).
Therefore, from the political standpoint, it is legitimate to expect that in companies with
more independent boards: 1) the negative association between higher control premia or
equity-financed acquisitions and CEO compensation will be reinforced, and 2) the
executive compensation will be tightly linked to firm performance rather than to
corporate size.
Explanations stemming from the political perspective can also be useful with regard to
our research question (2.2), which examines the incidences of the magnitude of
acquisition premium or method of payment on the frequency of the specific attributes of
executive compensation contracts adoption. Given that higher control premia and
acquisitions through share exchanges have negative wealth effects for acquiring
shareholders, the board members’ decision not to provide executives with compensation
protection clauses (e.g., employment agreement, termination clause, change of control
clause) when they undertake such deals is more likely when the board is powerful and
independent from management.
2.2.3 Institutional theory and symbolic assumptions
In the following subsections, we describe the institutional theory, explain how this
theoretical approach has been used in the literature studying CEO compensation in the
context of changes in corporate control, and highlight the institutional and symbolic
implications for our research.
Prior research in the field of executive compensation has given only limited
consideration to the implications of the institutional theory and symbolic perspective for
executive compensation issues (Westphal and Zajac, 1994). However, the potential
relevance of an institutional approach, together with its symbolic implications in
explaining CEO pay practices has been increasingly highlighted by many scholars
(Zucker, 1987; Zajac and Westphal, 1997; Magnan, 2000; Gélinas, 2001). The
institutional theory examines the role of social influence and pressures for social
conformity in shaping organizational actions (DiMaggio and Powell, 1983, 1991; Scott,
1987, 1995). From this perspective, firms operate within a social framework of norms,
values, and taken-for-granted assumptions about what constitutes appropriate or
acceptable economic behavior, and where conformity to social expectations contributes
to organizational success and survival (DiMaggio and Powell, 1983). Hence, since the
successful firms are considered those that gain support and legitimacy by conforming to
social pressures, organizations tend towards conformity with predominant norms,
traditions, and social influences in their internal and external environments – behavior
which leads to a greater homogeneity among firms in their structures and activities
(Oliver, 1997).
In DiMaggio and Powell’s (1983) terms, the concept that best captures the process of
organizational homogenization is called isomorphism, defined as a “constraining
process that forces one unit in a population to resemble other units that face the same set
of environmental conditions”. These authors identify three mechanisms through which
institutional isomorphic change occurs: 1) coercive, 2) mimetic, and 3) normative
isomorphism. Coercive isomorphism stems from the political influence and problems of
legitimacy for organizations confronted with a common legal environment and its
regulatory pressures. Mimetic isomorphism results from standard responses to
ambiguous goals and environmental symbolic uncertainty, which can occur either
unintentionally, through employee transfer among firms, or intentionally, through
consulting firms. Normative isomorphism is associated with the professionalization of
the members of an occupation in their collective struggle to define the conditions and
methods of their work, which permits the setting of a common matrix for shaping and
legitimizing their professional field.
Being applied to executive compensation, the institutional theory suggests that, in order
to legitimize one mode of corporate governance, companies act in accordance to the
pressures of institutional isomorphism (Zucker, 1987). In doing so, they tend to conform
to “accepted ways of doing business”, by reproducing the CEO pay practices in force in
other firms – simply because they are widespread or legitimized within organizations and
professional environments (Pfeffer, 1981). For instance, in a recent study made in
Canadian context, Gélinas (2001) shows that the process of CEO compensation strategies
development is based on pay practices legitimized by the market, and is therefore
explained through the institutional perspective. However, it should be noted that in some
cases, these isomorphic pressures induce firms to adopt similar practices over time
irrespective of their relative merits, and in other cases, they do not always promote their
interests in the most efficient way. The fact that most firms rely on compensation surveys
to align their compensation mixes on prevalent market practices is consistent with this
view (Pfeffer, 1994).
Furthermore, through an institutional perspective and given its symbolic implications,

executive pay issues could become more a question of impression management for the
board members (Magnan, 2000). The growing transparency of decisions with regard to
CEO compensation, particularly in the United States, Canada and United Kingdom exerts
more pressure on boards of directors to explain or justify their decisions, so that they will
be perceived by the stakeholders as both equitable in terms of internal coherence and
effective in terms of wealth creation for the shareholders. Since the logic of balance
between internal and external equity implies that managerial pay strategies must be
judged acceptable, desirable, legitimate, and credible by all stakeholders, including the
CEOs, the imitation of already accepted pay practices can support the impression of
equity more than innovation. For example, as shareholders find it perfectly legitimate to
tie executive pay to performance, given the CEO’s status as decision-maker, the board of
directors can propose the adoption of long-term incentive plans to encourage managers to
increase firm performance. This means is used to communicate symbolically to the
shareholders that the board members are concerned about their wealth in the long run
(Magnan, 2000).
In their research on the adoption and use of long-term incentive plans among 570 of the
largest U.S. corporations over two decades, Westphal and Zajac (1994) examine the
institutional and symbolic management forces driving this decoupling of substance and
symbolism in CEO compensation contracts. The first set of findings reports that a
manager’s relative power over the board is positively related to the likelihood of long-
term incentive plan adoption, but negatively associated with the likelihood and the extent
of its use. In light of these results, it appears that powerful executives seek to enhance
their reputation among external stakeholders by formally adopting mechanisms of
incentive alignment, while avoiding any compensation risk in their actual pay contracts.
As for the second set of results, it provides support for the institutionalization of long-
term incentive plans. More specifically, where early adopters are more likely to reduce
agency costs by aligning CEO pay substantively with shareholder returns; later adopters
incorporate these plans into their formal reward arrangements to symbolically enhance
the legitimacy of their compensation. In this sense, long-term incentive plans have
increasingly been adopted to address institutional demands rather than technical needs.
Since later adopters are also found to be less likely to make grants under newly adopted
plans, Westphal and Zajac (1994) conclude that a growing separation of substance and
symbolism occurs over time.
Managerial compensation strategies are based essentially on the management of

impressions that aim to prevent executive compensation from being questioned or
criticized (Magnan, 2000), and guard against the social dysfunction that can result from
unfair judgments (El Akremi et al., 2001). In this view, board members worry more
about the message they need to transmit than the real impact or effective use of a mode
or form of compensation (Westphal and Zajac, 1994). Examining the role of symbolic
management in CEO incentive pay, Zajac and Westphal (1995) investigate verbal
justifications in proxy statements for new long-term incentive plans. To anticipate
cynical interpretations of these plans, board members generally invoked credible
rationales, or “institutional logics,” to enhance their legitimacy. Content analysis by these
authors of long-term incentive plans justifications reveal two dominant rationales:
agency theory logic, which stresses the need to control management actions by aligning
their pay with returns (Jensen and Meckling, 1976) and strategic human resource logic,
which emphasizes the need to attract and retain scarce leadership talent by approving
competitive compensation contracts (Milkovich and Newman, 2002; Pfeffer, 1994).
• Institutional theory and symbolic implications in the study of executive

compensation in the M&A context
In the context of uncertainty brought about by the market for corporate control, it can be
assumed that the institutionalization of managerial compensation practices explains the
mergers and acquisitions waves in certain industries, leading firms to define themselves
as either acquirers or targets. With the institutional theory, boards of directors are more
likely to imitate the CEO pay practices of organizations that have already participated in
an operation of change in control, practices that are considered as legitimate and
acceptable by corporate stakeholders. In the case of target firms, since the stock market
reacts positively to the announcement of golden parachutes adoption (Lambert and
Larcker, 1987; Hall and Anderson, 1997), a significant increase of golden parachutes
payments to target executives is expected in the period preceding the change in control.
In the case of acquiring firms, a greater use of certain components of executive pay may
result not from increased executive effort but from an organization mimicking other
firms in its quest to gain legitimacy. In conditions of uncertainty brought by M&A

transactions, the recourse to variable components of executive pay may be considered
more acceptable and legitimate in the eyes of stakeholders. Since they permit the
alignment of CEO compensation with firm performance (Shleifer and Vishny, 1988;
Khorana and Zenner, 1998), it is likely that more acquiring companies will use variable
components of executive pay to reward their managers in the pre-acquisition period. In
the period immediately following the acquisition, an increased managerial compensation,
due particularly to its short-term compensation components (Schmidt and Fowler, 1990;
Firth, 1991) may be viewed as being an acceptable pay practice. Therefore, it is likely
that boards of directors will increasingly adopt similar managerial compensation
strategies in their firms.
• Conclusions and the institutional and symbolic implications for our research
Firms operate within a social framework of norms, values, and taken-for-granted

assumptions about what constitutes appropriate or acceptable economic behavior. The
institutional theory suggests that in order to legitimize one mode of corporate
governance, companies act in accordance with the pressures of institutional isomorphism,
reproducing those CEO compensation practices which are legitimized within
organizations and professional environments. By symbolic implication, executive
compensation issues become more a question of impression management for the board
members; and the imitation of accepted compensation practices, rather than innovation,
supports the impression of equity.
Institutional and symbolic insights could be useful with respect to our research question
(1.2), which examines the impacts of the magnitude of acquisition premium or method of
payment on executive compensation of acquiring firms. Managers are not always directly
rewarded for accruing their company’s shares value, but they are very well for the image
and impression their abilities make on the board. Since executives who manage to
negotiate and pay a lower acquisition premium can be perceived as more dedicated to the
company’s interests, they could extract additional compensation – other than that
rewarding actual improvement in firm performance. Similarly, CEOs can also get paid
for conducting complex operations that are expected to have a positive impact on firm
returns. From the institutional standpoint, in a given organizational setting where cash-
financed transactions are expected to positively affect firm performance, it is likely that
rewarding managers for just having completed cash-financed – rather than equity-
financed – acquisitions could be perceived as legitimate CEO compensation practice.
Similarly, institutional theory explanations can also be mobilized to answer our research
question (2.2), which examines the impacts of the magnitude of acquisition premium or
method of payment on the frequency of the specific attributes of executive compensation
contracts adoption. Since the payment of lower control premia and cash-financed
acquisitions are expected to have positive wealth effects for corporate stockholders, the
directors’ decision to provide CEOs with compensation protection arrangements (e.g.,
employment contract, termination clause, change of control clause) when they undertake
such deals will be easier to justify and to legitimatize in the eyes of shareholders.
2.2.4 Links among research questions and theoretical perspectives
The purpose of this section is to provide some comprehensive links among previously
presented theories and our research questions (see table 11). For this, it is worth recalling
the two sets of research questions of our investigation.
Questions related to the monetary magnitude of CEO compensation components are

the following. During the three years preceding and following the change in control
transaction,
compensation components of acquiring companies’ executives? Since this question is a
preliminary one aiming to set the stage for the following questions, there are no
associated theoretical assumptions.
payment on executive compensation following M&A transactions? This research question
could be answered using the institutional and symbolic perspectives insights (see
subsection 2.2.3 above).
acquiring firms? This research question could be examined by means of the agency
theory (see subsection 2.2.1 above).
and the executive compensation of acquiring companies? This research question could be
studied using the political perspective assumptions (see subsection 2.2.2 above).
Table 11. Links among research questions and theoretical perspectives
Question nature Research questions Theoretical perspectives

Monetary Question (1.1) No theoretical assumptions
magnitude of CEO Question (1.2) Institutional and symbolic perspectives
compensation Question (1.3) Agency theory
components Question (1.4) Political perspective
Specific attributes Question (2.1) No theoretical assumptions
of compensation Question (2.2) Agency, political and institutional theories
contracts Question (2.3) No theoretical assumptions
Questions concerning the specific attributes of executive compensation contracts are

the following. During the three years preceding and following the change in control
transaction,
contracts of acquiring firms? Since this question is mostly descriptive, there are no
associated theoretical postulates.

contracts adoption? Although there is no previous research on this topic, we argue,

however, that this question (particularly with respect to the three CEO compensation
protection provisions such as the adoption of employment contract, termination clause,
and change of control clause) could be more adequately answered by a combination of
agency, political, and institutional theories (see subsections 2.2.1, 2.2.2, and 2.2.3
above, respectively).

changing between the pre- and post-acquisition periods? Since the existing empirical
evidence concerning this question is very limited, our analysis of the frequency of
specific CEO compensation arrangements adoption is rather exploratory in nature. For
these reasons, there are no associated theoretical assumptions.
CHAPTER 3: MODEL DEVELOPMENT
The purpose of this chapter is twofold. First, we aim to provide a detailed literature
review related to our field of interest, paving the way for the development of our research
model. Second, we describe the conceptual framework of our study and the research
hypotheses developed based on the literature review.
3.1 LITERATURE REVIEW
This section provides insights on the various strands of research linking corporate M&A
activities with executive compensation. This literature review should not be considered
as a complete review of all of the vast M&A and compensation management literature;
the focus is rather on articles discussing the models which provide the foundations for
our analysis. It should instead be viewed as an exhaustive investigation of all previous
research done on managerial compensation of acquiring firms (given its limited number)
and as a selective examination of some of the articles judged relevant to the study of
acquirers’ CEO compensation both in the pre- and post-acquisition periods.
3.1.1 Review of studies analyzing CEO compensation of firms involved in M&A

transactions
Two strands of research can be identified in the literature that examines the relationship
between executive compensation of acquiring firms and M&A transactions. In the first
strand, executive compensation is seen as one among other determinants (e.g., corporate
governance practices, bidding and/or target company characteristics) of M&A
characteristics (e.g., acquisition success or failure measured by financial or operating
performance in the short and long run, control premium paid, method of payment, among
others). The main empirical papers that fall within this strand of investigation are causal
type studies (e.g. Morck et al. 1990; Hayward and Hambrick, 1997; Ghosh and Ruland,
1998; Datta et al. 2001, etc.). Although this strand of research does not represent the
route chosen in our investigation, it might be helpful to present some articles that study
the effects of bidding firms’ CEO compensation structure on M&A decisions and
performance. For more information on some determinants of the acquisition premium,

one of the independent variables used in this thesis, refer to appendix 7.
The second strand of research examines the effects of M&A characteristics on executive
compensation (or executive careers, turnover, promotions, external directorships) of
acquiring firms. Previous studies in this strand have mainly used an interrupted time
series and quasi-experimental design (Lambert and Larcker, 1987; Kroll et al., 1990;
Schmidt and Fowler, 1990; Firth, 1991; Kroll et al., 1997; Avery et al., 1998; Khorana
and Zenner, 1998; Bliss and Rosen, 2001; Wright et al., 2002). Since our study falls
within this strand of research, all of these studies are described in the following sections.
(A) Impacts of bidding firms’ executive compensation structure on M&A decisions

and performance
This subsection is dedicated to the review of studies that analyze the impacts of bidding
executive compensation structure on M&A decisions and performance, providing a
summary of current knowledge that partially sheds some light on our research questions
(1.1) and (2.1).
M&As are major, externally observable long-term investments important to the creation
of shareholder wealth. Some scholars argue that M&As represent an appropriate setting
to explore the relation between executive incentives and the efficiency of managerial
investment decisions. It has been stated in previous section of this thesis that managerial
compensation contracts can be used in order to effectively align the interests of CEOs
with those of investors. As a consequence, financial economists have recognized the
potential influence of executive pay on corporate takeover decisions. To explore this link,
several studies focus on the degree to which managers engage in strategic actions
depending on their compensation structure.
As shown in table 12, there is general support for the impact of executive compensation
strategies on strategic decisions of the firms. Previous studies on corporate takeovers
show that acquiring firms’ abnormal returns during the announcement day can be
explained by the percentage of stock owned by managers (Lewellen et al., 1985) and the
existence of long-term performance plans (Tehranian et al., 1987).
Table 12. Synthesis of studies analyzing the impacts of bidders’ executive

compensation structure and corporate merger or acquisition decisions
Bidders’ executive M&A’
Authors compensation structure abnormal Relationship
before M&A returns
Lewellen et al. (1985) Stock ownership Higher Positive
Existence of long-term Higher Positive
Tehranian et al. (1987) performance plans
Stock ownership Higher Positive
Travlos & Waegelein Existence of long-term Higher Positive
(1992) performance plans + stock
ownership
Khorana & Zenner (1998) Stock-based compensation Higher Positive
Bliss & Rosen (2001) Stock-based compensation N/A Negative
Datta et al. (2001) Stock option pay (EBC) Higher Positive
Sanders (2001) Stock ownership N/A Negative
Stock option pay N/A Positive
Lewellen, Loderer, and Rosenfeld (1985)
Lewellen et al. (1985) hypothesize that senior managers with large personal
stockholdings in their firms are less likely than CEOs who own a small percentage of the
firm stock to engage in mergers that reduce stockholder wealth. They find that various
measures of managers’ relative shareholdings are larger for bidding firms that experience
positive abnormal returns when they undertake major investment decisions, such as
mergers, than for firms that experience negative abnormal returns. According to the
authors, these results occur because CEOs with relatively small equity holdings in their
companies do not bear as high a cost from selecting an acquisition that decreases the
firm’s stock price as managers with substantial equity holdings.
Tehranian, Travlos, and Waegelein (1987)
The findings of Lewellen et al. (1985), which imply that management tend to act more in
the interest of shareholders if CEOs themselves have a large equity stake in the firm, are
generally confirmed in a study by Tehranian et al. (1987). The latter authors go further,
however, examining separately the relationship between the two different executive
compensation-related factors (managerial stockholdings and long-term performance
plans) and abnormal returns to bidding firms at takeover announcements. Their study
results provide evidence that bidding firms with long-term performance plans experience
higher abnormal returns at the announcement of merger proposals than firms without
these plans, and that after controlling for managerial stockholdings (Tehranian et al.,
1987).
Travlos and Waegelein (1992)
Travlos and Waegelein (1992) make their own contribution to research by investigating
jointly the association among method of payment, two CEO compensation factors
(managerial stockholding and long-term performance plans), and abnormal returns to
bidding firms at the announcement of mergers prior to 1980. Like Tehranian et al.
(1987), Travlos and Waegelein (1992) believe that the basic source of divergence
between management and stockholders’ interests is the horizon problem, which
presupposes that CEOs who are rewarded by a salary and a bonus may have a shorter
decision-making horizon than executives who are remunerated by a long-term
performance plan. If this assumption is true, it can be further hypothesized that short-
term bonus plans may motivate executives to select mergers that have positive effects on
earnings and cash flows in the short term, but negative earnings and cash flows in the
long term, and vice-versa when CEOs are paid with long-term performance plans. The
Travlos and Waegelein (1992) study findings confirm this hypothesis, indicating that
firms with long-term performance plans and high managerial stockholdings in cash offers
experience significantly higher abnormal returns at the announcement of a takeover
proposal than firms with small percentage of stock owned by CEOs and that do not have
long-term performance plans.
Khorana and Zenner (1998)
Khorana and Zenner (1998) also examine the role of managerial compensation in
corporate acquisition decisions. They find that stock-based compensation is significantly
higher for acquirers during periods of large acquisition activity. In explaining their
results, the authors argue that the purpose of granting executives incentive-based rewards
is to increase the alignment of manager and shareholder interests and improve the
likelihood of acquisition success.
Datta, Iskandar-Datta, and Raman (2001)
Datta et al. (2001) examine whether the insignificant or negative announcement stock
price response for bidding firms can be explained by an acquiring executive
compensation structure prior to the acquisition. Based on the assumption that providing
stock option incentives to managers of acquiring firms can have a large impact on
shareholder wealth, they find a strong positive relation between managerial equity-based
compensation (EBC) of bidding firms and stock-price performance around and after the
dates of acquisition announcements. After controlling for acquisition mode, means of
payment, managerial ownership and previous option grants, Datta et al. (2001) show that
compared to low EBC executives, managers with high EBC pay significantly lower
acquisition premiums, acquire targets that have higher growth opportunities, and engage
in acquisitions engendering larger increases in firm risk. It is further documented that in
the post-acquisition period, low EBC firms significantly underperform, which is not the
case with high EBC companies.
Bliss and Rosen (2001)
It has been shown so far that managers take their compensation structure into account
when taking strategic action. In their study of bank mergers from 1986-1995, Bliss and
Rosen (2001) also confirm that the form of compensation affects a manager’s decision to
acquire another firm. What is interesting to note here is that contrary to the findings in
previously cited studies, Bliss and Rosen (2001) find that banks where CEOs receive
more stock compensation are less likely to make acquisitions of other banks. The authors
interpret their results by saying that increasing stock-based wealth of managers raises
their concern about a negative stock price reaction to their acquisitions; since most
acquisitions have negative announcement effects, bank managers tend to make fewer
wealth-reducing mergers when they own more stock.
Sanders (2001)
Sanders (2001) examines the effects of stock ownership and stock option pay on firms’
acquisition and divestiture propensity. He shows that firms are more likely to engage in
acquisition and divestiture activities when their CEOs are compensated with stock option
pay, but that these companies are less likely to engage in such activities when their
executives own stock. The former statement corroborates the Datta et al. (2001) findings
that are, at their turn, in line with Bliss and Rosen (2001) study results. The main
argument put forward by Sanders (2001) is that executive stock ownership and stock
option pay have asymmetrical risk properties, and therefore managers respond to them in
different ways. For CEOs who own stock, the value of their shares changes in direct
proportion to shareholder returns, either positively or negatively. Moreover, executive
stock has real and immediate value that can be exchanged at any time for goods and
services. The author further argues that these stock ownership futures contrast with
attributes of stock options, which when granted, do not have marketable value. In the
event the stock price declines below the option price, executives who are paid with
options experience no reduction in real wealth, because managers will never exercise
their options waiting for stock prices to increase.
(B) Review of studies analyzing the managerial compensation of acquiring firms

before and after M&A completion
This subsection is devoted to a review of the existing studies on CEO compensation of

acquiring firms, thereby highlighting current knowledge of issues relating to the research
questions (1.1), (1.3), and (1.4).
Lambert and Larcker (1987)
Lambert and Larcker’s (1987) investigation is one of the first studies to provide
empirical evidence on the effect of corporate acquisitions on executive compensation of
acquiring companies in the U.S. context. The 35 sample acquisitions were selected from
the annual list of largest acquisitions in Mergers and Acquisitions over the period 1976-
1980. Each firm retained in the study made a single large acquisition, with a dollar
magnitude of at least 20% of the market value of the equity of the acquiring firm in the
year preceding the transaction. All companies that made failed acquisition proposals
were not included in the sample. Through an event study used to measure the security
market reaction to the transactions, 21 acquisitions from the sample are found to be
associated with a negative stock price reaction, while the remaining 14 acquisitions
registered a positive security market reaction.
To estimate the impact of the acquisition on managerial pay, the authors separate the
transaction’s effect on 1) executive short-term compensation, which includes the real
salary plus bonus, and 2) on total managerial wealth, composed of short-term pay and
stock ownership. Then, to distinguish the differential pay implications, they compare
executive short-term compensation and total wealth effects of acquisitions that resulted
in negative returns to shareholders with acquisitions that increased shareholder wealth.
The tests were conducted on compensation data collected individually for the CEO, and
collectively for a group of top three executive officers – CEO, chief operating officer,
and an executive vice-president.
When appraising the changes in managerial short-term rewards of acquiring firms after
the operation of change in control, Lambert and Larcker (1987) compare executives’ real
salary plus bonuses, expressed in 1984 constant dollars, to their respective levels before
the transaction. In order to control for factors unrelated to the acquisition, an executive
compensation benchmark is developed using the same characteristics in terms of
industry, size and growth in sales as the sample firms. The compensation numbers are
averaged over a two-year period before and a two-year period after the acquisition.
Changes in salary plus bonuses of acquiring firms’ managers are also compared to
changes in their respective executive compensation benchmarks. Finally, in assessing the
effect of acquisition on executive’s total wealth (ÌWEALTH), the authors capture
jointly the changes that occurred in managerial short-term compensation (ÌCOMP) and
in the value of executive stock holdings (ÌSTOCK). In this sense, the total wealth
effects are calculated as follows: ÌWEALTH = ÌSTOCK + ÌCOMP × P [A, 5 years
4%], where the P [A, 5 years 4%] represents the present value of an annuity of one dollar
for five years discounted at 4% interest. The most important features brought out by
Lambert and Larcker’s (1987) study are highlighted in table 13.
Table 13. Synthesis of study conducted by Lambert and Larcker (1987)
Items Description
Sample 35 acquisitions (21 bad and 14 good acquisitions)
Country United States
Period 1976-1980
Pay structure Cash compensation (salary and bonus);
Total wealth (salary + bonus + stock ownership)
Actors CEO; a group of top three executives (CEO, president/chief
operating officer, executive vice-president)
Interval [t − 2; t + 2]
Approach ÌCOMP = changes in executive pay (before and after acquisition)
compared with changes in compensation benchmarks;
ÌWEALTH = ÌSTOCK + ÌCOMP × P [A, 5 years 4%]
Results Good acquisitions: significant increase ↑ in COMP and WEALTH;
Bad acquisitions: insignificant ↑ in COMP and ↓ in WEALTH.
The Lambert and Larcker (1987) study results show different consequences for executive
compensation and total wealth, depending on the security market reaction to the
acquisition. On the one hand, for the acquiring firms where the shareholder returns are
negative, the median change in short-term compensation is a statistically insignificant
increase for both the top three executives as a group ($32,031), and the CEO alone
($14,414). The median change in real wealth resulted in a statistically insignificant
decrease of -$38,928 for the top three executives and of −$9,215 for the CEO. Thus, for a
group of bad acquisitions, the statistical tests suggest that executives do not improve the
level of their compensation and total wealth by selecting large corporate acquisitions that
have an adverse impact on shareholders.
On the other hand, for the firms with increased shareholder wealth, the median change in
real salary and bonus resulted in a statistically significant increase of $172,383 for the
top three executives and of $90,078 for the CEO. Similarly, the median change in real
wealth is also significant and positive for both groups of managers ($931,029 for the top
three executives and $481,807 for the CEO). Thus, for a group of good acquisitions the
results indicate that executives selecting M&As that brought positive returns to their
firms’ shareholders, experience an increase in both real compensation and wealth.
Overall, the Lambert and Larcker (1987) findings provide support for the hypothesis that
the managerial labor market has a disciplinary effect on the acquisition decisions of
CEOs.
Kroll, Simmons, and Wright (1990)
In their study of CEO compensation determinants following major acquisitions, the

authors address two important issues. The first issue examines whether the type of firm
control – manager or owner control – plays a role in the linkage between the acquisition
activity and additional compensation. The second issue seeks to determine whether the
company type – single or multiple industries – has an impact on the post-acquisition
executive compensation. For both issues, a set of four different hypotheses related to
performance and nonperformance determinants of managerial pay are tested. The sample
companies that completed major acquisitions in either 1982 or 1983 were identified from
respective annual editions of Merger & Acquisitions magazine. However, only those
firms were retained for which the compensation data were available from Forbes’ annual
survey of executive compensation, and for which ownership data could be gathered from
the CDE Stock Ownership Directory. Two additional selection constraints were imposed.
All companies had to have: (1) the same CEO for at least two years prior and following
the acquisition, (2) acquired a firm with sales equal to at least 10% of the acquiring
firm’s sales volume.
In order to test the first set of hypotheses on executive rewards’ factors, the sample of 50
firms was split into two groups, according to the type of control, resulting in 26 owner-
controlled and 24 manager-controlled companies. Kroll et al. (1990) define the owner-
controlled firms as companies which have a significant shareholder who holds at least
5% of the outstanding stock of the firm at the time of acquisition. In the absence of a
significant single owner the companies are qualified as manager-controlled. Then, to
verify the applicability of the second set of hypotheses the total sample was divided by
industry structure, where 23 firms were classified as single-industry and 27 – as multiple-
industry firms. In this study, the former firms are viewed as those which generate more
than 70% of their revenues from a single business unit and have an integrated production
structure. While in the latter group the multiple-industry companies are seen as those
which derive less than 70% of their revenues from any one group of related businesses.
For each of these sample groups, besides data measuring managerial compensation, other
variables are included in the analysis: firm size, firm performance, and executive tenure.
As in a number of previous studies, Kroll et al. (1990) use total sales as the measure of
firm size. Two variables, later found to be highly correlated, are retained in order to
measure organizational performance. One is the return on equity, estimated by dividing
total net income by total shareholders’ equity, and the other is the return on equity as a
percent of industry standard. Finally, aiming to allow the full impact of the acquisition on
executive compensation to be felt, the dummy variable is lagged one year after the
transaction completion. The main futures of the Kroll et al. (1990) research are
summarized in table 14.
Table 14. Synthesis of study conducted by Kroll et al. (1990)
Items Description
Sample 50 acquiring firms [(26 owner-controlled and 24 manager-controlled
companies) or (23 single-industry and 27 multiple-industry firms)]
Period 1982-1983
Pay structure Short-term compensation + stock ownership
Actors Chief Executive Officer
Interval t+1
Approach Determinants of CEO pay changes in the post-acquisition period
Results Manager-controlled firms: sig. ↑ in $, + nonperformance variables
(CEO tenure and sales volume);
Owner-controlled firms: sig. ↑ in $, + performance (as percent of
industry standard);
Multiple-industry firms: sig. ↑ in $, not sig. related to performance
(as percent of industry standard);
Single-industry firms: sig. ↑ in $, + nonperformance variables (CEO
tenure and sales volume).
The results of multiple regression tests used in this study provide support for the first set
of hypotheses regarding both manager-controlled and owner-controlled firms. Thus, for
manager-controlled companies, the statistical analyses report a significant increase in
CEO compensation in the year following the acquisition. This higher level of post-
transaction managerial pay is found to be significantly related (p = 0.0001) to the two
non-performance variables: the sales volume and the tenure as CEO. As predicted by the
authors, the performance variable does not appear to be significantly related to increases
in managerial pay. As for the owner-controlled firms, the significantly greater executive
rewards are observed during the post-acquisition year, meaning that the CEOs of these
companies are also likely to be rewarded for completing acquisitions. Since the other and
last variable which showed significance (p = 0.0001) is the profitability as a percent of
industry standard, it is concluded that in owner-controlled firms, executives are paid on
the basis of performance-related factors, disregarding their tenure and the size of the
firms they are managing.
The second set of hypotheses receives only partial support. On the one hand, neither of
the two propositions regarding multiple-industry firms is confirmed by the results. Given
that acquisition completion is found to have the most significant effect on managerial
pay, the authors’ initial expectation that CEOs will not experience higher post-
acquisition levels of compensation is therefore rejected. The anticipated positive
relationship between executive rewards and firm performance for multiple-industry firms
is also unsupported, since the link between return on equity as a percent of industry
standard and CEO pay is found to be significant at only a 0.10 level. On the other hand,
both single-industry firms related hypotheses are confirmed. Managers of these
companies are found to experience significant increases in their rewards in the post-
transaction period, these augmentations being significantly explained (p = 0.0001) by
some non-performance variables such as CEO tenure and sales volumes. Noting that in
all four models R² are not extremely high, Kroll et al. (1990) conclude that the great
portion of CEO pay left unexplained is most likely to reflect the current managerial labor
market price indispensable for retaining managerial talent.
Schmidt and Fowler (1990)
In their empirical study, Schmidt and Fowler (1990) analyze the financial performance
and changes in executive cash compensation in the post-acquisition period. Assuming
that acquisition form has an impact on post-acquisition performance, the authors divide
their sample of acquiring firms into two groups. The first group consists of companies
that engaged in a major tender offer, while the second includes firms that engaged in a
major acquisition by a means other than a tender offer. To be selected, the tender offers
and acquisitions had to take place in the period from 1975 to 1979. Further, a third group
of companies that had no major acquisition activity during the study period was
constituted for control purposes. Thus, 127 industrial companies were retained for the
study, including 41 bidding firms, 51 acquiring companies, and 35 control or non-
acquiring firms. Bidding companies were selected from the Austin Tender Offer Statistics
database, while the Mergers & Acquisitions Roster Cross-Index was used to identify the
sample of acquiring firms.
Different determinants of managerial cash-compensation, such as firm size, form of

acquisition and financial performance, are tested for the two groups of acquiring and
bidding companies, and the results are compared to a group of control firms. To analyze
the changes that occurred in firm size, performance and executive compensation, a
longitudinal design is adopted covering nine years: the four-year period (t−4, t−3, t−2,
t−1) preceding an acquisition, the base year (t) when a transaction took place, and the
four-year period (t+1, t+2, t+3, t+4) following an acquisition. The study examines the
compensation data of each company’s three highest-paid executives, information which
was extracted from the firms’ annual proxy statements at the Securities and Exchange
Commission in Washington, DC. To remove inflationary effects, these compensation
data were then deflated by the consumer price index and restated in 1983 constant
dollars. Finally, the firm’s financial data were collected from the Compustat industrial
file tapes.
Schmidt and Fowler’s (1990) study is centered around the analysis of the changes in
executive compensation levels following acquisition activity, and how these changes
relate to firm performance after controlling for company size. Three different measures
of financial performance are analyzed: accounting data (ROCE - returns on common
equity), capital market data (RSH - returns to shareholders), and the composite
performance measure (PERF) – computed as the average of change scores in ROCE and
RSH. The ROCE and RSH scores are estimated by subtracting from the mean post-
acquisition period abnormal return the mean pre-acquisition period abnormal return for
both ROCE and RSH. The executive cash-compensation measures consist of the annual
salaries, bonuses, and cash-equivalent compensation. The managerial cash-rewards are
computed for all nine years under the study, and the rate of change in mean executive
compensation (ÌCOMP) between the pre- and post-acquisition periods is calculated.
The firm size rate of change (ÌSIZE) between the pre- and post-periods (defined as total
assets) is also computed. For a brief summary of Schmidt and Fowler’s (1990) study see
table 15.
Table 15. Synthesis of study conducted by Schmidt and Fowler (1990)
Items Description
Sample 127 firms (41 bidding, 51 acquiring, and 35 control companies)
Period 1975-1979
Pay structure Cash compensation (salary + bonus + cash-equivalent compensation)
Actors Top three executives
Interval [t − 4; t; t + 4], longitudinal design
Approach ÌCOMPi = [mean post-period compensation − mean pre-period
compensation] / mean pre-period compensation
Results Acquiring and bidding firms: significant ↑ in cash compensation
For the financial performance variable, the statistical tests show a significant decrease in
the shareholder return measure for the bidding group, while this decrease is statistically
insignificant for the acquiring firms. The returns on common equity for both bidding and
acquiring groups also result in statistically insignificant decreases in the post-acquisition
period. These results indicate that, on average, companies that engaged in a major
acquisition perform poorly in the post-transaction period. While the statistics on
compensation data show that the top three executives of bidding and acquiring firms
experience, on average, significant increases in their cash compensation, which appeared
in the year t when the transaction took place. The difference between executive
compensation in the year t and mean pre-period compensation is also positive for the
control group, but it is not statistically significant. Furthermore, the mean change in
compensation value for the bidding (0.162) and acquiring (0.128) firms is significantly
different (p < 0.02) from the control group (0.016), but they are not significantly different
from each other (p = 0.54).
Since the financial performance variable seems to be a weak predictor of executive

compensation, Schmidt and Fowler (1990) try to explain the significant increases in
managerial cash rewards in year t for bidding and acquiring companies by looking at firm
size. The authors observe that these increases are consistent with substantial growth rates
in total assets and number of employees (the two common organization size measures)
exhibited by these firms in the same year. However, they note that these results do not
necessarily provide support for the management welfare hypothesis. To properly analyze
the relationship between pay and performance, Schmidt and Fowler (1990) include firm
size as a moderating variable and compare residual executive rewards to various financial
performance measures.
Once the size effect is removed from the managerial pay measure, it is found that
financial performance generally does not relate to changes in executive compensation for
the acquiring and bidding firms, but does relate strongly to these changes for the non-
acquiring companies. No significant coefficients for the performance variables are
displayed by the bidding group, while the only significant (p < 0.05) performance
measure for the acquiring group is the return on common equity (0.2694). The control
group, however, demonstrates a significant (p < 0.05) relationship with managerial cash
pay for the return on common equity (0.3180) and composite performance (0.3163)
measures, and a strong relationship for the return to shareholders measure (0.2760). The
size coefficient is found to be significant for all three groups in each of the three models
of financial performance. Schmidt and Fowler (1990) find that in bidding and acquiring
companies, rewards to top managers are driven more by organization size than by
performance. The authors then conclude that these results provide evidence confirming
the managerial welfare hypothesis.
Firth (1991)
Firth (1991) examines the returns to shareholders and the compensation of top
management of acquiring companies following corporate takeovers in the United
Kingdom. His intention is to find out whether the results are consistent with either of the
two most cited takeover motives – the maximization of shareholder wealth and the
management welfare hypothesis. The sample data used in this research consist of a total
of 254 stock-exchange listed acquirors (171 successful bidders and 83 unsuccessful)
having made one acquisition during 1974-1980. Firms that successfully completed more
than one takeover transaction are excluded from the sample. Compensation data for two
members of senior management – the highest-paid director and the chairperson of the
acquiring firm – are extracted from publicly available sources and analyzed in detail.
The approach taken by Firth (1991) when analyzing the changes in managerial
compensation is to compare actual compensation to predicted compensation absent a
takeover, in the two financial years subsequent to the transaction. In order to model what
compensation would have been without the takeover, measures of firm size, growth, and
profitability are initially retained, using ten years of inflation-adjusted annual financial
statement data prior to the operation of change in control. The firm size variable is
measured either as the natural logarithm of sales revenue or as the natural logarithm of
total assets, while profitability is measured as the ratio of net income to the book value of
shareholders’ equity. Since individual regression tests show company size to be the only
significant variable in the model, the growth and profitability variables are omitted. Thus,
a model based on firm size of both actual managerial compensation (ACTREMi,t+1(t+2))
and predicted one (PREREMi,t+1(t+2)) is developed for each acquiring company.
Hypothesizing that takeovers have a potential impact on both senior management’s pay
and shareholding wealth, Firth (1991) examines separately the changes that occurred in
both variables, differentiating on the one hand between firms that experienced negative
and positive abnormal returns, and on the other hand between successful and
unsuccessful bids. He first assesses the average change in managerial rewards for the two
years following the transaction (ÌREMi), where the changes in the year t+1 and t+2 are
calculated as a difference between actual and predicted compensation (ÌREMi,t+1(t+2) =

ACTREMi,t+1(t+2) − PREREMi,t+1(t+2)). Then, to include changes in managerial
shareholding wealth (ÌSTOCKi) he analyzes the overall impact of the takeover on
managers’ total wealth, calculated as ÌWEALTHi = ÌSTOCKi + 5.242 × ÌREMi,
where the factor 5.242 represents the annuity value of £1 for six years and discounted at
4%. A brief description of Firth’s (1991) study appears in table 16.
Table 16. Synthesis of study conducted by Firth (1991)
Items Description
Sample 254 acquirors: 171 successful and 83 unsuccessful
Country United Kingdom
Period 1974-1980
Pay structure Remuneration; Total wealth (remuneration + stock ownership)
Actors Highest-paid director (managing director); chairperson
Interval [t + 2]
Approach ÌREMi,t+1(t+2) = ACTREMi,t+1(t+2) − PREREMi,t+1(t+2);
ÌWEALTHi = ÌSTOCKi + 5.242 × ÌREMi,
Results Bad and good acquisitions: significant ↑ in REM and WEALTH
Study results show that for the panel of successful bids, the median pay of both the
highest-paid director and the chairperson increases significantly following a takeover bid.
The change in rewards for firms which experienced positive abnormal returns is greater,
but not statistically significant, than that for firms with negative abnormal returns. For a
panel of unsuccessful bids, the change in compensation after the takeover bid is positive
for the highest-paid director (£122) and negative for the chairperson (−£179), but
generally small and not statistically significant. The change in managerial total wealth
during the two years following the acquisition is found to be positive and significant for
both the managing director (£26,217) and the chairperson (£24,718) of firms
experiencing positive abnormal returns. More interesting are the findings that report
positive and statistically significant wealth changes for the highest-paid director
(£15,472) and chairperson (£15,198) of companies with negative, abnormal returns.
Since the evidence of U.K.-based data shows that managers gain not only when the
takeover results in positive returns to shareholders, but also in the case of a reduction of
the stock market value of the acquiring firm, Firth (1991) concludes that these results are
consistent with the maximization of the senior management utility hypothesis.
Kroll, Wright, Toombs, and Leavell (1997)
Kroll et al. (1997) focus their research on examining whether acquisition decisions are
driven by managers’ or shareholders’ interests as moderated by a form of corporate
control. They explore whether and how the transaction’s positive or negative outcomes
are related to post-acquisition executive rewards in three types of firms: 1) manager-
controlled – a company with a diffused ownership structure, 2) owner-controlled – a firm
with a significant shareholder owning at least 5% of the firm’s stock, and 3) owner-
manager-controlled – a firm in which a manager has significant financial investments.
Table 17. Hypothesized links among variables by Kroll et al. (1997)
Type of Owner-controlled Owner-manager- Manager-controlled

control firms (OC) controlled firms (OM) firms (MC)
Definition of Significant external Manager as significant Diffused external
control shareholder: ≥5% of stock owner: ≥ 5% of stock ownership
M&A quality Positive returns Positive returns Negative returns
Pay basis Performance criteria Performance and non- Non-performance
(e.g. excess returns) performance criteria criteria (e.g. firm size)
Two hypotheses for each firm type are proposed, testing the relationship between the
form of control and the abnormal returns to shareholders, and the link among
performance and non-performance criteria and the executive rewards (see table 17).
Since in manager-controlled firms CEOs are more likely to engage in self-maximizing
behavior at the expense of shareholders, the authors theoretically presume that in this
case, acquisitions may result in negative excess returns, while executive compensation
might be based on nonperformance criteria. Given that the presence of a significant
shareholder (external or internal) in owner-controlled and owner-manager-controlled
firms allows for closer monitoring of managerial actions, acquisitions may benefit the
stockholders of these firms. As far as CEO compensation is concerned, it is presumed
that in owner-controlled firms, managers may be compensated based on performance
criteria, whereas in owner-manager-controlled companies, they may be rewarded

according to both performance and non-performance factors.
In order to test these hypotheses, 209 firms having completed major acquisitions
(increasing acquiring firms’ sales by at least 10%) between 1982 and 1991 are selected
from various editions of Mergers and Acquisitions. To be included, firms must have had
the same CEOs during the two years prior and following the transaction announcement,
and must not have made other major acquisitions in the same period. The total sample
consists of 68 manager-controlled firms, 95 owner-controlled firms, and 46 owner-
manager-controlled firms. Compensation data gathered for each firm’s CEO consist of
total cash payments, deferred compensation, and the value of executive stockholdings.
Total changes in inflation-adjusted rewards (ÌCOMP) are measured for a five-year
period: the two years preceding and following and the announcement year itself. The
model used in this study examines the link between executive rewards for the three
different ownership control forms and the two independent variables − firm size (sales)
and performance (CARs − Cumulative Abnormal Returns). To test acquisition
performance across corporate control forms, two dummy variables (earlier takeover
experience and relatedness in acquisitions) and some interactive variables (form of
control and percentage ownership by outside directors) are also included in the model.
The major points of this research are highlighted in the table 18.
Table 18. Synthesis of study conducted by Kroll et al. (1997)
Items Description
Sample 209 acquiring firms (68 manager-controlled, 95 owner-controlled, and
46 owner-manager-controlled)
Period 1982-1991
Pay structure Cash payments + deferred compensation + stockholdings
Actors Chief executive officer
Interval [t − 2; t; t + 2]
Approach ∆COMP = a + B1(SALES) + B2(CAR) + B3(OC) + B4(OM) + B5(OC ×
SALES) + B6 (OC × CAR) + B7(OM × SALES) + B8 (OM × CAR) + e
Results Manager-controlled firms: − returns; ↑ in $, + firm size;
Owner-controlled firms: + returns; ↑ in $, + excess returns;
Owner-manager-controlled firms: + returns; ↑ in $, + firm size.
Overall, the regression tests used in this study confirm the hypothesized relationships. It
is found that in the third −5 to +5 days window the impact of M&A announcements is
significant (p = 0.01) and negative (−0.153) for manager-controlled firms. For both
owner-controlled (0.148) and owner-manager-controlled firms (0.139), they result in
significant positive excess returns. The findings also reveal that neither relatedness (p =
0.14) nor earlier experience in takeovers (p = 0.51) correlate significantly with abnormal
returns to shareholders. Regarding the interactive variables, the results report that higher
levels of outside board member ownership are positively (0.119) and significantly (p =
0.01) related to greater executive supervision for manager-controlled companies, while
this is not the case for other corporate forms of control. All these relationships are
consistent across the three study windows.
The evidence further suggests that in the third window, greater CEO compensation is
significantly and positively associated with increases in corporate size (sales), due to
acquisitions in both manager-controlled (215.31) and owner-manager-controlled (135.6)
firms. But then in owner-controlled companies, executive compensation is significantly
and positively (270.12) related to performance factors, since managers are found to
experience greater levels of compensation with positive cumulative abnormal returns
accruing to their shareholders. These links are also consistent across the three windows,
while the positive relationship found between CEO compensation and abnormal returns
in owner-manager-controlled firms appears to be significant in the first (−1 to 0) and
second (−3 to 3) windows, but not in the third. Given these results, Kroll et al. (1997)
conclude that in manager-controlled firms the M&As decisions are primarily driven by
managers’ benefits, unlike the case of owner-controlled companies, where the interests of
shareholders appear to be of primary importance. In owner-manager-controlled
corporations the compensation impacts are somewhat mixed, since CEOs seem to gain
both from investing in profitable acquisitions and for simply expanding the firm size.
Avery, Chevalier, and Schaefer (1998)
Using a large sample of industrial firms, Avery et al. (1998) examine whether CEOs
receive internal rewards in the form of increased compensation, and/or external rewards
(e.g., outside directorships) for acquisitiveness. The authors select a set of executives, –
collecting data on their compensation and seats on outside boards, and matching that to
firm performance and acquisition information – and follow their careers from the
beginning of 1986 to the end of 1991. The change in compensation and outside
directorships for the sub-sample of CEOs who undertook acquisitions is compared with
data for the non-acquiring managers; the benchmark hypothesis in this study is that a
CEO who makes acquisitions that cause firm sales to increase by 20% does not receive
more rewards (either internal or external) than a CEO who undertakes no acquisitions.
Then, in order to assess the effects of firm performance associated with acquisitions on
directorships and compensation for the sub-sample of acquirers, the responses from
value-increasing acquisitions are compared with those that reduce shareholder wealth.
Avery et al. (1998) also test the relationship between acquisitions and internal and
external rewards given to acquiring managers conditional on whether or not the
transaction is diversifying.
Data on outside directorships of CEOs are collected from the Lotus One-Source and
Datext databases. The Lexis-Nexis M&A database is used to select data on mergers and
acquisitions that occurred between 1986 and 1988 with transaction values in excess of
US$25 million. Data on firm performance, measured as stock market returns and returns
on shareholder equity, are obtained from CRSP and Compustat sources. The
compensation measure used in this research is the change in salary plus bonus between
1985 and 1991, information which is extracted from the Forbes surveys and proxy
materials. To classify whether a transaction represents a diversification to the acquirer,
the SIC codes of the target are matched to the SIC codes of the bidder. To measure
diversification activity, a dummy variable is introduced, taking the value “one” if the
firm undertook the diversifying acquisition, and “zero” otherwise. Since the main interest
of the article is the effect of a CEO’s acquisition activity on the CEO’s subsequent
compensation, companies that changed managers over the study period are excluded
from the sample. The final sample consists of 346 CEOs, of whom 215 managers did not
make an acquisition and 131 managers did. For an overview of the research conducted by
Avery et al. (1998), see table 19.
Table 19. Synthesis of study conducted by Avery et al. (1998)
Items Description
Sample 346 CEOs (131 acquiring CEOs, 215 control firms’ CEOs)
Period 1986-1988
Pay structure Salary and bonus
Actors CEO
Approach ÌlogCOMP85:91 = β0 + β1 MKRET85:91 + β2ÌROE85:91 +
β3ÌlogSALES85:91 + β4ACQ + β5ACQ ∗ ÌSAL
Results ÌCOMP Acquiring firms = ÌCOMP Control firms;
ÌCOMP Good acquisitions = ÌCOMP Bad acquisitions;
ÌCOMP Diversifying deals = ÌCOMP Non-diversifying deals.
The results of Avery et al. (1998) concerning internal rewards are quite surprising when
compared to previously done research, with the exclusion of Lambert and Larcker’s
(1987) analysis, which finds pecuniary returns to acquisitions from changes in salary and
bonus are small. The findings report that managers who undertook acquisitions do not
have significantly different compensation growth from CEOs who did not undertake
acquisitions. More precisely, if a CEO undertakes an acquisition that increases sales by
20%, their compensation is predicted to go down by 0.3% (statistically insignificant),
relative to the mean non-acquirer in the sample. The authors find no difference in
compensation increases between executives who made value-increasing and value-
reducing operations, and compensation growth is found not to be statistically different
between managers who undertook diversifying acquisitions (4.8% increase) and those
who undertook non-diversifying (2.5% decrease) deals.
These results suggest that CEOs do not receive any internal rewards for acquisitiveness.
The authors do, however, find a benefit to M&As regarding external rewards, since
CEOs who completed the deals are significantly more likely (13%) to gain outside
directorships than their peers who did not undertake such transactions. It is then
supposed that an acquisition may serve as a signal that the CEO has the skills required to
manage a large and more complex enterprise. In the light of these empirical findings,
Avery et al. (1998) conclude that executives do not pursue acquisitions in order to
increase their own compensation, but to enhance their prestige and standing in the
business community.
Khorana and Zenner (1998)
Khorana and Zenner (1998) examine changes in the logarithm of executive compensation
[Ìln(COMPit)] following large acquisitions, after controlling for modifications in the
executive position (ÌPosit) and stock performance (ÌPerfit-1) of acquirers. They then
compare the managerial compensation of acquiring firms to a control-group of non-
acquirers. The authors also investigate whether these post-acquisition changes relate to
sales growth, the acquisition’s quality, the change in the riskiness of firms after the
takeover operation, the degree of relatedness between bidding and target firms, or the
acquirer’s industry. Including all these variables in their model, they differentiate
between an indirect effect of acquisitions on managerial compensation and a direct
acquisition effect. The indirect effect on CEO pay results from stock returns and changes
in organizational size, while the direct acquisition effect is explained by the complexity
and risk for managing a large acquisition. The overall acquisition effect is defined as the
sum of the direct and indirect effects. To integrate the differential impact of the quality of
acquisition on executive rewards, Khorana and Zenner (1998) compare compensation
data for managers of bad and good acquirers. The company is categorized as a bad
acquirer if the announcement of abnormal returns for the bidding firm is negative and
significant and as a good acquirer if the opposite is true.
The acquirers sample include those firms making one or more acquisitions over the
1982-1986 period, which added up to more than 70% of the bidder’s size. Only those
companies in which one or two top executives remained in the list of five top executives
over the entire sample period are retained. These selection criteria yield a sample of 46
executives of 27 acquiring firms, where nine companies are classified as bad acquirers,
and 18 as good acquirers. Then, for each sample company, the authors identify one size-
and industry-matched control firm that had made no acquisitions during the investigation
interval. The control group also consists of firms for which it was possible to identify at
least one executive whose compensation is reported in proxy statements for a minimum
of five of the six years surrounding the acquisition. This procedure resulted in selection
of 53 CEOs of 27 control-firms.
The compensation data are gathered over the six-year window, starting three years before
and ending two years after the large acquisitions. Cash compensation and total
compensation are the two measures of managerial pay that are used in this study. Cash
compensation is composed of salary and bonus, while the total pay includes cash
compensation, insurance and personal benefits, grants of restricted stock, phantom
shares, performance shares, stock options, stock appreciation rights, and deferred
compensation. The accounting data are extracted from Compustat database and the stock
price information is obtained from the Center for Research in Security Prices tapes of the
University of Chicago. The investigation conducted by Khorana and Zenner (1998) is
briefly described in table 20.
Table 20. Synthesis of study conducted by Khorana and Zenner (1998)
Items Description
Sample 99 top executives of 54 firms: 46 top executives of 27 acquiring
firms (9 bad and 18 good) and 53 top executives of 27 control firms.
Period 1982-1986
Pay structure Cash compensation (salary + bonus); Total compensation (cash
compensation + insurance and personal benefits + grants of restricted
stock, phantom shares, and performance shares + stock options and
stock appreciation rights + deferred compensation).
Actors Two (or at least one) top executives
Interval [t − 3; t; t + 2], longitudinal design
Approach ∆ln(COMPit) = a0 + a1 ∆Perfit-1 + a2 ∆Posit + eit
Results Control firms: no sign. Change in cash and total $;
Acquiring firms: sign. ↑ in cash and total $;
good acquisitions: sign. ↑ in cash and total $;
bad acquisitions: no sign. + effect on $.
The statistic analyses report different results according to the study period. Before the
acquisition, it is found that changes in the acquirers’ executive compensation relate
positively (0.309 for cash and 0.583 for total compensation) and significantly (p = 0.00
and 0.04, respectively) to changes in organization size (measured as firm’s sales). No
significant size-compensation sensitivity is reported for the control group in the pre-
acquisition period. These findings led the authors to hypothesize an ex-ante expectation
that larger company size will result in higher executive pay. However, in the two years
following the takeover transaction, the results suggest that large acquisitions have little
positive effect on the total compensation of bidding managers. The tests also show that
CEO compensation increases abnormally in the post-acquisition period for acquirers, but
not for firms which did not undertake such operations.
In Khorana and Zenner’s (1998) study, the evidence suggests that for the group of
acquirers both cash and total rewards increase after the acquisition, and stock or option
grants tend to be large during the transaction year and decline subsequently. The post-
acquisition/acquirer indicator variable, designed to capture the direct effect of the
acquisition, is positive and significant for both cash (0.105; p = 0.05) and total
compensation (0.049; p = 0.02) of acquiring managers. In other words, these results
indicate that a 10.5% increase in executive cash compensation and a 4.9% increase in
total pay are explained by the greater complexity and risk of managing larger firms
subsequent to the transaction. The indirect acquisition effect, resulting from acquirers’
sales and stock returns, is found to be marginally negative, thereby reducing the total
acquisition effect. The overall acquisition effect for the two years following the
acquisition is 8.9% annually for cash compensation, and 1.8% annually for total
compensation. These findings remain robust even after controlling for acquisition
quality, divestiture intensity, managerial ownership, changes in firm riskiness,
relatedness of acquisition, and industry specificity.
Interesting results are reported when the authors divide their sample according to
acquisition quality. Managers of companies undertaking good acquisitions are found to
have significantly higher equity ownership (mean = 1.27% in the year t+1) over the six
years covering the study period than executives of firms making bad acquisitions (mean
= 0.37% in the year t+1). The investigators conclude these findings to be consistent with
incentives alignment arguments, since the low levels of managerial ownership observed
among executives of bad acquiring firms can explain some of their non-value-
maximizing behavior. Khorana and Zenner (1998) also examine the overall acquisition
effect separately for bad and good acquirers. They find that this effect is about 2% higher
for good acquirers due to higher announcement returns, being not significantly different
from zero for bad acquirers. So, good acquisitions resulted in a net positive effect on cash
and total compensation, whereas bad transactions had an insignificant effect on total
compensation. Finally, when incorporating the increased likelihood of dismissal after a
bad acquisition, it is shown that bad acquisitions are not likely to enhance executive
rewards.
Bliss and Rosen (2001)
More recently, Bliss and Rosen (2001) choose the banking industry as their field of study
in order to investigate the link between bank mergers and executive compensation. Their
intention is to examine: 1) whether merger activity has a positive effect on CEO rewards,
and 2) whether the form of compensation affects a manager’s decision to acquire another
bank. The basic empirical model used to test these relations assesses compensation as a
function of merger activity, firm performance, organization size and control variables
(e.g., CEO age, executive share ownership as a percentage of total shares outstanding,
number of years as CEO, and various age dummies in order to measure how close a
manager is to retirement). None of these control variables are used in the final analyses,
however, since they add little explanatory power.
Information on bank merger activity is extracted from such sources as Securities Data
Corporation, Lexis-Nexis, and Mergers and Acquisitions magazines. The final sample
consists of 32 banks that engaged in merger activity during a ten year period, from 1986
through 1995. Only those banks that could be classified among the 30 largest in asset
size over at least one year of the sample period are retained. They also needed to have
existed for at least five years during the same period. To test the differential impact of
intensity in merger activity (frequent versus few acquisitions) on compensation, sample
banks are divided into high- and low-merger groups, based on the average level of
merger activity during the time interval under study. This split produced 16 most active
and 16 least active acquiring banks.
Both stock market and accounting (return on assets) data are used to measure firm
performance. The merger activity variable is represented by a total number of assets
acquired through all mega-mergers done in three years prior to the end of the year t. The
organization size is estimated as the bank’s real total assets in a given year. The CEO pay
variable is broken into two parts: 1) cash pay, defined as salary, bonus, and other cash
payments as reported in the bank’s proxy statements, and 2) total compensation including
cash payments, plus the value of newly-granted restricted shares and stock options. A
brief description of Bliss and Rosen’s (2001) research is presented in table 21.
Table 21. Synthesis of study conducted by Bliss and Rosen (2001)
Items Description
Sample 32 acquiring banks (16 high-merger banks and 16 low-merger banks)
Period 1986-1995
Pay structure Cash compensation (salary + bonus + other cash payments);
Total compensation (cash payments + value of stock options + value
of restricted stock).
Actors CEOs
Approach COMP = f (merger activity, performance, size, control variables)
Results Acquiring banks: sign. ↑ in cash $ and total $;
high-merger banks: sign. ↑ in cash $ and ↑ in total $;
low-merger banks: ↑ in cash $ and ↑ in total $.
To estimate the impact of mergers on CEO compensation, the authors calculate the
annual rate (annual increase in compensation during the sample period, excluding a
CEO’s first year in office) and the aggregate rate of change in compensation (annual rate
for nine years). The analysis reveals a general gain in compensation for managers
following the merger. Hence, the mean gain in total (cash) compensation is 10.3%
(9.9%) per year and 141.6% (133.9%) over the entire sample period. The tests show that
“annual total pay” rises slightly more (1.0), and “annual cash pay” increases significantly
more (4.3) at high-merger banks than at low-merger banks.
The findings suggest that mergers have a net positive effect on CEO compensation,
mainly via the effect of size on pay. For every $1 million increase in assets, a CEO gets
$24-59 more in total compensation, including $6-32 cash compensation. Moreover,

mergers appear to enhance CEO compensation significantly (at the 5% level) faster than
internal growth; $1 million in new assets through a megamerger increases a CEO’s total
compensation by $54, while $1 million of internal growth raises it by $30. The overall
impact of other variables on compensation is found to be small, and the CEO age
indicator does not affect compensation at all. One standard deviation increase in return
on assets (0.67%) enhances total and cash pay by about 7% each. An increase in CEO
share ownership (0.20%) leads to a more or less proportionate increase in both total and
cash compensation (0.20%).
Even though CEOs gain from mergers by receiving more compensation, they will, like
other shareholders, suffer a loss in value on existing stock in a typical merger, since a
merger causes the acquiring bank’s stock to decline after the announcement day. Using
the average cumulative abnormal returns, the median decrease in wealth is $155,728,
about 40% of the median compensation increase. When combining the median wealth
effect and total compensation change, the CEO experiences an 18% increase in the total.
Since pay growth, paid to managers annually, is much larger than the one-time wealth
loss resulting from the announcement, it appears that over the period the acquiring
executives gain significantly from M&A.
Regarding the merger activity, results show that high-merger managers are rewarded
much less per dollar of merger growth than their low-merger counterparts. For example,
for $1 million of assets acquired in megamergers, executives from low-merger banks
receive $40 more in cash and $111 more in total compensation, while the value of the
same variables are insignificant for the high-merger group. Furthermore, low-merger
CEOs’ total compensation is more closely tied to the bank’s stock price ($1,025-$1,535),
but less related to accounting returns on assets (0.72). For the high-merger managers,
statistical tests report a significantly larger coefficient on return on assets for both total
(16.76) and cash compensation (13.92). When looking at the aggregate effect of merger
strategy on compensation, it is shown that managers of more active acquirers gain more
in total compensation (mean = $112,510) than those of less active acquirers (mean =
$26,573), even if they receive less per dollar acquired.
Bliss and Rosen’s (2001) investigation provides interesting empirical evidence for the
banking industry. Mergers are found to significantly increase executive compensation,
even after accounting for the typical announcement date stock price decline. Despite the
fact that subsequent salary gains are partially offset by the existing wealth decline, the
study shows that bank mergers still enhance CEOs’ overall wealth – often at the
shareholders’ expense. The form of compensation is also found to affect merger
decisions, since managers with higher levels of stock-based compensation are less likely
to be involved in acquisition activities.
Wright, Kroll, and Elenkov (2002)
Wright et al. (2002) explore the extent to which the intensity of corporate monitoring
activities moderates the effects of acquisition-related factors on changes in CEO
compensation of acquiring firms. Two kinds of hypotheses are formulated. The first
suggests that for firms with vigilant external monitoring activities, changes in executive
compensation are directly associated with returns accruing to their shareholders. The
second suggests that for firms with lax monitors, changes in CEO pay are directly
associated with an increase in firm size due to an acquisition. In their hypotheses
development, the authors initially distinguish external monitors (not executives of the
firm) from internal monitors (senior executives of the firm). Then, they focus on three
groups of external monitors: 1) security analysts, 2) independent outside board members,
and 3) activist institutional investors. Thus, Wright et al. (2002) expect a more intense
monitoring of a company to be exerted through a larger number of analysts following the
firm, higher investments by institutions, and a higher proportion of independent board
members.
The final sample of 171 acquiring firms, of which 77 are located in the group with
vigilant monitors and 94 in the group with lax monitors, is obtained from various editions
of Mergers and Acquisitions over the 1993-1998 period. Only firms that made
acquisitions entailing an increase in the revenues of at least 10% are included in the
sample. The acquiring company must not have undertaken another major acquisition
during the year of the transaction announcement or the year following the announcement.
Data related to CEO rewards, boards of directors, number of analysts, ownership, firms’
sales, and institutional investors are obtained from proxy statements, the Disclosure
database, and the Institutional Brokers Estimate System.
The dependent variable of the study represents the changes in CEO compensation, which
are defined as the year prior (t−1) versus the year (t) of the acquisition announcement
percentage changes in acquiring firms’ CEOs’ salaries, bonuses, and value of stock
options. Two independent variables are used in this study: returns and changes in size.
Wright et al. (2002) relate CEO rewards to both short-term (cumulative abnormal returns,
CARs, for two event windows: −1 to 0 days and –3 to +3 days) and long-term (firm’s
return on equity, ROE) measures of returns. The pre- and post-acquisition changes in
firm size are measured as percentage changes in sales. Three control variables are added
to the model: CEO tenure, changes in rewards linked to SIC codes, and CEO ownership.
With respect to the first variable, the authors suppose that CEOs expand their influence
as their years of tenure increase, while the second variable suggests that executive pay is
influenced by industry norms. Finally, the CEO ownership variable is represented by the
average weekly dollar value of an acquiring firm’s CEO equity holdings (excluding
options) for the quarter prior to transaction announcement. The main features of Wright
et al.’s (2002) study are highlighted in table 22.
Table 22. Synthesis of study conducted by Wright et al. (2002)
Items Description
Sample 171 acquiring firms (77 with vigilant monitors; 94 with lax monitors)
Period 1993-1998
Pay structure Salary, bonus, and stock options
Actors CEOs
Interval [t−1; t; t+1]
Approach ÌCOMP = a + returns (CARs or ÌROE) + Ìsales + CEO tenure +
CEO ownership + ÌComp linked to SIC codes + e
Results Firms with vigilant monitors: ÌComp linked to ↑ returns;
Firms with lax monitors: ÌComp linked to ↑ size.
The results of regression analyses provide empirical support for both hypotheses. It is
found that where external monitoring is active, CEO compensation is significantly
influenced by acquisition returns, while in firms with weak monitoring, executive

rewards are significantly impacted by increases in firm size. Furthermore, the findings
report that the tenure of CEOs is significantly related to changes in managerial rewards
for both groups with vigilant (0.46) and lax (0.40) monitoring. Managerial ownership is
also found to be directly and significantly related to compensation (0.35 for vigilant and
0.73 for lax monitoring groups). However, the variable for changes in compensation
linked to SIC codes is not significant for both vigilant (0.24) and lax monitoring (0.33)
sub-samples. Wright et al. (2002) conclude that the results of their study from the agency
perspective are consistent with the theoretical contention that external monitors may limit
selfish managerial behavior, protecting the interests of principals.
3.1.2 Review of studies analyzing M&A performance and its determinants
Firm performance represents the mediating variable of this study; its impact on the
monetary magnitude of executive compensation components is thought to be significant.
It is a cornerstone variable in the research hypotheses’ development. Therefore, the
following brief review of studies analyzing the corporate performance of firms involved
in M&As, as well as its determinants, provide empirical evidence in relation with our
research question (1.3).
(A) Studies of financial and operating performance of acquiring firms
Whether shareholders, the veritable owners of companies, receive any wealth gains from
M&As is an important question to be addressed. Given that CEOs are also rewarded for
their firms’ performance ex-ante and ex-post, the link between M&As and performance
is also of interest for this thesis, constituting the main subject of inquiry in M&A
literature. Two tendencies can be distinguished in the previous research: 1) studies that
analyze the financial (stock-market) performance of target or acquiring firms, and 2)
those that analyze the accounting performance of acquiring firms (see table 23).
Financial performance studies concentrate on the evaluation of securities’ behavior in

the capital market before and after the deal. Within this group of studies there are those
that analyze the short-term financial performance of firms involved in M&As, and
others that investigate the long-term financial performance of these firms. The “short-
term” research focuses on the short-term abnormal-returns to shareholders of bidding
companies and/or target firms, between the dates of the deal’s announcement and its
completion. The “long-term” research looks at the long-term wealth gains to shareholders
of acquiring companies a number of years after the transaction was completed. Studies of
operating performance are concerned with the accounting results generated by
acquiring firms’ operations. Their goal is to examine whether the M&A strategy allows
for an improvement in the acquirers’ operating performance after the transaction, and
whether this improvement corresponds to the magnitude of control premium paid to
target shareholders (André et al., 2000).
Table 23. Synthesis of some studies on M&A’ performance
Firm performance
Financial performance Operating performance
(stock market-based measures) (accounting-based measures)
Short-term Long-term Long-term
Target Bidder Acquiring Acquiring
U.S.: Jensen & U.S.: Jensen & Ruback, U.S.: Agrawal et al., U.S.: Healy et al., 1992 (+);
Ruback, 1983 (+); 1983 (-/+); Schwert, 1996 1992 (-/+); Loughran Switzer, 1996 (+); Healy et
Draper & Paudyal, (0); Draper & Paudyal, 1999 & Vijh, 1997 (-/+); al., 1997 (-); Parrino & Harris,
1999 (+); Schwert, (0); Schwert, 2000 (-); Rau & Vermaelen, 1999 (+); Heron & Lie, 2002
1996, 2000 (+). Moeller et al., 2003 (-). 1998 (-/+). (+).
Canada: Eckbo, Canada: Eckbo, 1986 (+); Canada: Ikenberry Canada: Bécotte, 2002 (-)
1986 (+); Patry & Patry & Poitevin, 1991 (+); et al., 2000. (-);
Poitevin, 1991 (+); Eckbo & Thornburn, 2000 André & L’Her, 2002
Eckbo &Thornburn, (-/+). (-); André et al.,
2000 (+). 2004 (-).
"+" positive; "−" negative; "0" not significantly different from zero.
The most important studies on short-term financial performance of target companies

report the following findings. The often-quoted article of Jensen and Ruback (1983)
provides a comprehensive review of existing to that date M&A performance literature.
The authors find that target abnormal returns vary between 6.20% and 47.26%, according
to the estimation period used in the articles, and they conclude that significant M&A
gains accrue to target shareholders (the premiums they received vary between 20%-25%
for mergers and 30%-35% for acquisitions). In a more recent article, Draper and Paudyal
(1999) also find that target shareholders benefit from M&A announcements. The two
subsequent studies of Schwert (1996; 2000) show that the control premiums received by
acquired firms are 35% and 22% respectively. Short-term financial performance studies
involving Canadian firms report positive cumulated abnormal returns to shareholders of
target firms, similar to those observed in the American context (Eckbo, 1986; Patry and
Poitevin, 1991; Eckbo and Thornburn, 2000).
When analyzing bidders’ short-term financial performance, Jensen and Ruback

(1983) show that bidders’ abnormal returns typically range from −2.96% (for mergers) to
4.85% (for acquisitions). Schwert’s (1996) data on bidder stock prices suggest that, on
average, the abnormal returns to bidders for the period 1975-1991 are not significantly
different from zero. Draper and Paudyal (1999) support the fact that bidders typically
earn only normal returns and hence do not suffer from M&A transactions. Schwert
(2000) find that abnormal returns to bidders for two event windows before and after the
transaction announcement are 1.25% and −2.25%, respectively (−1% for the whole event
window). More recently, Moeller et al. (2003) document substantial negative
announcement returns and significant losses to large acquiring companies, especially for
acquisitions after 1997. Research conducted in Canada documents that bidder
shareholders obtain slightly positive cumulated abnormal returns, varying between 2.4%
(Eckbo and Thornburn, 2000) and 3.1% (Eckbo, 1986) for the year preceding the event
announcement, and between −0.7% (Eckbo and Thornburn, 2000) and 4.9% (Eckbo,
1986) during the twelve months following the transaction announcement. Patry and
Poitevin (1991) show that the average returns the acquiring firms’ shareholders obtain
are of 3.4%.
When looking at abnormal returns to acquirers from a long-term financial

performance perspective, the literature brings different results, depending on the
transaction type. Most studies show that bidders in mergers underperform, while bidders
in tender offers over-perform – some years after the acquisition. For example, Agrawal et
al. (1992) find negative and significant abnormal returns (−10.3%) for 937 mergers over
the five years following the transaction, and positive but non significant abnormal returns
for 227 acquisitions. Loughran and Vijh (1997) report negative long-term abnormal
returns (−15.9%) in the case of mergers, while for acquisitions these returns are positive
(+43%) in the five years following the operation. When using another methodology, Rau
and Vermaelen (1998) obtain definitely inferior results in absolute value to those
documented by Loughran and Vijh (1997), results that confirm, however, the same
general tendency.
Ikenberry et al. (2000) examine a sample of 27 acquisitions involving Canadian

companies between 1989 and 1995, a third of which were financed by shares, and find
that abnormal returns for the three years following the transaction are negative, but not
significantly different from zero. André and L’Her (2002) reveal negative long-term
abnormal returns to acquiring firms in the post M&A period of around −25% or −40%,
depending on the privileged analytical approach. In a recent study of the long-run
performance of 267 Canadian M&As between 1980 and 2000, André et al. (2004) find
that acquirers significantly underperform over the three-year post-event period, the
negative performances ranging from −35.13% to −30.86%.
Healy et al. (1992) examine the postmerger operating performance of the 50 largest
U.S. mergers between 1979 and 1984, and report that the asset turnover and return on
market value of assets improve significantly, due to better asset management. These
study results are confirmed by subsequent research. In a study of 324 firms that
undertook M&As between 1967 and 1987, Switzer (1996) reports a significant
improvement in industry-adjusted operating performance of merging firms. Based on the
analysis of 197 U.S. deals between 1982 and 1987, Parrino and Harris (1999) also
observe that operating performance during five years following the deal improve
significantly. This improvement disappears when the control premium paid to target
shareholders is included in the analysis of bidders’ operating performance (Healy et al.,
1997).
More recently, Heron and Lie (2002), using a sample of 859 American acquisitions
completed by 657 different acquirers between 1985 and 1997, examined both pre- and
post-acquisition operating performance of acquiring firms relative to two groups of
benchmarks matched on industry classification and prior performance. They find that
acquiring firms outperform their industries both before and after their acquisitions, and
experience significantly higher improvements in operating performance than control
firms with similar pre-event operating performance. Similar studies of long-term
operating performance of acquiring firms have been conducted in the Canadian context.
For instance, Bécotte (2002) observes that Canadian companies involved in M&A
transactions between 1986 and 1997 generate significant losses – in terms of cash-flow
returns, asset turnover, and cash-flow margin on sales – in the three years following the
M&A transaction.
(B) Studies analyzing some M&A characteristics as determinants of post-

acquisition performance
This subsection is structured as follows. We start by providing a brief overview of

studies examining the impact of the magnitude of acquisition premium on performance
of acquiring firms. Then, we present a review of studies analyzing the impact of the
method of payment on acquirers’ performance. This literature review aims to shed more
light particularly on our research question (1.3) which explores the effects of firm
performance on the relationships between the two deal characteristics and CEO
compensation of acquiring firms.
(i) Impact of the magnitude of acquisition premium on acquirers’ performance
Even if mergers create value through efficiency gains, cost savings, or diversification
benefits, the acquiring firm’s shareholders only benefit if the price paid for the target is
sufficiently low. The specialized literature demonstrates that the key mechanism by
which the acquirors’ performance impairment occurs is the payment of large acquisition
premia. If all of the merger benefits are passed on to the shareholders of the target firm
through a high premium, shareholders of the acquiring firm will not want their CEO to
make the acquisition (Bliss and Rosen, 2001). Research on stock price changes around an
announcement suggests that M&As lead to a decline in acquirer stock prices.
Bradley et al. (1988) show that for single bidders, the cumulative abnormal return (CAR)
is a positive 2% to 3%. In multiple bids, the bidder CAR is essentially zero. Late bidder
acquirers, called white knights, loose 2.38%, which is statistically significant. The
authors conclude that on average, white knights “pay too much”.
It appears that overpayment for targets is frequent, occurring in 67% of the acquisitions
completed in the mid-1980s (Varaiya and Ferris, 1987). Some researchers suggest that
overpayment may be the reason for the generally disappointing postmerger performance
seen in acquiring firms (Lubatkin, 1983; Varaiya and Ferris, 1987). Sometimes, firms
pay so much that they cause their own bankruptcy (Haunschild, 1994). For instance, one
year after Campeau paid a 124% premium to acquire Federated Department Stores,
Campeau declared bankruptcy because of the inability to meet debt payments on the
acquisition (Kaplan, 1989).
The literature on acquirers’ performance after acquisition is extensive, with evidence

showing that – with some exceptions (Lubatkin, 1987) – acquisitions tend to destroy
value for acquiring firms’ shareholders. In an exhaustive study on the topic, Agrawal et
al. (1992) find that acquiring shareholders suffer a 10% loss over a five-year post-merger
period. Sirower (1994) uses post-acquisition periods ranging from three days to four
years and finds a consistently significant negative association between premium size and
subsequent returns. More precisely, Sirower (1994) finds that acquisition premia are
negatively associated with immediate returns, and that they have about four times as
much negative effect on one-year returns. It is axiomatic, therefore, that the higher the
premium paid to target shareholders the lower the ultimate returns to the acquirer from a
given acquisition (see table 24).
Table 24. Synthesis of studies analyzing the impact of the magnitude of acquisition
premia on acquiring firms’ performance
Variable/ Authors Varaiya & Bradley et al. Sirower Hayward &

Ferris (1987) (1988) (1994) Hambrick (1997)
Control premium Negative Negative Negative* Negative*
Statistically significant Statistically insignificant
* For one-year returns
Although it is not the main focus of their study, Hayward and Hambrick (1997) examine
the implications of hubris for acquiring firms’ performance. While the essential
denotation of hubris is “exaggerated self-confidence,” its connotation is that retribution
will follow. For if the sources of hubris increase acquisition premia, but do not damage
corporate performance, there is doubt about whether a CEO’s confidence is
“exaggerated”. The authors hypothesize that the larger the premium paid for an
acquisition, the worse the subsequent performance of the acquiring firm. The results of
statistical tests support this hypothesis, since acquisition premia are found to be
negatively and significantly related to one-year returns, even though there is no
association with immediate returns.
(ii) Impact of the method of payment on acquiring firms’ performance
Corporate finance literature implies that the means of payment used in M&As may
influence the returns to the shareholders of both target and bidding companies. Three
different arguments are advanced in order to support this statement: tax considerations,
information asymmetry, and interval between announcement and completion. The
tax codes generally award tax-deferred status to a purely stock-financed transaction,
while requiring capital gains taxes to be paid immediately in an all-cash purchase. Since
these gains are fully taxable to target shareholders, it is hypothesized that higher control
premia will be offered by bidders to compensate for taxes paid by targets (Weston et al.,
1998). Thus, the acquisition premium paid to target shareholders and abnormal returns to
bidding shareholders would be higher in the case when the transaction is cash-financed
rather than equity-financed (André et al., 2000).
The theory of Myers and Majluf (1984) holds that the method of financing an investment
conveys information to investors. In the context of M&As, this theory implies that in the
presence of information asymmetry between managers and shareholders, managers will
have an incentive to pay for their acquisitions with shares when they believe that their
stock is overvalued, and use cash when their stock is undervalued. Thus, part of the
negative announcement effect of stock deals could be the signal by the acquiring firm
that its CEOs think that their stock is overpriced. The means of payment hypothesis
requires that the short-term positive announcement returns to bidders in all-cash mergers
and negative announcement returns to bidders in all-stock deals do not fully reflect the
extent of bidder mispricing. This hypothesis also predicts that, on average, long-run
abnormal returns to bidders will be negative in share-financed acquisitions and positive
in cash-financed transactions (for a synthesis of studies providing support for this
hypothesis, see table 25). However, such timing strategy will only work if the market,
and especially the target shareholders, underestimates the extent of over- or under-
evaluation of the bidder (Rau and Vermaelen, 1998).
Table 25. Synthesis of studies supporting the means of payment hypothesis
Short-term financial Long-term financial Operating

performance performance performance
Travlos (1987); Heron Loughran and Vijh (1997); Rau Ghosh (1997)
Means of payment
negative
Abnormal returns
Stock
and Lie (2002) and Vermaelen (1998); Mitchell

and Stafford (1999)
Travlos (1987); Heron Loughran and Vijh (1997); Rau Ghosh (1997)
positive
Cash
and Lie (2002); Eckbo and Vermaelen (1998) Heron and

and Thornburn (2000) Lie (2002)
On a temporal level, the time interval to complete the transaction is shorter when cash is
used, because securities deals may involve regulatory approval and much more
documentation. In a study of 203 M&As between 1970 and 1978, Wansley et al. (1983)
provide empirical support for this view, observing that securities transactions take twice
as long to complete as their cash counterparts. A short interval reduces the time for
targets to prepare defenses, including turning to additional bidders. A lengthy acquisition
permits rival bidders to enter the competition, a situation which often leads to a higher
price and lower returns for the eventual acquirer (Weston et al., 1998).
Consistent with the method of payment argument, numerous short-term financial

performance studies demonstrate that the average market reaction to the announcement
of equity offerings is significantly negative (Asquith and Mullins, 1986; Masulis and
Korwar, 1986; Mikkelson and Partch, 1986). For a sample of 167 acquisitions conducted
between 1972 and 1981, Travlos (1987) finds that, on average, American acquirers
experience negative and significant excess returns (−1.5%) at the announcement of
stock-financed acquisitions and normal returns (0.24%, not significant) at the
announcements of cash-financed acquisitions. He concludes that "the findings are
consistent with the signaling hypothesis, which suggests that financing a takeover
through exchange of common stock conveys the negative information that the bidding
firm is overvalued". More recently, Heron and Lie (2002), similarly to Travlos (1987),
document that acquiring firms experience negative abnormal stock returns around
announcements of stock-financed acquisitions and normal returns around cash
acquisitions. Consequently, their analysis of both bidder returns and combined firm
returns suggests that announcements of cash acquisitions convey more favorable
information than do announcements of stock acquisitions.
Empirical studies on financial performance in the short run conducted in the Canadian
context do not integrally confirm the method of payment hypothesis. For instance, in an
analysis of 182 transactions between 1964-1982, Eckbo et al. (1990) report that abnormal
returns to bidders for equity deals are positive (2.7%), while they are insignificant for
cash-financed transactions. Eckbo and Thorburn (2000) find that returns obtained by the
shareholders of the acquiring company are on average 3.1% for cash-financed deals, 3%
for deals financed exclusively by stock, and 5.1% for deals with a mixed payment.
Other studies examine the impact of method of payment on the long-term financial
performance of the acquiring company. Franks et al. (1991) find that the difference
between the returns of equity bids and those of cash bids is not significantly different
from zero. However, Loughran and Vijh (1997) find that in the case of mergers financed
by share exchanges, the merged company earns significantly negative abnormal returns
in absolute value (−25%), while acquirers paying for their acquisitions in cash earn
significantly positive abnormal returns (+61.7%) in the five years following the
acquisition. The results of Rau and Vermaelen’s (1998) study on long-term performance
(over three years after the transaction completion) of acquiring firms in a sample of 709
mergers and 278 tender offers, are also consistent with the means of payment hypothesis.
In particular, post-acquisition returns in mergers are negative, while in tender offers they
are positive. This is predicted by means of a payment hypothesis, because in mergers,

bidders tend to pay with shares, and in tender offers, they pay with cash. Without
distinguishing between mergers and acquisitions, Mitchell and Stafford (1999) report
negative abnormal returns (between −8.4% and −5.3%) over three years for stock-
financed deals. Finally, Heron and Lie (2002) show that, although combined firms
returns are positive for both cash- and equity-financed transactions, they are significantly
higher for cash deals.
The results of studies examining the impact of the means of financing on acquirers’
operating performance are controversial. Albeit it is not the primary focus of their
research, Healy et al. (1992) report the results of a regression model in which they
regress port-acquisition operating performance against pre-merger performance and a
dummy variable capturing the form of financing. They conclude that there is no evidence
to relate post-acquisition operating performance to the form of financing. Healy et al.’s
(1992) results are open to criticism, since their sample of 50 observations may be
insufficient to accurately test for cross-sectional differences in operating performance
across the methods of financing. Also, their emphasis on only the largest acquisitions
may prevent their results from being generalized to the entire population of public
acquisitions (Heron and Lie, 2002). Ghosh (1997) provides different results, showing
that the operating performance of acquirers that used cash to finance their transactions
improves, while it deteriorates in the case of equity-financed deals. The findings of
Ghosh (1997) are not confirmed by Healy et al. (1997). For a sample of 50 American
acquisitions between 1979 and 1984, Healy et al. (1997) conclude that acquiring firms
that financed their transactions through share exchanges report better operating returns
and pay lower premia than firms that used cash payments.
Finally, similar to Healy et al. (1992), Heron and Lie (2002) report no evidence that the
trends in industry-adjusted operating performance differ across the three payment
methods, a finding that contrasts with their announcement returns results and the long-
term stock returns patterns of acquirers. The authors offer three possible explanations for
this weak relation between post-acquisition stock returns and operating performance in
relation to the means of payment hypothesis: 1) Stock return performance subsequent to
acquisitions is not attributable to the systematical investors’ erroneous expectations that

short-term earnings correlate with the method of payment; 2) Stock return patterns reflect
changing investors’ perceptions of future growth opportunities rather than changes in
short-term earnings or operating performance; 3) Since debt ratios increase by
significantly greater margins around cash acquisitions than around stock acquisitions, the
relation between stock returns and payment method is attributable to differential changes
in capital structure and, thus, the cost of capital.
3.1.3 Synthesis of the results of previous studies related to executive

This section focuses on proving a synthesis of results obtained in previous research on

executive compensation of acquiring firms. We start by identifying the whole set of
variables having an impact on executive compensation of acquiring firms. We continue
by highlighting the major findings of previous research conducted on compensation of
acquiring firms’ managers. And, we finish this subsection by presenting some limitations
observed within these studies.
(A) Variables influencing CEO compensation of acquirers
Throughout an in-depth literature review made in previous sections, a wide range of

variables influencing executive compensation of acquiring firms could be identified. For
presentation reasons, these variables could be arbitrarily located at three different levels:
individual, organizational, and transactional (see figure 5).
1. Individual characteristics: CEO/directors experience, CEO/directors age,

CEO/directors tenure, CEO membership on the board and other human capital
characteristics of both CEOs and board members (Kroll et al., 1990; Bliss and
Rosen, 2001).
2. Organizational characteristics: ownership structure, board structure

(inside/outside board members), stock-market and accounting performance,
previous M&A experience, firm size (Schmidt and Fowler, 1990; Firth, 1991;
Kroll et al., 1997; Wright et al., 2002).
3. Transactional (M&A-related) characteristics: type of transaction (merger or

acquisition), method of payment (transactions financed in cash, through share
exchanges or through a combined method of cash and stock), magnitude of
acquisition premium, success or failure of the deal (Schmidt and Fowler, 1990;
Khorana and Zenner, 1998).
Figure 5. Variables influencing executive compensation of acquiring firms
Transactional
characteristics:
type of
Organizational transaction
characteristics: method of
board structure
Individual payment
ownership
characteristics: control
structure
age firm size premium
experience stock-market/ success or
tenure accounting failure
board performance attitude
membership previous M&A (friendly or
experience hostile)

(B) Major findings of previous studies on acquiring executive compensation
The results of existing literature on managerial compensation of acquiring companies are

synthesized in table 26. All previous studies generally find senior management to profit
considerably from takeovers. The investigation of Avery et al. (1998) is the only one that
shows the average level of managerial cash compensation not to be affected by M&A
transactions. Executives increase their wealth due to different factors, such as greater
firm size, increased stock-market and accounting performance in the post-acquisition
period (Khorana and Zenner, 1998; Wright et al., 2002), and in different types of
companies – manager-controlled, owner-controlled, and owner-manager-controlled firms
(Kroll et al., 1990; Kroll et al., 1997).
Table 26. Synthesis of studies analyzing the executive

Compensation Shareholder Changes in

Authors Firms’ type
structure returns compensat.
Lambert & N/A salary + bonus Increase Increase
Larcker Decrease Increase
(1987) salary + bonus + stock Increase Increase
ownership Decrease Decrease
Kroll et al. manager-controlled short-term compensation N/A Increase
(1990) owner-controlled + stock ownership Increase
single industry Increase
multiple industry Increase
Schmidt & bidding firms cash compensation Decrease Increase
Fowler (1990) acquiring firms Decrease Increase
Firth (1991) N/A short-term compensation Increase Increase
Decrease Increase
short-term remuneration Increase Increase
+ stock ownership Decrease Increase
Kroll et al. manager-controlled cash payments + Decrease N/A
(1997) owner-controlled deferred compensation + Increase Increase
owner-manager- stockholdings Increase N/A
controlled
Avery et al. N/A salary + bonus Increase Increase
(1998) Decrease Increase
Khorana & N/A cash compensation N/A Increase
Zenner (1998) (salary and bonus) Increase Increase
Decrease Increase
total compensation N/A Increase
Increase Increase
Decrease Increase
Bliss & Rosen banks cash remuneration N/A Increase
(2001) total compensation N/A Increase
Wright et al. with lax monitors salary + bonus + stock N/A Increase
(2002) with vigilant options Increase Increase
monitors
As reported in table 26, the existing research in our field of investigation is also
unanimous in showing that executives gain in compensation even when M&A
transactions tend to destroy value for acquiring firms’ shareholders (Schmidt and Fowler,
1990; Firth, 1991; Khorana and Zenner, 1998). This finding is consistent with the
hypothesis of maximization of senior management welfare, excepting for Lambert and
Larcker’s (1987) study reporting that executive salary, bonus and stock ownership
diminish when M&A deals have an adverse effect on acquirers’ performance.
(C) Major limitations of previous studies on CEO compensation of acquirers
Despite their contributions, previous studies on executive compensation of acquiring firms

encounter several limitations:
• Few investigations have been conducted so far, and the existing ones focus mainly
on American (Lambert and Larcker, 1987; Kroll et al., 1990; Schmidt and Fowler,
1990; Kroll et al., 1997; Avery et al., 1998; Khorana and Zenner, 1998; Bliss and
Rosen, 2001, Wright et al., 2002) and sometimes British (Firth, 1991) samples.
M&A transactions in the Canadian context are still under-explored.
• Most studies, with only a few exceptions (e.g., Wright et al., 2002), investigate
executive compensation of acquiring firms that undertook M&A transactions during
the 1980s. Therefore, the previous empirical results can be undermined in the light
of changes that have occurred during the 1990s in legal and fiscal environments.
• The analysis is generally limited to a restricted number of executive compensation

components, such as salary, short-term bonus (Avery et al., 1998; Khorana and
Zenner, 1998; Bliss and Rosen, 2001,) and sometimes, stock-options (Kroll et al.,
1990; Firth, 1991; Wright et al., 2002). CEOs’ compensation packages include a wide
range of components that have not yet received detailed analytical consideration in the
context of markets for corporate control.
• A small number of studies adopt a longitudinal research design, ante-post M&A

transaction (Schmidt and Fowler, 1990; Khorana and Zenner, 1998). While being
methodologically more complex to complete, this approach allows for a better
understanding of the evolutions in CEO compensation levels and structure.
• In general, most studies rely on the underlying assumptions stemming from the
agency theory (Lambert and Larcker, 1987; Kroll et al., 1997; Avery et al., 1998;
Bliss and Rosen, 2001, Wright et al., 2002), and do not take into account explanatory
factors from other theoretical perspectives. Recent studies in compensation field
demonstrate, however, that political approach (St-Onge et al., 2001), institutional
theory (Gélinas, 2001), and symbolic assumptions (Zajac and Westphal, 1995) can
bring some useful insights to investigations focusing on CEO compensation in the
M&A context.
• Previous studies do not concentrate explicitly on explanatory factors of CEO post-

acquisition compensation such as the magnitude of control premium and method of
payment. Hence, it has to be recognized that this type of research is of great interest
for investigation purposes.
3.2 RESEARCH MODEL AND HYPOTHESES
This section includes detailed descriptions of the theoretical model and research
hypotheses. The conceptual framework is based on the previously described literature
review, which conclusions permit the identifying of variables and establishing
relationships affecting CEO compensation. Several core research hypotheses are also
introduced, and the underlying assumption on which each of the hypotheses relies is
discussed through a brief literature review.
3.2.1 Conceptual model
Different rationales have been put forward in the literature in order to shed more light on
corporate M&A activities. This field of inquiry becomes even more interesting when the
often disappointing returns accrued to the shareholders of acquiring companies after the
acquisition announcement or completion are accounted for. Among the most cited
reasons for companies to be involved in M&A operations are: expansion objectives,
diversification, synergistic benefits, financial and tax motives (Weston et al., 1998;
Gaughan, 1999). While economic gains represent a viable explanatory rational, some
authors suggest that managers engage in acquisition behavior for their own personal
motives (Roll, 1986).
Previous research that relies on the agency theory assumptions suggests that CEOs, as
utility maximizers, sometimes serve their own interests at the expense of shareholders,
giving rise to agency problems. Evidence of these problems can be found in excessive
rewards, executive perquisites, or in aggressive but unprofitable growth strategies, which
Trautwein (1990) calls “empire building”. For example, a CEO might be predisposed to
supporting a diversifying acquisition in order to increase managerial power or expected
compensation, disregarding whether the acquisition is really in the best interests of
shareholders (Jensen, 1986). Other indirect incentives may include the prestige or status
of owning one of the largest companies in a given industry (Belcourt and McBey, 2000).
To palliate these problems linked to managerial self-maximizing behavior, the corporate
governance literature advances that devising an appropriate executive compensation
contract, especially if it involves increasing the ownership stake of managers, may be one
means of motivating good behavior aligned with shareholder wealth maximization
objectives.
The importance of executive compensation levels and structure in M&A transactions has
long been recognized by scholars, but little empirical research has been done so far in
this field. This thesis contributes to the literature by integrating and examining jointly
two highly controversial topics – the incidences of M&As and executive compensation.
The emphasis is on analyzing the implications of acquisition-related characteristics
(magnitude of acquisition premium and method of payment) on executive compensation
of acquiring firms (see figure 6). More specifically, we consider these implications in
two ways. First, we assess how M&A transactions relate to the monetary magnitude of
CEO compensation components (short-term compensation: salary, short-term bonus,
other short-term compensation; long-term compensation: stock options, restricted stock
awards, long-term payouts; total compensation). Second, we ascertain if M&A activity
relates to specific attributes of CEO compensation contracts (adoption of employment
agreement, termination clause, change of control clause, and new long-term incentive
plans).
Figure 6. General research design
BEFORE transaction TAKEOVER AFTER transaction
Acquirers' executive Acquirers' executive

compensation: Characteristics: compensation:
components • mode of payment components
magnitude • control premium magnitude
performance indices performance indices
CEO compensation (COMP)
Our analysis of the monetary magnitude of CEO compensation components is guided

by four distinct research questions. During the three years preceding and following the
change in control transaction,
compensation components of acquiring companies’ executives?
payment on executive compensation following M&A transactions?
acquiring firms?
and the executive compensation of acquiring companies?
To answer these questions we take the following steps: (1.1) we determine whether top
managers of acquiring companies experience statistically significant changes (increases
or decreases) in the monetary magnitude of their compensation components between the
pre- and post-acquisition periods; (1.2) we examine the direct effect of such M&A-
related determinants as the magnitude of control premium and method of payment on

executive compensation; (1.3) we consider the mediating effect of firm performance on
the relationships between the magnitude of acquisition premium or method of payment
and executive compensation, and (1.4) we analyze the moderating effect of structural
board independence on the relationships between the magnitude of acquisition premium
or method of payment (firm performance or size) and executive compensation of
acquiring firms.
We also attempt to make an exploratory analysis of the specific attributes of executive

compensation contracts, analysis that is guided by three distinct research questions.
During the three years preceding and following the change in control transaction,
contracts of acquiring firms?

contracts adoption?

changing between the pre- and post-acquisition periods?
To answer these three questions we: (2.1) determine whether executives of acquiring
firms experience statistically significant changes in the structure of their compensation
contracts between the pre- and post-acquisition periods, (2.2) examine the direct effect of
the magnitude of control premium and method of payment on the frequency of the
specific attributes of CEO compensation contracts adoption, (2.3) consider whether the
adoption frequency of these specific attributes of executive compensation contracts is
determined by firm performance or size both before and after the acquisition completion.
From the methodological point of view, this study adopts a longitudinal design pre-post
M&A for a group of Canadian firms that engaged in M&A activities between 1995 and
2001. For each M&A transaction, the time horizon under investigation is seven years,
i.e., three years pre-M&A, the year of M&A, and three years post-M&A. Three sets of
research data are collected: data on executive compensation (mainly from companies’
proxy statements available on Sedar database), on acquirers’ financial characteristics
(generally from the Compustat database), and on M&A transactions (mostly from
Thompson Financial Securities Data). These data are analyzed separately for the full
sample (all sample firms) and the restricted sample (firms having the same CEO during
the seven years under study) using multivariate regression analyses.
Furthermore, we develop an integrative conceptual framework in this thesis, based on

recent publications in the field of executive compensation (Zajac and Westphal, 1997;
Magnan et al., 1998; Magnan et al., 2000; St-Onge et al., 2001). More precisely, we
consider that CEO compensation in companies involved in M&A activities can be more
adequately analyzed by a combination of three different theoretical approaches: agency
theory (e.g., executive compensation as a mechanism of executives and shareholders
interests’ alignment); political perspective (e.g., CEO compensation as result of power
games within companies); and institutional theory (e.g., executive compensation as
result of imitating the legitimized compensation practices). Therefore, different
explanatory factors and determinants stemming jointly from all these theoretical
perspectives are assembled in order to explain the research findings.
As it was shown in the literature review, previous research in our field of inquiry
concentrates on the analysis of the monetary magnitude of acquiring executive
compensation components. Therefore, we rely on existing research, building a
conceptual model and developing several research hypotheses with respect to the
monetary magnitude of compensation components. However, since previous empirical
evidence with respect to the specific attributes of acquiring executive compensation
contracts is very limited, their analysis in this thesis is rather exploratory in nature. For
this reason, in this study we only attempt to depict some explanatory tendencies
regarding the frequency of the adoption of these specific contractual arrangements of
acquiring executives, but we do not develop any specific research hypotheses.
Figure 7. Determinants of executive compensation (monetary magnitude of

compensation components) of acquiring firms
mediating effect Structural board

H 2a, 2b independence (SBI)
Performance
(PERF)
moderating effect
Size (assets)
H 4a, 4b
Acquisition premium direct effect H 1a, 1b

CEO compensation
Method of payment (COMP)
moderating effect
H 3a, 3b
Structural board
independence (SBI)
Based on the in-depth literature review presented in section 3.1, the research model in
this thesis is designed to explore different kinds of relationships between research
variables. As shown in figure 7, four kinds of effects are examined concerning the
magnitude of executive compensation components:
1. Direct effect of the magnitude of acquisition premium or method of payment on

executive compensation of acquiring firms;
2. Mediating effect of firm performance on the indirect relationship between the

magnitude of acquisition premium or method of payment and acquirers’ CEO
compensation;
3. Moderating effect of structural board independence on the direct relationship

between the magnitude of acquisition premium or method of payment and CEO
compensation of acquiring firms;
4. Moderating effect of structural board independence on the relationship between

firm performance or firm size and acquiring executive compensation.
3.2.2 Research hypotheses
This subsection is designed to provide a detailed description of our research hypotheses.

We proceed by presenting the eight core hypotheses tested in this thesis, underlying their
association with our research questions. Upon introducing the rational of each research
hypothesis through a brief literature review, we highlight the theoretical perspective we
rely on while developing these hypotheses.
(A) Links among research questions and hypotheses
¾ Research Question (1.1): During the three years preceding and following the
change in control transaction, are there any significant changes in the monetary
magnitude of different compensation components of acquiring companies’ executives?
The first research question is mostly descriptive in nature, aiming to set the stage for the
following research questions. Since question (1.1) does not establish any relationships
between variables, no research hypotheses are associated with this question.
¾ Research Question (1.2): What are the impacts of the magnitude of acquisition
premium or method of payment on executive compensation following M&A transactions?
In order to answer the research question (1.2), the hypotheses 1a and 1b, testing the
direct effect of the magnitude of acquisition premium or method of payment on CEO
compensation, are developed.
Hypotheses 1a and 1b: Direct effect of the magnitude of acquisition premium or

method of payment on CEO compensation
Previous studies in this field have not investigated the direct effect of the magnitude of
control premium or method of payment on CEO compensation, yet this presents an
interesting link to explore using the insights of institutional and symbolic perspectives
(DiMaggio and Powell, 1983; Westphal and Zajac, 1994). Managers are not always
directly rewarded for accruing their company’s shares value, but they are for their image
and the impression of their abilities they transmit to the board. For instance, executives
who manage to negotiate and pay a lower acquisition premium to target shareholders can
be perceived as more dedicated to the company’s interests than those who do not; it is
not surprising, therefore, that those executives are able to extract additional
compensation, other than that rewarding actual improvement in organizational
performance. And vice-versa, symbolic implications could be used to predict negative
compensation outcomes for acquiring managers who initiated an M&A transaction
paying a higher acquisition premium to the target company. We, therefore, suggest
testing the following direct link between the magnitude of control premium and CEO
compensation of acquiring firms (see hypothesis 1a):
Hypothesis 1a: The magnitude of the acquisition premium produces a negative effect
on CEO compensation.
Similarly, CEOs can be paid not only for enhancing the organizational performance of
the firms they are managing but also for just having conducted complex operations that
are expected to have a positive impact on firm returns. According to the institutional
theory, organizations in a highly institutionalized environment will tend to mimic those
compensation practices presumed to be widely accepted and legitimate (Zucker, 1987;
Scott, 1995). Since in a given organizational setting, cash-financed transactions are
expected to positively affect organizational performance (Rau and Vermaelen, 1998;
Heron and Lie, 2002), we put forth that rewarding managers for just having completed
cash-financed (rather than equity-financed) acquisitions could be perceived as legitimate
compensation practice. The following direct link between method of payment and
acquiring CEO compensation can be tested (see hypothesis 1b).
Hypothesis 1b: Acquisitions through share exchanges (rather than in cash) produce a
negative effect on CEO compensation.
¾ Research Question (1.3): What are the effects of firm performance on the
relationships between the magnitude of acquisition premium or method of payment and
the CEO compensation of acquiring firms?
Hypotheses 2a and 2b, testing the mediating effect of firm performance on the indirect
relationship between the magnitude of acquisition premium or method of payment and
acquiring CEO compensation, are developed in order to provide empirical answers to this
question (1.3).
Hypotheses 2a and 2b: Mediating effect of firm performance on the indirect

relationship between the magnitude of acquisition premium or method of payment
and executive compensation
The majority of previous studies in finance have concentrated on the relationship

between the magnitude of acquisition premium and the stock-market performance of
acquiring firms. As argued in subsection 3.1.2(B)(i), traditional wisdom states that the
higher the premium paid the lower the ultimate returns to the acquirer from a given
acquisition (Sirower, 1994; Hayward and Hambrick, 1997). In light of the agency theory,
where compensation plans are designed in such a way as to align CEOs and
shareholders’ interests, it is legitimate to expect decreased firm performance to have a
negative effect on managerial compensation (Fama and Jensen, 1983; Jensen and
Murphy, 1990). Therefore, we hypothesize the magnitude of acquisition premium to have
an indirect effect on executive compensation, as diminished firm performance due to
high control premia translates into a reduction in CEO compensation. Within an
organizational setting where firm performance is rewarded, the magnitude of control
premium has a negative effect on a CEO’s individual compensation through the
mediating effect of organizational returns. Accordingly, we propose to test the following
indirect link between the magnitude of acquisition premium and executive compensation
(see hypothesis 2a):
Hypothesis 2a: For acquiring firms, the magnitude of acquisition premium produces
a negative effect on CEO compensation through firm performance.
The means of payment hypothesis, as put forth in subsection 3.1.2 (B)(ii), predicts that
in the case of equity-financed transactions, the acquiring company earns negative
abnormal returns, while in cash transactions, positive returns (Loughran and Vijh, 1997;
Mitchell and Stafford, 1999). According to the agency theory, we expect that negative
returns that result from operations paid through share exchanges will have a negative
impact on the magnitude of executive compensation (Bloom and Milkovich, 1998).
Therefore, we hypothesize the equity-financed M&A deals to have an indirect effect on
managerial compensation as deteriorated firm performance (due to a payment through
share exchanges and not in cash) translates into a reduction in CEO compensation.
Hence, in companies where managers are rewarded for firm performance, financing by
stock has a negative effect on CEOs’ individual compensation through the mediating
effect of organizational returns. We propose to test the following indirect link between
the method of payment and executive compensation (see hypothesis 2b):
Hypothesis 2b: For acquiring firms, acquisitions through share exchanges (rather
than in cash) produce a negative effect on CEO compensation
through firm performance.
¾ Research Question (1.4): What are the effects of structural board independence on
(firm performance or size) and executive compensation of acquiring companies?
Structural board independence exerts a twofold moderating effect. Therefore, in order to

answer the research question (1.4), two sets of hypotheses are developed: (i) hypotheses
3a and 3b, testing the moderating effect of structural board independence on the direct
relationship between the magnitude of acquisition premium or method of payment and
CEO compensation, and (ii) hypotheses 4a and 4b, testing the moderating effect of
structural board independence on the relationship between firm performance or firm size
and executive compensation of acquiring firms. We start by describing the hypotheses 3a
and 3b and continue by explaining the hypotheses 4a and 4b.
Hypotheses 3a and 3b: Moderating effect of structural board independence on the

direct relationship between the magnitude of acquisition premium or method of
payment and CEO compensation
Our contention is that structural board independence moderates the negative direct link
between the magnitude of acquisition premium and CEO compensation. An independent
from management board has more power to link executive compensation increases to
CEOs’ decisions that are value-maximizing for company shareholders and vice-versa
(Westphal, 1998; Wright et al., 2002). Since it was argued in hypotheses 1a and 2a that
paying a higher acquisition premium is not in line with shareholders’ interests (Hayward
and Hambrick, 1997), it is legitimate to expect that structurally independent boards will
further enhance the negative link between the magnitude of acquisition premium and
CEO compensation. Using political perspective insights (Pfeffer, 1981; Finkelstein and
Hambrick, 1989), we argue that in the presence of an independent board, the magnitude
of executive compensation will be negatively affected by a higher acquisition premium
paid for a transaction. We propose testing the following link (see hypothesis 3a):
Hypothesis 3a: For acquiring firms, structural board independence enhances the
negative relation between the magnitude of the acquisition premium
and CEO compensation.
Similarly, we believe that structural board independence also moderates the negative
direct relation between the acquisition payment through share exchanges (instead of
cash) and executive compensation. Based on political perspective insights (Salancik and
Pfeffer, 1980; Barkema and Pennings, 1998), we argue that within an organizational
setting with a structurally independent board, the negative association between the
transaction payment through shares exchanges and CEO compensation is further
enhanced. We, therefore, suggest testing the following moderating effect of structural
board independence (see hypothesis 3b):
Hypothesis 3b: For acquiring firms, structural board independence enhances the
negative relation between the acquisition payment through share
exchanges (rather than in cash) and CEO compensation.
Hypotheses 4a and 4b: Moderating effect of structural board independence on the

relationship between firm performance or firm size and executive compensation
We also question whether corporate returns or growth in firm size owing to an

acquisition influence executive compensation in the post-transaction period. We assume
that structural board independence may moderate whether performance or corporate size
will affect executive compensation of acquiring firms. From the political standpoint,
organizational decisions related to managerial compensation represent the result of
complex power games between company actors, such as CEOs and board members
(Perrow, 1970; Finkelstein, 1992). Since under structural board independence the balance
of power becomes unfavorable for managers (David et al., 1998), it could be argued that
an independent board will exert greater power of control over managers’ potential self-
interested behavior, such as undertaking personally beneficial strategies that are not value
maximizing for their shareholders. Given that a structurally independent board will tend
to enhance the role of compensation as a means of executive control, we expect CEO
compensation to be tightly linked to firm performance due to an acquisition. The
following hypothesis tests this moderating effect of structural board independence (see
hypothesis 4a):
positive relation between firm performance and CEO compensation.
Since boards structurally more independent from management are better able to control
executive decision-making on behalf of their shareholders (Westphal, 1998), we expect
firm size not to be an important determinant of CEO compensation following an
acquisition. More precisely, using the political perspective assumptions (Zajac et
Westphal, 1997), structural board independence is hypothesized to diminish the link
between corporate size and executive compensation. This moderating effect can be tested
using the hypothesis 4b.
negative relation between firm size and CEO compensation.
(B) Links among research questions, hypotheses, and theoretical perspectives
As stated in subsection 3.2.1, we use an integrative theoretical approach to develop the

conceptual framework of our research and explain our research findings. The use of
multiple theories in designing and explaining the research hypotheses is apparent in their
detailed presentation. We conclude this chapter with a comprehensive table highlighting
the links among the research questions, hypotheses, and theoretical perspectives used in
this thesis (see table 27).
Table 27. Links among research questions, hypotheses,

and theoretical perspectives
Q-on nature Questions Hypotheses Theoretical perspectives

Question (1.1) No hypotheses No theoretical assumptions
Hypothesis 1a Institutional and symbolic
Question (1.2)
Monetary Hypothesis 1b perspectives
magnitude of Hypothesis 2a
Question (1.3) Agency theory
executive Hypothesis 2b
compensation Hypothesis 3a
components Hypothesis 3b
Question (1.4) Political perspective
Hypothesis 4a
Hypothesis 4b
Attributes of Question (2.1) No theoretical assumptions
compensation Question (2.2) No hypotheses Agency, political and institutional
contracts Question (2.3) No theoretical assumptions
CHAPTER 4: METHODOLOGY
Our aim in this chapter is to provide an in-depth description of our research

methodology. The first section concentrates on the description of acquiring companies’
characteristics, including issues related to the sampling design and methods of data
collection. The second section is dedicated to the description of the empirical model and
methodology used for data analyses. And finally, the last section provides a detailed
explanation of the measurements of the five groups of research variables: dependant,
independent, mediating, control, and moderating.
4.1 ACQUIRING FIRMS’ DATA COLLECTION
This section provides details on criteria related to the constitution of the sample of
acquiring companies and on methods of data gathering.
4.1.1 Constitution of the sample
The data sets of Canadian M&As were obtained from the Securities Data Corporation
(SDC) Worldwide Mergers and Acquisitions database. This database was chosen because
it is the most complete in terms of numbers of registered mergers and acquisitions (more
than 300,000 deals), time period covered (1979 to the present), and information on
transactional characteristics. Only those acquiring companies that met the following
criteria were included in the sample. First, transactions had to be conducted between
Canadian companies. The nationality of the firms included in the sample constitutes an
important insight, since no research has been conducted so far in the Canadian context
answering the research questions of this thesis. Second, only observations that covered
the period beginning in January of 1995 and ending in December of 2001 inclusively
were collected. This time period was chosen in order to better understand the dominant
characteristics of transactions that occurred in the second half of the 90s and which
remain under-explored. Third, the selected transactions had to be completed. For the
purposes of this thesis, the year t, used as “base year” in the data analyses, represents the
year of the deal’s completion and not the announcement year. Fourth, in order to be
retained in the sample, deals had to be mergers, exchange offers or acquisitions of

majority interests. Fifth, the acquiring companies that undertook several M&A deals
during the period under study were not rejected. Sixth, only companies having made
acquisitions of a value exceeding CAN$10 million were included. The size of an
acquisition is important as only a major corporate acquisition is likely to impact firm
contingencies (Morck et al., 1990). Seventh, different sets of data had to be available for
all selected deals, and for all seven years under the study: three years before the deal (t–3,
t–2, t–1), the year of the transaction completion (t) and three years after the deal (t+1,
t+2, t+3).
Table 28. Some methodological aspects of this thesis
Item Description
Sample 80
Country Canada
Period 1995-2001
Interval [t−3;t;t+3]
Table 29. Comparative analysis of some methodological considerations in studies

analyzing the executive compensation of acquiring firms
Authors Lambert & Kroll et Schmidt & Firth, Kroll et al., Avery et Khorana & Bliss & Wright et
Larker, 1987 al., 1990 Fowler, 1990 1991 1997 al., 1998 Zenner, 1998 Rosen, 2001 al., 2002
Sample 35 50 92 (35) 254 209 131 (215) 27 (27) 32 171
Country U.S. U.S. U.S. U.K. U.S. U.S. U.S. U.S. U.S.
Period 1976-1980 1982-'83 1975-1979 1974-'80 1982-'91 1986-'88 1982-1986 1986-1995 1993-'98
Interval [t-2;t;t+2] [t+1] [t-4;t;t+4] [t+2] [t-2;t;t+2] [t-1;t;t+3] [t-3;t;t+2] [t-2;t;t+1] [t-1;t;t+1]
Sample N(N) - Acquiring (Control) companies
The above criteria yield a final sample of 80 acquiring companies (see table 28) which
made acquisitions during the study period and for which all research data were available.
Compared to the nine studies analyzed in the literature review (see table 29), the sample
of this thesis has the following characteristics. Firstly, the number of acquiring
companies included in the final sample falls somewhere in between; it is larger in four
cases (Lambert and Larcker, 1987; Kroll et al., 1990; Khorana and Zenner, 1998; Bliss
and Rosen, 2001) and smaller in five cases (Schmidt and Fowler, 1990; Firth, 1991;
Kroll et al., 1997; Avery et al., 1998; Wright et al., 2002). Secondly, the sample design
of this thesis is similar to that used in a great deal of previous research – with the
exception of Schmidt and Fowler (1990), Avery et al. (1998), and Khorana and Zenner
(1998) – in that it does not include a control group. Thirdly, since all of the previous
studies concentrated exclusively on American and British samples, this thesis is the first
one to investigate the links between executive compensation and M&A activity in a
Canadian context. Fourthly, previous research considered only those transactions that
occurred mainly in the last three decades of the twentieth century, while this thesis also
includes some M&A deals that took place at the beginning of the twenty-first century.
Lastly, the time interval – covering seven years – is larger than that used in all but one
previous investigation, that of Schmidt and Fowler (1990) who conducted their
longitudinal study over a nine-year period.
4.1.2 Gathering research data
Three groups of data were collected for this thesis: data related to M&A characteristics,
financial data on sample firms that undertook M&A transactions, and executive
compensation data. Different sources of data helped in the collection of this information
(see table 30). Since all these information sources are public databases, they are freely
available. First of all, data related to M&A were obtained from Securities Data
Corporation (SDC) Worldwide Mergers and Acquisitions database of Thompson
Financial Securities Data. More specifically, this database was used to collect data on
acquiring firms’ profile (industrial sector, nationality) and transactional characteristics
(transaction type, magnitude of acquisition premium paid to target shareholders, method
of payment, transaction announcement date and transaction completion date, deal value).
The CEO compensation information gathering was facilitated due to the Ontario
Securities Commission amendment of Regulation 638 on October 1993, which requires
that firms listed on the Toronto Stock Exchange provide detailed executive compensation
data for their five highest paid managers. All executive pay data, except for the value of
stock options, were extracted from proxy statements available in Micromedia Proquest
for proxy statements prior to 1997, and on the Sedar Website, for proxy statements after
1997. Even though the value of stock options is not indicated in proxy statements, such
information as the number of stock options granted, their exercise price, the value of the
shares at the date of granting and the exercise period are provided. Therefore, based on
this information, the formula of Core et al. (1999) is applied in order to determine the
approximate value of options granted to executives of acquiring companies in a given
financial year.
Table 30. Synthesis of information sources used to collect research data
Information sources Data types Data description

Securities Data 1) data related • Transaction type
Corporation (SDC) to mergers & • Nationality of acquiring firms
Worldwide Mergers and acquisitions • Announcement / completion date
Acquisitions database of characteristics • Method of payment
Thompson Financial • Magnitude of acquisition premium
Securities Data
• Industrial sector of acquiring firms
• Value of the deal
Proxy statements 2) data related • Executive compensation (salary, short-term
(Micromedia Proquest, to executive and long-term bonus, stock options, long-term
Sedar) compensation incentive plans, other compensation)
• Details on executive compensation contracts
(pension funds, termination clause, new plans
adopted, golden parachute, pay criteria)
• Composition of the board of directors
• Compensation of directors
• Tenure as director
• Ownership structure (number of ordinary
stock, presence of the control block)
Stock Guide, Cancorp, 3) data related • Acquiring firms total assets / sales
FISonline, Toronto Stock to financial • Returns on equity
Exchange Review, etc. characteristics • Stock market returns
of acquiring • Stock market capitalization
firms • Tobin’s q
Further, data related to tenure as CEO were more difficult to collect, because disclosure
of this information in proxy statements is done on a volunteer basis. Since tenure as CEO
is retained as one of the nine variables included in the composite measure of structural
board independence, only those firms for which this information was available were
retained in the study. Hence, these data gathering limitations produced 80 M&A
transactions which were included in the full sample of data. Finally, in order to ensure
that executive compensation observed in this thesis are not due to managerial turnover,
separate statistical analyses were performed with those acquiring companies where the
same manager (for whom the compensation information was collected) was in place for
the whole study period covering seven years. This selection criterion, which requires
same CEO to be at the company’s top during the treatment period, produced 43 acquirers
that were included in the restricted sample of data.
For each acquiring company, seven proxy statements, representing respectively the year
t−3, t−2, t−1, t, t+1, t+2, t+3 have been codified and entered in the database, where the
year t represents the year of transaction completion. Thus, a sample size of 560 firm-
years (80 acquirers x 7 years = 560) was used to compute the dependent variables.
To codify all the proxy statements covering the seven years under study, we used Excel
program cells. The time required to codify one proxy statement varied significantly
according to the heterogeneity of the information available and the distinctive
characteristics of organizations. For instance, as far as directors’ compensation is
concerned, some companies divulge the total amount paid during the year, while other
companies provide only the amount paid per board of directors’ meetings attended,
leaving it up to the reader to calculate the total amount paid per year. The board of
directors’ size is a good example of the heterogeneity of firms’ characteristics, ranging as
it does from four members in some firms (like Ultra Petroleum Corporation in 1998 and
1999) to twenty-nine in other companies (like Bank of Nova Scotia in 1994).
Subsequently, data related to the financial characteristics of acquiring firms, such as

stock market capitalization, total assets, total sales, returns on equity, stock market
returns, which could not be obtained from previous sources were gathered from the
following databases: Stock Guide, Toronto Stock Exchange Review, Cancorp, FISonline,
Financial Post Industrials Survey, Financial Post Survey of mines and energy resources,
Financial Post Historical Reports, Canadian financial research market, the archives of
the journals La Presse, Globe and Mail, and Bloomberg.
4.2 EMPIRICAL MODEL AND METHODOLOGY
In the following subsections we, first, briefly describe the empirical models retained in
this thesis and, second, present the methodology used for data analyses.
4.2.1 Empirical models
(A) Monetary CEO compensation components
In order to answer the four research questions related to the monetary magnitude of
CEO compensation components, we proceed as follows. Before initiating a deeper
multivariate analysis, we have to check whether there are any changes (increases or
decreases) in the magnitude of executive compensation components between the pre- and
post-acquisition periods. To answer the research question (1.1), some basic descriptive
analyses are performed for different executive compensation components. With respect
to the research question (1.2), the following ordinary-least-square regression model is
used. This equation (1) tests the existence of a direct link between the two transactional
characteristics and executive compensation in the post-acquisition period. The final
model includes the interaction terms for control premium and method of payment,
control variable for firm size and year-specific fixed effects.
(1) COMP = β0 + β1Premium*Post + β2LnAssets*Post + β3Method*Post +

β4LnAssets + β5Years(1992-2004)
Then, several multivariate analyses are performed in order to answer the research
question (1.3) of this thesis. Since the magnitude of acquisition premium (or method of
payment) is hypothesized to affect executive rewards through organizational
performance ratings, we adopt the empirical mediating-variable approach suggested by
Baron and Kenny (1986). This approach has already been used in compensation studies
by Renaud et al. (2004), who tested the mediating role of individual performance in the
relationship between stock purchase plan participation and workers’ cash compensation.
According to Baron and Kenny (1986), a given variable may be said to function as a
mediator to the extent that it accounts for the relation between the independent and
dependent variables. To test for mediation, three regression equations should be

estimated: first, regressing the dependent variable on the independent variable; second,
regressing the mediator on the independent variable; third, regressing the dependent
variable on both the independent variable and on the mediator. To establish the mediation
the following conditions must hold: first, the independent variable must be shown to
affect the dependent variable in the first equation; second, the independent variable must
affect the mediator in the second equation; third, the mediator must affect the dependent
variable in the third equation.
In the context of our research, the mediator is represented by firm performance, while the
independent variables by two transactional characteristics – control premium and method
of payment. As suggested by Baron and Kenny (1986), three regression equations are
used to test the mediating role of firm performance in the indirect relation between deal
characteristics and CEO compensation. First, the regression model which tests the
relation between acquisition premium or method of payment and executive compensation
is represented by the equation (1).
Second, the same ordinary-least-square regression as that expressed in equation (1) is

performed, but this time with organizational performance ratings (RET/ROE) as
dependant variables. Once again, explanatory factors include such M&A transaction
year-specific variables (t) as: the acquisition premium and method of payment, control
variable for firm size, and year-specific fixed effects. This equation (2) tests the
existence of relation between the acquisition premium or method of payment and the
firm performance ratings.
(2) RET / ROE = β0 + β1Premium*Post + β2LnAssets*Post + β3Method*Post +

β4LnAssets + β5Years(1992-2004)
Third, an ordinary-least-squares regression is performed with executive compensation as

dependent variable, including the same explanatory factors as in the previous regression
equation (2) plus organizational performance ratings. The coefficients for stock-market
and accounting firm performance (RET/ROE) in the equation (3) test their mediating
role in the relationship between the acquisition premium or method of payment and CEO
compensation.

β4LnAssets + β5RET + β6ROE + β7Years(1992-2004)
Finally, in order to capture the pre-acquisition effect of firm performance and the change
in this effect between the pre- and post-deal periods, an additional analysis is performed
using the regression equation (4). In order to enrich the empirical analysis, the research
samples are split into two subgroups (high versus low acquisition premium and cash-
versus equity-financed transactions) and the performance coefficients compared across
the subgroups.
(4) COMP = β0 + β1LnAssets + β2RET + β3ROE + β4LnAssets*Post + β5RET*Post

+ β6ROE*Post (control premium or method of payment partition)
For the research question (1.4), the structural board independence variable is expected
to moderate the links between deal-specific (organizational) characteristics and executive
compensation. To test these relationships, we adopt the empirical moderator-variable
approach suggested by Baron and Kenny (1986). According to these authors, the
moderation implies that the causal relation between two variables changes as a function
of the moderator. The statistical analysis must measure the differential effect of the
independent variable on the dependent one as a function of the moderator variable. For
this, an interaction term of independent and moderator variables is computed and the
moderator hypothesis is supported if this interaction is found to be significant.
In the context of our research, two kinds of relationships are tested with respect to the
moderating effect of the structural board independence (SBI) variable. The first
relationship is intended to test the moderating effect of SBI on the direct relation between
transactional characteristics and executive compensation in the post-acquisition period.
Hence, in order to capture this moderating SBI effect, the interaction terms with SBI
variable are computed for each of the two deal characteristics (Premium*Post*SBI and
Method*Post*SBI). The final equation (5), testing this effect, is designed as follows:

β4LnAssets + β5SBI + β6Premium*Post*SBI + β7Method*Post*SBI +
β8Years(1992-2004)
The intention of the second relationship is to test the moderating effect of SBI on
executive compensation association with firm performance or company size. In order to
capture the moderating SBI effect before an acquisition and the change in this effect
between the pre- and post-acquisition periods, a multivariate analysis is performed using
the regression equation (4). As with the two transactional characteristics, both research
samples are split once again into two subgroups, but this time across the SBI partition.
The performance and size coefficients are then compared between the subgroup
including the independent from management boards of directors and that with dependent
boards. The final regression equation (6) is presented as follows:

+ β6ROE*Post (structural board independence partition)
(B) Attributes of CEO compensation contracts
In order to answer the three research questions related to the specific attributes of CEO
compensation contracts, we take the following steps. Here again, before initiating a
deeper multivariate analysis, we check whether there are any changes in the structure of
executive compensation contracts between the pre- and post-acquisition periods. To
answer the research question (2.1), some basic descriptive analyses are performed for
different executive compensation contractual arrangements. Concerning the research
question (2.2), a logistic regression model is used. The equation (7) tests the existence
of a direct link between the two transactional characteristics and the frequency of the
adoption of specific attributes of executive compensation contracts in the post-acquisition
period. The final model includes the interaction terms for control premium and method of
payment, and control variable for firm size.
(7) COMP = β0 + β1Premium*Post + β2Method*Post + β3LnAssets + e.

To provide empirical answers to the research question (2.3), the following logistic
regression model is tested. The equation (8) captures whether the frequency of the
adoption of specific attributes of executive compensation contracts is associated with
firm performance or size before the acquisition and whether there is any change
produced in this association between the pre- and post-acquisition periods.

+ β6ROE*Post
4.2.2 Methodology
Quantitative research methods are used in order to provide answers to all research
questions of this thesis. These methods allow for the formal control of the influence of
some explanatory factors which affect executive compensation of acquiring companies.
All statistic analyses (e.g., tests of significance of difference, linear and logistic
regressions) applied to the research data are performed using the SPSS program.
Descriptive statistics (e.g., means, medians, standard deviations, and correlations) are
performed for the whole set of research variables used in this thesis. In order to
determine whether the pre- versus post-acquisition period differences in executive
compensation levels and structure are statistically significant, two tests of significance of
difference are performed. First, the t-statistic test of significance is used for the monetary
magnitude of executive compensation components, and, second, the Mann-Whitney
nonparametric test is applied to the specific attributes of CEO compensation contracts.
Multivariate regression analysis is then performed to verify whether empirical findings

corroborate the research hypotheses formulated with respect to the magnitude of
acquiring CEO compensation components. Different liner regression models (presented
in the previous subsection) are tested using different executive compensation components
as dependent variables. For each regression model, the F-statistic test and adjusted R² are
comprehensively reported, together with all regression coefficients, their respective
levels of significance, and the total number of observations. Specific diagnostic tests
such as Durbin-Watson test (which looks for correlations between errors) and
multicollinearity test (which produces variance inflation factors and tolerance levels), are
also performed. Additional statistical tests are performed as they are considered
interesting for discussion purposes. The latter refer to the tests of significance of
difference in coefficients on different explanatory variables (e.g., stock-market
performance, accounting performance, firm size) across a given variable partition (e.g.,
magnitude of acquisition premium, method of payment, structural board independence).
Finally, a similar multivariate analysis is applied to the four attributes of executive

compensation contracts used in this thesis: adoption of employment agreement,
termination clause, change of control clause, and new long-term incentive plans.
However, since these dependent variables are not continuous (like the monetary
compensation components) but categorical dichotomies, logistic regression models are
applied in this case. For each logistic regression model, the Chi-square (produced as
result of Hosmer-Lemeshow goodness-of-fit statistic), the regression coefficients and
their respective levels of significance are reported.
4.3 VARIABLES’ DEFINITIONS AND MEASURES
The whole set of variables used in this research is divided into five groups: 1) dependent
variables, 2) independent variables, 3) mediating variables, 4) control variables, and
5) moderating variables. In the following subsections we describe and explain how we
have measured these research variables.
4.3.1 Dependent variables
The dependent variable of this research represents the executive compensation of

acquiring companies. For the purposes of this thesis, the compensation data of the
highest-paid executive (usually CEO) of acquiring firms, information available in proxy
statements, are taken into consideration. Two dimensions of CEO compensation are
analyzed: the monetary magnitude of executive compensation components and the
specific attributes of executive compensation contracts. To study the monetary
components, the following components of executive compensation are used: salary,
short-term bonus, other short-term compensation, restricted stock awards, long-term

payouts, and stock options. Then, these monetary compensation components are
assembled in such a way as to form three groups of executive compensation: short-term
compensation, long-term compensation, and total compensation. Considering these
compensation components under different types of compensation can produce different
findings. The empirical analysis of the attributes of compensation contracts is based on
observations of structural composition of executive compensation packages. In this way,
four different attributes are investigated: the adoption of employment agreement,
termination clause, change of control clause (or golden parachute clause), and new long-
term incentive plans.
Figure 8. Changes in the magnitude of executive compensation components
Pre = t – 3; t – 2; t – 1 Post = t; t + 1; t + 2; t + 3
Before Before Before M&A After After After

t−3 t−2 t−1 t t+1 t+2 t+3
Size, perf., Size, perf., Size, perf., + premium, Size, perf., Size, perf., Size, perf.,
SBI, comp. SBI, comp. SBI, comp. + method SBI, comp. SBI, comp. SBI, comp.
Pre = t – 3; t – 2; t – 1; t Post = t + 1; t + 2; t + 3
ÌCOMPpost, pre = (COMPpost – COMPpre)/COMPpre
In order to be able to compare the compensation differences between the pre- and post-
acquisition periods, changes in managerial compensation are also considered, being
defined as the ‘after the acquisition completion versus before’ percentage change in
executive compensation. For this, different periods can be taken into consideration:
changes between the years t and t−1; years t and t−2; years t+1 and t, etc. (see appendix
9). For the purposes of this thesis, only two kinds of compensation changes between the
post- and pre-acquisition periods are privileged (while others are also considered in the
‘descriptive statistics’ section of the following chapter): in the first, the acquisition year t
is included in the post-acquisition period, while in the second one, the transaction year t
is included in the pre-acquisition period (see figure 8).
• Salary
The base salary (SAL) corresponds to a fixed amount of money that firms are committed
to paying their managers annually, whatever the circumstances. Generally, this
component is directly indicated in the proxy statement and no additional calculation is
required to obtain it. However, in cases of managerial turnover, the annual salary of the
newly employed CEO corresponds to the amount indicated in his employment contract.
In order to be able to eliminate this bias, a separate analysis was performed exclusively
on companies that had the same CEO during the whole seven-year study period. All
salary data were adjusted for inflation (expressed in 2004 standard Canadian dollars).
When needed, changes in base salary were calculated as percentage change from the
post-acquisition to pre-acquisition period. The formula is presented as follows:
ÌSAL(post, pre) = [(SAL(post) − SAL(pre)) / SAL(pre)] ∗ 100 %
• Short-term bonus
The short-term bonus corresponds to an amount of money paid in cash or in stock; it is

designed to reward a manager for attaining short-term goals within a period not
exceeding one year. This component is also indicated in proxy statements and no
additional calculation is required to obtain the amount of bonus paid in cash. However, in
order to obtain the amount of short-term bonus paid in company shares, the number of
shares granted to CEO has to be multiplied by the price of this share at the date of grant.
To measure the changes in CEO’s short-term bonus, we calculated the percentage change
from the post- to the pre-acquisition period, adjusting for inflation. This measure is
presented as follows: ÌSTB(post,pre) = [(STBonus(post) − STBonus(pre)) / STBonus(pre)] ∗
100 %
• Other short-term compensation
Proxy statements do not systematically report the value of components classified under
“other short-term compensation”. Those firms which disclosed the information on this
component indicated that it corresponds to employers’ contributions to employees’
pension plans, employment insurance plans, and the evaluations of the value of non
pecuniary benefits granted to managers. The percentage change in other forms of short-
term compensation was calculated in the same way as for the previous compensation
components: ÌOther STComp (post, pre) = [(Other STComp(post) − Other STComp(pre)) /
Other STComp(pre)] ∗ 100 %
• Stock options
We estimated the total value of each CEO’s stock option holdings using the information
from the proxy statements. In order to estimate the value of this compensation
component (ValSO), we need to know the number of stock options (NoSO) granted to
CEOs and their exercise price. The stock options valuation is a problematic task, and
different approaches were used in previous research. Although the bulk of studies
(Lambert et al., 1993; Sanders et al., 1995; Westphal, 1998) estimated options’ values
using the sophisticated Black-Scholes (1973) model, which estimates the value of the
option based on the historical price volatility of the underlying security, this method has
been criticized for overstating the options’ value (Kerr and Kren, 1992). Alternatively,
other studies (Agrawal and Mandelker, 1987; Kerr and Kren, 1992, Sanders, 2001;
Wright et al., 2002) used the SEC present-value method, in which one defines a lower
bound value of options as the higher of either zero or the current stock price, subtracting
the present value of the exercise price, and then discounting the present value of the
stream of dividends payable by the stock.
For the purposes of this thesis, Core et al. (1999) formula is used, whereby stock options
are valued at 25% of their exercise price. Even though this formula is simpler, the
simulation results (Lambert et al., 1991; McConnell, 1993) suggest that more
sophisticated option pricing models based on the Black-Scholes (1973) formula typically
produce similar values. The value of stock options granted to acquiring CEOs is
estimated as follows:
ValSO = NoSO ∗ (25% ∗ exercise price)
To measure the changes in the value of CEOs’ stock options, we calculated the
percentage change from the post- to the pre-acquisition period, adjusting for inflation.
The calculation formula is presented as follows:
ÌValSO (post, pre) = [((NoSO(post) ∗ (25% ∗ exercise price)(post)) − (NoSO(pre) ∗ (25% ∗

exercise price)(pre))) / (NoSO(pre) ∗ (25% ∗ exercise price)(pre) )] ∗ 100 %
• Long-term incentive plans
The long-term incentive plans granted to acquiring managers include stock purchase
plans, restricted stock awards, phantom stock grants, performance unit plans, and stock
appreciation rights. Restricted stock awards and phantom stock grants are valued
according to the price per share at the date of grant and are calculated as follows:
RestAw (PhanSt) = (No. of shares ∗ Stock price)
The valuation of performance shares’ grants and performance units’ grants is made by
multiplying the number of performance shares or performance units, respectively, by the
company stock price at the grant date (Core et al., 1999). For this, the following formula
is used:
PerfShares (PerfUnit) = (No. of performance shares/units ∗ Stock price)
Grants of stock appreciation rights (SAR) are valued in the same way as stock option
grants, that is, at 25% of their exercise price:
SAR = No. of rights ∗ (25% ∗ Stock price)
Stock appreciation rights are typically attached to option grants and permit managers to
exchange options for a cash payment equal to the stock price less the exercise price
(Wesphal and Zajac, 1994). Thus, stock options and stock appreciation rights should
have the same value (Mehran, 1995). To obtain the value of long-term incentive plans
given to acquiring managers in a given year (t+1), the following formula is used:
LTIP t+1 = (No. of shares(t+1) ∗ Stock price(t+1)) + (No. of performance units(t+1) ∗

∗ stock price(t+1)) + (No. of performance shares(t+1) ∗ stock price(t+1)) +
(No. of SAR(t+1) ∗ (25% ∗ exercise price)(t+1))
Then, in order to calculate the percentage change in the value of long term incentive
plans between the post- and pre-acquisition period, the following measure is used:
ÌLTIP(post, pre) = [(LTIP(post) − LTIP(pre)) / LTIP(pre) ]∗ 100 %
• Short-term compensation
Short-term compensation (STComp) is the sum of salary, short-term bonus, and other
short-term compensation given to acquiring managers. Hence, we calculate the short-
term compensation component as follows:
STComp = SAL + STB + Other STComp
The measure used to estimate the quantitative changes between the post- and pre-
acquisition periods in short-term compensation component is presented hereinafter as:
ÌSTComp(post,pre) =[(STComp(post)−STComp(pre)) / STComp(pre)] ∗ 100%
• Long-term compensation
Long-term compensation (LTComp) includes the value of stock options and long-term
incentive plans granted to acquiring managers and is calculated as follows:
LTComp = ValSO + LTIP
The percentage change between the two M&A-related periods is estimated as follows:
ÌLTComp (post,pre) = [(LTComp(post) − LTComp(pre)) / LTComp(pre))] ∗ 100 %
• Fixed compensation
For the purposes of this thesis, fixed compensation (FixComp) corresponds to the base
salary of the acquiring manager: FixComp = SAL. Therefore, changes in executive fixed
compensation are equal to changes in salary: ÌFixComp (post, pre) = ÌSAL (post,pre)
• Variable compensation
Variable compensation of acquiring executives includes the following three components:

short-term bonus, the valuation of stock options, and long-term incentive plans.
VarComp = STB + ValSO + LTIP

In order to estimate the percentage change in variable compensation of acquiring CEOs,

the following measure is used: ÌVarComp (post, pre) = [(VarComp(post) − VarComp(pre)) /
VarComp(pre)] ∗ 100 %
• Total compensation
The total compensation (TotComp) of acquiring managers represents the sum of the base
salary, short-term bonus, other short-term compensation, stock options value, and long-
term incentive plans. For this, the following formula is used:
TotComp = SAL + STB + OTComp + ValSO + LTIP
To obtain the change values in total compensation from post- to pre-deal period, the
following calculation is made: ÌTotComp (post, pre) = [(TComp(post) − TComp(pre)) /
TComp(pre)] ∗ 100 %
(B) Attributes of CEO compensation contracts
o Employment agreement
Whether the acquiring company has entered in any employment agreement with its CEO
during the seven years under study or prior to this period is an important attribute of
CEO compensation contracts to take into consideration. This information, if existing, is
specified under the “employment agreement” section of the proxy statement. These kinds
of agreements normally specify the time period covered by this contract, the annual
salary granted to the CEO, and can eventually provide for a severance payment in the
event of the termination of the executive’s services – for reasons other than cause, or for
a change in corporate control. In order to code the employment agreement existence, a
dummy variable was developed taking the value 1, if this agreement existed in a given
year and 0, otherwise. This is represented as follows:
EmployAgreem = 1, if agreement exists and 0, otherwise
Further, the year to year changes in the adoption of these employment agreements are
also computed in order to determine the year of the agreement addition, if any.
o Termination clause
The second variable used in this thesis to measure the specific arrangements of executive
compensation contracts constitutes the adoption of a termination clause (of executive
services to the company). To code this phenomenon, proxy statements were examined
and a dummy variable was developed taking the value 1, if a termination clause existed
in a given year and 0, otherwise:
TermClause = 1, if clause exits and 0, otherwise
Here again, the year to year changes are computed in this variable in order to determine
the specific year of the addition of termination clause, or the specific year when this
clause has ceased to be used.
o Golden parachute clause (change of control clause)
For the purposes of this research, we have determined whether in the pre-acquisition or
post-acquisition period acquiring firms adopted a specific clause providing for severance
payments to top executives of the company, should a change in control occur. Proxy
statements usually provide data on the presence of a golden parachute (GoldPar) clause
or its equivalent. To measure the golden parachute payments existence, we developed a
dummy variable that takes the value 1, if this clause existed in a given year and 0,
otherwise:
GoldPar = 1, if clause exists and 0, otherwise
Then, the calculation of the year to year changes in this component allowed us to
determine the year in which this clause was adopted or ceased to exist.
o New long-term incentive plans
In this thesis, the adoption of a long-term incentive plan (LTIP) refers to the introduction
(announcement indicated in proxy statements for purposes of receiving shareholders’
approval) of a relatively comprehensive incentive program. A variety of long-term
incentive programs are possible, such as deferred share units, stock appreciation rights,
phantom stock or restricted compensation. The necessary condition for coding a firm as
having adopted a LTIP is the adoption of at least one new plan that is aimed at adding
multiyear incentives to a CEO’s compensation contract. In their study, Westphal and
Zajac (1994) wanted to exclusively ensure the newness and uniqueness of coded LTIP
adoptions. For the purposes of this study, we have considered both the presence of these
plans and the frequency of new adoptions. We coded the LTIP introduction as new when
it first occurred during the seven-year period under study, disregarding whether a given
plan had already been adopted prior to the investigation period. We developed a
dichotomous measure coded as 1, if a new LTIP was adopted in a specific year and
whether it continued to exist in the following years, and 0, if no new LTIP adoptions
were registered in this period. This measure is presented as follows:
NewLTIP = 1, if a new LTIP adopted and 0, otherwise
We also computed the year to year changes in order to be able to account specifically for
the frequency of new adoptions and for the specific year when any new long-term
incentive plan started to be used in the company.
4.3.2 Independent variables
(A) Merger and acquisition characteristics
Acquisition premium
The acquisition premium can be computed according to its accounting or stock market
values. Since the second measure is more precise, we estimate the acquisition premium
according to its stock market value. The most important issue in this method is to
identify the number of days prior to the acquisition announcement, which will constitute
the basis for the premium calculation. Previous studies of takeovers report that premia
are generally calculated two to eight weeks before the announcement date (Haunschild,
1994) to avoid the distortion caused by a typical run-up (increase) in target stock prices
due to the information leakage (Jarrell and Poulsen, 1989; Nathan and O’Keefe, 1989).
More precisely, authors who use the acquisition premium variable in their studies take an
adequate time period into consideration, such as the price per share 14 days (Walking
and Long, 1984), 20 days (Slusky and Caves, 1991) or 30 days (Varaiya, 1987;
Haunschild, 1994; Cotter and Zenner, 1994; Hayward and Hambrick, 1997; Datta et al.,
2001) prior to the announcement date, in order to obtain the “unaffected” by takeover
news stock price and, thus, not under-estimate the gains to target shareholders.
The premium paid to the target company is usually calculated as the percentage
difference between final price per target share paid by the acquiring firm and the target’s
stock price four weeks before the offer announcement. The announcement day is the day
on which the target receives its first official bid. The final price paid per share is the one
when the deal is consummated. The premium data were obtained from the Merger and
Corporate Transaction Database, available at Securities Data Corporation (SDC). Since
the acquisition premium is a unique event in the seven-year period under study being
paid during the year of acquisition completion, its magnitude is calculated only for the
year t. For the purposes of this thesis, three different measures of control premium are
developed: using target’s stock price – one day, ten days, and 20 days before the
acquisition announcement. The first of these control premium measures can be illustrated
as follows:
AcqPREM (t) = [(Purchase price per share − target's stock price one day prior to the
announcement date) / target's stock price one day prior to the announcement date] ∗ 100%
Method of payment
Two different ways to measure the method of payment (MethPAY) variable for M&A
transactions can be identified in the specialized literature. A majority of authors use a
dummy variable, equal to 1, if the payment of the takeover price is made entirely in cash,
and 0, otherwise (Slusky and Caves, 1991; Comment and Schwert, 1995). While others
(Hayward and Hambrick, 1997; Ghosh and Ruland, 1998), develop a 3-point ordinal
scale, where 1 (0) = cash; 2 (1) = a combination of cash and stock, and 3 (2) = stock. For
the purposes of this thesis, a 3-point ordinal scale is used to measure the method of
payment, where the value 1 means that an M&A transaction was financed in cash, value
2, that the payment was made through a combination of cash and stock, and value 3, that
the deal was paid through share exchanges. Since method of payment is a unique event in
the seven-year period under study, occurring only during the year of acquisition, this
measure is calculated only for the year t. The measure of the method of payment used in
this thesis is presented as follows:
MethPAY (t) = 1, if payment in cash; 2, if combination of cash & stock; and 3, if stock
4.3.3 Mediating variables
(A) Measures of corporate performance
The mediating variable of this thesis is represented by the different corporate

performance measures. For comparison purposes, table 31 shows the measures of firm
performance that have been developed and used in previous research.
Table 31. Comparative analysis of performance and size measures used in studies
analyzing executive compensation of acquiring firms
Authors Performance Size

Lambert & Larker Abnormal stock returns Total sales
(1987)
Kroll et al. (1990) 1) return on equity = total net income / total shareholders’ equity; Total sales
2) return on equity as a percent of industry standard
Schmidt & 1) abnormal profitability returns (return on common equity); Total assets
Fowler (1990) 2) abnormal stock returns to shareholders = (firm’s annual
dividend per share + annual per share increase or decrease in the
average price of its stock) / previous year’s average share price
Firth (1991) Net income / book value of shareholders’ equity 1) ln sales revenue
2) ln total assets
Kroll et al. (1997) Cumulative abnormal returns Total sales
Avery et al. 1) stock market returns Logarithm of sales
(1998) 2) change in return on common equity
Khorana & Stock returns Logarithm of sales
Zenner (1998)
Bliss & Rosen 1) stock market performance (change in firm’s equity value due to Total assets
(2001) change in index; change in firm value due to firm-specific events)
2) accounting performance (return on assets)
Wright et al. 1) cumulative abnormal returns Sales
(2002) 2) return on equity
ln - natural logarithm
As it appears from the table, five out of nine synthesized studies developed a double
measure of organizational performance (Kroll et al., 1990; Schmidt and Fowler, 1990;
Avery et al., 1998; Bliss and Rosen, 2001; Wright et al., 2002), while the other four
retained only one – either stock market return (RET) or return on equity/assets
(ROE/ROA). Since using both market-based and accounting-based measures of firm
performance as mediating variables enhances the robustness of the findings (Bliss and
Rosen, 2001; Wright et al., 2002), both of these measures are retained in this thesis.
Information regarding the stock market return, return on equity and return on assets of
acquiring companies under investigation has been collected from Thompson Financial
Securities Data.
• Stock market return
The first measure of organizational performance retained in this thesis is based on stock
market results. This measure is calculated as follows:
RET = [Stock price(t) − Stock price(t-1) + Dividend(t)] / Stock Price(t-1)) ∗ 100 %
The percentage change in RET from post- to pre-deal period is calculated as follows:
ÌRET (post, pre) = [(RET(post) − RET(pre)) / RET(pre)] ∗ 100 %
• Return on equity
Return on equity, the first measure of accounting performance, can be calculated by

dividing net earnings per stockholders’ equity in a given year. This measure can be
presented as follows:
ROE = (Net earnings / Stockholders’ equity) ∗ 100 %
In this thesis, accounting-based returns are also assessed by measuring the post- versus
pre-acquisition percentage change in an acquiring firms’ return on equity: ÌROE (post,
pre) = [(ROE(post) − ROE(pre)) / ROE(pre)] ∗ 100 %
• Return on assets
Return on assets, the second measure of accounting performance, can be calculated by

dividing net earnings per company’s total assets in a given year. This measure is
presented as follows:
ROA = (Net earnings / Total assets)∗ 100 %

To calculate the post- versus pre-acquisition percentage change in an acquiring firms’

return on assets, the following formula is used: ÌROA (post, pre) = [(ROA(post) − ROA(pre)) /
ROA(pre)] ∗ 100 %
4.3.4 Control variables
(A) Acquiring company characteristics
o Firm size
As shown in table 26, two different measures of company size (logarithm of total assets
and total sales) have been used in previous studies. In this thesis, three alternative
measures of size have been considered: logarithm 1) of total assets, 2) of total sales, and
3) of stock market capitalization. These measures can be resumed as follows:
SIZE1 = Ln Assets; SIZE2 = Ln Sales; SIZE3 = Ln Stock market capitalisation = Ln (no. of

common shares outstanding ∗ price per share)
The post- versus pre-acquisition change in firm size is measured as percentage change
between these periods: ÌSIZE (post, pre) = [(LnAssets(post) − LnAssets(pre)) / LnAssets(pre)]
∗ 100 %
o Acquisition experience
For the purposes of this study, the variable called “acquisition experience” represents the
multiplicity of transactions made by the same firm during the seven years under
investigation (between 1995 and 2001). Therefore, a firm that undertook more than one
acquisition is considered to have more acquisition experience than a firm that made only
one transaction. Information on the number of acquisitions made by the same firm was
obtained from an analysis of the final database, which showed whether the same
acquiring firm appeared in the database once, twice or more times. To measure
acquisition experience, a dichotomous variable was developed, which takes the value 1,
if the acquiring company undertook more than one acquisition during the study period,
and 0, if only one operation was made during this interval:
AcqExp = 1, if multiple acquisitions and 0, otherwise

(B) Transactional characteristics
Transaction type: merger or acquisition
According to previous research (Hayn, 1989; Comment and Schwert, 1995), the
transaction type is measured using a dummy variable which takes the value 1, if the
transaction is an acquisition, and value 0, in the case of a merger. In this thesis, the same
dichotomous variable is used to estimate the transaction type and is presented as follows:
TYPE = 1, if acquisition and 0, otherwise
4.3.5 Moderating variables
(A) Structural board independence components
According to Westphal (1998), structural board independence (SBI) is defined as "those

aspects of formal position and informal social structure that can potentially reduce the
extent to which directors are socially or professionally beholden to the CEO". He
incorporates in this definition both formal (ratio of outside to inside directors, CEO/board
chairman split) and informal (CEO-board friendship ties, demographic distance) sources
of structure in CEO-board relationships. For the purposes of this investigation, the two
Westphal (1998) formal sources (slightly transformed) have been included in the
composite measure of structural board independence. Seven other dimensions have also
been added in order to better indicate both structure and independence of the board of
directors. Those other dimensions are: board size, CEO tenure, ownership concentration,
CEO shares ownership, value of shares owned by the CEO, board of directors’ shares
ownership (excluding CEO), and the value of these shares owned by all board members
excepting the CEO.
Data on structural board independence were all drawn from company proxy statements
available under the “statement of corporate governance practice” section. Moreover,
Canadian public companies are committed to an ongoing process of clear disclosure of
their practices, as opposed to the corporate governance guidelines adopted in 1994 by
The Toronto Stock Exchange (TSX). Given that most companies identify their
compliance with these guidelines, such information as the number of unrelated directors,
board size, and the separation of the offices of Chair and CEO are clearly stated in proxy
statements.
• Ratio of unrelated to total number of directors
According to Westphal (1998), the proportion of the board composed of outside directors
represents one dimension of formal structural independence from management. While
both inside and outside directors are responsible for overseeing corporate strategy, the
agency theory suggests that outsiders have the potential to evaluate strategic decision
making more objectively since they are not beholden to CEOs for their jobs (Fama and
Jensen, 1983). Westphal (1998) defines outsiders as “non-employee directors who are
not full-time employees of the corporation”. However, the use of this measure is
problematic, since there is mixed evidence as to whether boards are more effective when
they consist of fewer inside directors. For instance, few studies find that this measure of
board structure explains statistically significant variation in CEO compensation (Core et
al., 1999; Sridharan, 1996; Mehran, 1995), while the great majority of investigations
report non-significant impacts (Daly et al., 1998; Newman and Bannister, 1998; Sanders
and Carpentier, 1998; Malette et al., 1995; Westphal and Zajac, 1995). According to St-
Onge et al. (2001), these discrepancies in findings may be due to the limitative nature of
an “inside-outside” dichotomy, since some directors qualified as outsiders can be more or
less “related,” due to family or business ties with current or past management.
Therefore, for the purposes of this thesis, it is more appropriate to consider the
percentage of unrelated directors on the board. An “unrelated” director, under the TSX
Guideline No. 2, is a director who is “free of any interest and any business or other
relationship which could, or could be reasonably perceived to, materially interfere with
the director’s ability to act in the best interests of the corporation, other than interests
arising from shareholding”. The proportion of unrelated directors was calculated as the
ratio of directors disclosed as unrelated – according to the TSX Guideline No. 3 requiring
disclosure for each director in office as to whether or not he is related, and how that
conclusion was reached – to board size (the total number of directors on the board) in the
current year. The measure of ‘unrelated directors to total’ ratio is presented as follows:
UnrelBoard = (No. of unrelated directors / board size) ∗ 100%
• CEO/board chairman split
The top executive, usually the most highly compensated executive of the firm,
sometimes also serves as chairman of the board (COB). This duality title places him in a
powerful position to manage the firm’s operations and oversee such board activities as
hiring, firing, and compensating top management – including the CEO. In light of the
agency theory, when the CEO also fills the position of chairman a potential conflict of
interest arises, which diminishes the objectivity of the director’s decision-making process
regarding CEO compensation (Jensen, 1993). It is also unclear whether separating the
positions of CEO and COB removes these conflicts of interests and improve the board’s
effectiveness. In this sense, the empirical evidence is quite mixed. For instance, some
researchers find that the dual position has a negative effect on managerial rewards
(Sridharan, 1996; Sanders and Carpentier, 1998), while others have reported a positive
influence (Westphal and Zajac, 1995; Core et al., 1999). Among high profile business
failures, Enron Corporation had its CEO serve as the chairperson of the board, while
both WorldCom Inc. and Global Crossing Ltd. separated the positions of CEO and COB
(Petra, 2005). A better understanding of the role of the CEO/COB split variable in the
board independence from management is therefore required.
The most common measure used to estimate the CEO/COB split is a binary variable
coded as 1, if different individuals filled the CEO and COB positions in a current year,
and 0, otherwise (Westphal, 1998; Core et al., 1999). In this thesis, a similar measure is
used to estimate the CEO/COB split:
CEO/COB = 1, if CEO is chairman of the board and 0, otherwise
• Board size
A board must have enough directors to carry out its duties efficiently, while presenting a
diversity of views and experience. Board size can also, however, be associated with less
effective board monitoring; this argument states that on larger boards, individual
directors tend to lose a sense of accountability for board decisions and are therefore more
likely to be influenced by the CEO (Jensen, 1993; Yermack, 1996). According to the
TSX Guideline No. 7, companies are required to determine the impact of the number of
directors upon board effectiveness, review the contributions of directors, and consider
whether the size and make-up of the board promotes efficiency. Thus, the measure of the
board size (BrdSize) refers to the total number of directors on the board in a current year
and is calculated as follows:
BrdSize = No. of directors on board in the current year
• CEO tenure
A number of studies have hypothesized a link between tenure and CEO influence over
the board (Finkelstein and Hambrick, 1989; Ocasio, 1994). The latter authors suggest
that as tenure lengthens, CEOs expand their influence over firm processes and acquire
greater personal power by populating boards with supporters. Furthermore, top managers
may acquire firm-specific knowledge with longer permanence at the firm’s management
head, furthering their companies’ dependence on their leadership. The CEO tenure
variable is measured as the total number of years in the CEO position, and is presented as
follows:
CEOTenure = No. of years as CEO
• Ownership concentration
Ownership concentration is another variable that has been considered extensively in

studies on corporate governance. Since Canadian securities regulations require disclosure
of individual shareholdings greater than 10%, this information is clearly stated in a firm’s
proxy statements under the “Voting shares and principal holders thereof” heading.
However, according to generally accepted accounting principles in Canada, only
shareholders with more than 20% ownership are considered as having significant
influence over a company’s policies. For the purposes of this thesis we use a 20%
ownership cutoff, which is similar to the ownership concentration measure used in some
previous studies (Craighead et al., 2004; Engel et al., 2002). Firms with no significant
shareholders (where no single party possesses more than 20% of outstanding votes) are
designated as “widely held,” while companies with related external shareholder blocks
that exercise control over more than 20% of any class of voting securities are classified
as “closely held.” Ownership concentration is a dummy variable which takes the value 1
when the company is closely held and 0, when the company is widely held.
OwnConcent = 1, if the company is closely held (one party owns ≥ 20% of company
shares) and 0, otherwise
• Percentage of board share ownership
Another structural board independence variable constitutes the percentage of shares

owned by all board members, aside from the CEO. According to the agency theory, stock
ownership by the board allows for a greater alignment of directors’ and shareholders’
interests (Malette et al., 1995). Zajac et Westphal (1995) also argue that the voting rights
associated with directors’ stock ownership increase their formal influence in the firm, a
power that increases with the magnitude (both percentage and value) of their ownership.
To measure the percentage of directors’ common stock holdings, the number of shares
owned by all directors excluding the CEO was divided by the total number of company
ordinary shares in circulation.
PerBrdOwn = (No. of shares owned by directors / total no. of shares) ∗ 100%
• Value of shares owned by the board
In order to better estimate the magnitude of the board ownership, the dollar value of
shares owned by all board members, excluding the CEO, was also calculated in this
thesis. For this, the number of total shares owned by all board members excepting the
CEO was multiplied by the price per share in the current year.
ValBrdOwn = No. of shares owned by directors ∗ share price

• Percentage of CEO share ownership
The magnitude of senior executive ownership, both in terms of percentage and dollar
values, was also retained in this study, since there may be a significant relationship
between CEO ownership and board effectiveness (Core et al., 1999). As for the CEO
tenure variable, the legitimacy of the CEO and the accuracy of his behavior within the
firm could be judged by the number of company shares he possesses. If this is the case, it
could be hypothesized that the higher the number and/or value of CEO shares, the greater
the probability that the CEO will affect board functioning and thus undermine its
independence from management. In order to calculate the percentage of CEO ownership,
we divided the number of common shares owned by the CEO by the total number of the
company ordinary shares in circulation.
PerCEOOwn = (No. of shares owned by CEO / total no. of shares) ∗ 100%
• Value of shares owned by the CEO
The dollar value of CEO stock ownership was estimated by multiplying the number of
total shares owned by CEO by the price per share in the current year. This measure can
be resumed as follows:
ValCEOOwn = No. of shares owned by CEO ∗ share price
(B) Composite measure of structural board independence
Nine different variables were retained in order to create a composite measure of

structural board independence: the ratio of unrelated directors to the total (%); the CEO
& COB split (dummy variable); board size (number of persons on board); CEO tenure
(number of years in service as CEO); ownership concentration (dummy variable); the
percentage of shares owned by the board, excepting the CEO (% of total shares
outstanding); the value of shares owned by the board, excepting the CEO (dollar
amounts); the percentage of shares owned by the CEO (% of total shares outstanding);
and the value of shares owned by the CEO (dollar amounts). Table 32 presents the
descriptive statistics (mean, median, minimum, and maximum) of each of these variables
that helped us to constitute the final SBI measure.
Table 32. Descriptive statistics for the nine components of the composite measure
of structural board independence
Component Mean Median Min Max

Ratio of unrelated directors (%) 73.53 78.57 20 100
CEO & COB split (dummy variable) 0.24 0 0 1
Board size (number of persons) 10.28 10 3 29
Tenure as CEO (number of years) 7.48 5 1 33
Ownership concentration (dummy variable) 0.41 0 0 1
Percentage of shares owned by the board (%) 7.84 0.67 0 97.8
Value of shares owned by the board ($) 53,744,710 5,700,741 0 1,573,246,999
Percentage of shares owned by CEO (%) 5.06 0.25 0 75.41
Value of shares owned by CEO ($) 25,546,451 3,019,970 0 2,641,461,028
In order to render a full account of the real distribution of values within the sample
companies, the median values of these variables were retained to construct the structural
board independence measure. Each of these nine components was recoded in dummy
variables, taking the value 1 to designate an independent board, and value 0 when the
board is thought to be dependent. Since a higher percentage of unrelated directors on a
board means greater independence from management, the ratio of unrelated directors to
the total is coded as 1 if this percentage is higher than 78.57%, and 0 if lower. Assuming
that when the CEO also plays the role of chairman, the board independence from
management is lower, the CEO&COB split is coded as 1, when the CEO and the COB
are two different people and 0, otherwise. Board size is coded as 1, when the number of
persons on board is equal or lower than ten and 0, otherwise – greater board size being
associated with less effectiveness and more dependence. Because longer tenure within
the firm increases the probability that a CEO will be able to influence board’s decisions
and its independence, the CEO tenure variable is coded as 1, if CEO tenure is lower than
5 years and 0, otherwise.
Since the board is thought to work more effectively when the company is closely held
and where a significant shareholder can more strongly monitor board behaviour, thus
promoting more responsible decision making, the ownership concentration variable is
recoded taking the value 1, if one single party owns more than 20% of outstanding shares
and 0, otherwise. Since board effectiveness and thus, its independence, is thought to be
greater when the percentage and the value of the board ownership (excluding the CEO) is
high, these variables are coded as 1, when the percentage is greater than 0.66% and the
value greater than CAN$5,809,955 respectively and 0, otherwise. Assuming that board
independence from management tends to diminish with a higher percentage and value of
shares owned by the CEO, the latter variables are recoded taking the value 1, if the
percentage is lower than 0.25% and the value lower than CAN$2,949,058 respectively
and 0, otherwise. The summary of the recoding conditions of the variables included in
the composite measure of structural board independence is presented in table 33.
Table 33. Recoding conditions related to the variables

included in the composite SBI measure
Component Coding
Ratio of unrelated directors (%) 1, if ratio ≥ 78.57%; 0, if ratio < 78.57%
CEO & COB split (dummy variable) 1, if split = 0; 0, if split = 1
Board size (number of persons) 1, if size ≤ 10; 0, if size > 10
Tenure as CEO (number of years) 1, if tenure ≤ 5; 0, if tenure > 5
Ownership concentration (dummy variable) 1, if concentration = 1; 0, if concentration = 0
Percentage of shares owned by the board (%) 1, if percentage ≥ 0.67%; 0, if percentage < 0.67%
Value of shares owned by the board ($) 1, if value ≥ 5,700,741; 0, if value < 5,700,741
Percentage of shares owned by CEO (%) 1, if percentage ≤ 0.25%; 0, if percentage > 0.25%
Value of shares owned by CEO ($) 1, if value ≤ 3,019,970; 0, if value > 3,019,970
where 1 means an independent board, and 0 – a dependent board
Once the nine variables had been recoded, their sum was computed for each of the seven
years under investigation – in order to establish the degree of board independence. Since
there are nine different components in the composite measure of structural board
independence, the final SBI variable takes values between 1 and 9, where 9 indicates a
very independent board of directors, and 1 indicates a very dependent board.
4.3.6 Synthesis of measures used to estimate the research variables
Table 34 represents the synthesis of measures used to estimate the set of variables used
in this thesis – dependent, independent, mediating, control, and moderating.
Table 34. Variables’ definitions and measures
Variables Abbreviation Measures

(1) dependent variables:
Base salary SAL Amount indicated in proxy statement
Short-term bonus STB Amount indicated in proxy statement
Other short-term compensation Other STComp Amount indicated in proxy statement
Value of stock options ValSO NoSO ∗ (25% ∗ exercise price)
Restricted awards (phantom stock) RestAw(PhanSt) No of shares∗ stock price
Performance shares (units) PerfSh/PerfUn (No. of performance shares / units ∗ stock price
Stock appreciation rights SAR No. of rights ∗ (25% ∗ exercise price)
Long-term incentive plans LTIP RestAw(PhanSt) + PerfSh/PerfUn + SAR
Short-term compensation STComp SAL + STB
Long-term compensation LTComp ValSO + LTIP
Fixed compensation FixComp SAL
Variable compensation VarComp STB + ValSO + LTIP
Total compensation TComp SAL + STB + OTComp + ValSO + LTIP
Adoption of employment agreem. EmployAgreem 1, if employment agreement existed in a given year and 0, otherwise
Addition of termination clause TermClause 1, if termination clause existed in a given year and 0, otherwise
Addition of golden parachute clause GoldPar 1, if golden parachute clause existed in a given year and 0, otherwise
New LTIP adoption NewLTIP 1, if a new LTIP adopted during a given year and 0, otherwise
(2) independent variables:
Acquisition premium AcqPREM [(Purchase price per share – target’s stock price 1day prior to
announcement date) / target’s stock price 1 day prior to
announcement date ] ∗ 100 %
Method of payment MethPAY 1, if payment in cash; 2, if mixture of cash & stock; 3, if payment
through share exchanges
(3) mediating variables:
Stock market return RET [(Stock price (t) – Stock price (t-1) + Dividend (t))/Stock price (t-1)]∗ 100%
Return on equity ROE (Net earnings / Stockholders’ equity) ∗ 100 %
Return on assets ROA (Net earnings / Total assets) ∗ 100 %
(4) control variables:
Firm size (1) LnAssets Logarithm of total assets
Firm size (2) LnSales Logarithm of total sales
Stock market capitalization (3) MkCapital No. of shares outstanding ∗ stock price
Acquisition experience AcqExp 1, if multiple acquisitions and 0, otherwise
Transaction type TYPE 1, if acquisition and 0, otherwise
(5) moderating variables:
Ratio unrelated/total directors OutBoard (No. of unrelated directors/ board size) ∗ 100%
CEO/board chairman split CEO/COB 1, if CEO is chairman of the board and 0, otherwise
Board size BrdSize No. of directors on board in the current year
Tenure as CEO CEOTenure No. of years as CEO
Ownership concentration OwnConcent 1, if the company is closely held (one party owns ≥ 20% of company
shares) and 0, otherwise
Percentage of board ownership BoardOwn (No. of shares owned by board / total no. of shares) ∗ 100%
Value of board ownership ValBoardOwn No. of shares owned by all board embers ∗ share price
CEO ownership CEOOwn (No. of shares owned by CEO / total no. of shares) ∗ 100%
Value of CEO ownership ValCEOOwn No. of shares owned by CEO ∗ share price
Structural board independence SBI Composite measure of nine previous moderating variables
CHAPTER 5: RESULTS
5.1 DESCRIPTIVE RESULTS
In this section we report the descriptive statistics and basic statistical tests for the whole
set of research variables used in this thesis – dependent, independent, mediating, control,
and moderating.
5.1.1 Dependent variables
Our main objective in this subsection is to provide empirical answers to the research
questions (1.1) and (2.1). Due to their descriptive nature, there are no specific associated
research hypotheses. Descriptive statistics, t-tests and Mann-Whitney nonparametric tests
are presented, which allow us to determine whether acquiring CEOs experience
statistically significant changes in the magnitude of their compensation components and
in the structure of their compensation contracts.
Table 35 provides descriptive statistics of the monetary CEO compensation components

for the full sample of 80 acquiring companies (see appendix 8, table A14) for the pre-
acquisition, acquisition, and post-acquisition periods. All data are in constant 2004-
Canadian dollars. Since the mean is very sensitive to extreme values, the median value of
different compensation components is also presented. There is great inconsistency in the
rewarding amounts offered to CEOs by their respective (sample) firms. The CEO of
Mountain Province Diamonds, Mr. Jan W. Vandersande, received no salary during the
seven years under study, though he benefited from a special consulting fee-contract of
US$14,000 per month. The salary of Hollinger’s CEO, Mr. Conrad Black, however, was
as high as CAN$1,919,688 before the acquisition, and the CEO of Nortel Networks, Mr.
J.A. Roth, received a salary of CAN$1,789,535 during the acquisition year.
Table 35. Descriptive statistics for the full sample of compensation data
Compensation Pre-M&A M&A Post-M&A

component t-3 t-2 t-1 t t+1 t+2 t+3
Salary Mean 488,855 487,575 522,446 569,997 607,517 649,798 663,907
Median 391,866 414,467 409,643 475,568 519,792 581,767 621,770
ST Bonus Mean 314,028 414,321 502,373 660,461 561,695 611,970 566,322
Median 157,886 156,861 252,859 331,552 355,041 364,553 383,767
Other ST Comp Mean 53,581 82,714 152,964 76,830 70,615 155,512 60,719
Median 0 0 1,694 0 0 0 0
Short Term Comp Mean 856,465 984,609 1,177,783 1,307,288 1,239,827 1,417,279 1,290,948
Median 675,916 719,327 783,662 854,491 1,027,396 1,121,201 1,134,000
Restricted Comp Mean 37,939 694 38,257 70,677 127,303 189,594 226,348
Median 0 0 0 0 0 0 0
LT Payouts Mean 26,902 14,992 51,243 106,725 37,241 274,730 24,987
Median 0 0 0 0 0 0 0
Stock Options Mean 519,803 921,727 826,931 1,097,754 1,125,004 924,350 1,114,683
Median 327,036 297,387 193,015 491,182 427,409 447,336 684,606
Long Term Comp Mean 584,143 936,930 921,151 1,283,420 1,291,053 1,401,172 1,369,945
Median 327,036 297,387 244,549 567,288 433,763 687,778 768,304
Total Comp Mean 1,443,342 1,932,523 2,104,780 2,604,997 2,534,992 2,829,493 2,669,787
Median 1,023,927 975,418 1,033,572 1,522,379 1,699,540 1,959,811 2,035,916
The same observation can be made about the values of stock option grants made to
sample CEOs. For instance, in a majority of cases, the options’ value remains moderate
(CAN$395,359 for the Donohue’s CEO in the first year after the acquisition completion)
when compared to that of Nortel Networks’ CEO, Mr. J.A. Roth (CAN$24,062,487)
during the acquisition year. The effectiveness of the stock option grants made to Mr.
Roth in 2000 needs to be closely scrutinized, however, in the context of the continuously
declining market for Nortel shares (where the options’ exercise price, CAN$118,68 rose
sharply over the current market value of the company’s shares). Since such extreme
values are largely responsible for artificially inflating the mean of the option grants value
(CAN$1,097,754) made to the sample CEOs during the acquisition year, the median
value of stock option grants (CAN$491,182) constitutes a more appropriate indicator of
real distributions among sample acquirers.
Some key trends can be drawn from table 35. After declining an insignificant 0.26%
between t–3 and t–2, CEO salaries grew steadily from t–2 to t+3, resulting in a total
augmentation of 30% over the six-year period. The evolution of short-term bonus
payments made to CEOs is slightly different, since their growth was constant during the
pre-acquisition period, reached a peak in the acquisition year (CAN$660,461), and then
dropped twice in the post acquisition period – first by 15%, between t and t+1, and
second by 7.5% between t+3 and t+2. The use of such compensation components as
restricted stock awards and long-term payouts is very limited – median values equal zero
for each of the seven years under study, and the respective mean values vary between
CAN$694 and CAN$ 226,348, and CAN$14,992 and CAN$274,730 during the whole
period. Despite losing value in the years t–1 and t+2, stock options grew significantly
over seven years, their amount in t+3 being two times higher than in t–3. Finally, both
short-term compensation and total compensation figures depict an upward tendency from
the pre-acquisition period to the acquisition year, and a mixed up and down evolution in
the post-acquisition period, while attaining their highest values of respectively
CAN$1,417,279 and CAN$ 2,829,493 two years after the acquisition completion.
Results should be interpreted carefully for two reasons. First, since companies that
undertook more than one acquisition were not excluded from the sample, some
observations concerning the same acquiring company may have been doubled or even
tripled. With the longitudinal type of study design, there may be year-specific overlaps in
data due to multiple acquirers, so that 16 out of 80 sample firms can be qualified as
multiple acquirers (see appendix 8, table A16), as they participated in more than one
acquisition activity during the study period. For instance, Precision Drilling Corporation
was involved in three different M&A operations between 1996 and 2000: in 1996 it
acquired EnServ Corporation, in 1999, Computalog Ltd, and in 2000, Plains Energy
Services Ltd. Second, because this is a longitudinal study, we have to account for CEO
changes that occurred in the sample firms and which could bias the results’ comparisons.
If a firm changed its CEO, the previous year’s compensation data would relate to a
different CEO. Even though many acquirers (such as Hummingbird Communications
Ltd, Talisman Energy Inc, and Alimentation Couche-Tard Inc.) had the same CEO during
the seven years under investigation, close to 30 different sample companies (37
observations when including multiple acquirers) made one or two CEO changes over the
same period. The most unstable companies in this sense are AT&T Canada and Barrick
Gold Corporation, both of which changed CEOs three times during the study period. For
example, in 1997 (t–3) AT&T Canada had Mr. Philip Ladouceur as CEO, in 1998 (t–2) it
recruited Mr. D. Craig Young who, one year later (t–1), was replaced by Mr. Meenan,
who was in turn replaced by Mr. John McLennan in 2000 (t).
Moreover, situations in which a new CEO is recruited for a salary less than that accorded
to the previous CEO are quite common. For example: TransCanada Pipelines Ltd, which
in 1993 (t–3) was paying its CEO, Mr. Maier, a salary of CAN$620,000, paid in 1994 (t–
2) its newly recruited CEO, Mr. G.W. Watson, in his first employment year a salary of
CAN$441,389, representing a 29% decrease. BCE Inc. also offered its new CEO, Mr.
J.C. Monty, recruited in the year t–2, CAN$85,040 less than was paid in terms of salary
to the former CEO, Mr. L.R. Wilson. These observations could be reflecting the sliding
trend in salary component observed between t–3 and t–2, as illustrated in table 35. For
these reasons, the descriptive statistics of monetary compensation components are also
presented for the restricted sample of 43 observations (34 different companies when
accounting for multiple acquirers) which had the same CEO during the whole study
period (see appendix 8, table A15).
The key trends in compensation data observed in the restricted sample (see table 36) are
comparable to those depicted in the full sample. Both show a growing tendency in salary
figures – aside from a small decline in t–2, but the overall increase in this compensation
component for the whole period is higher in the restricted sample (46.5%) than in the full
sample (35.8%). The use of other short-term compensation, restricted stock awards and
long-term payouts is very limited in both the full and restricted samples, but the
magnitude of these components are generally higher in the former than in the latter. The
short-term compensation amounts for the firms with same CEO follow an upward
evolution, with two decreasing moments occurring in t+2 and t+3, while the values of
stock options decline in the year t–1 and in the second and third years after the
acquisition completion. Total compensation grows steadily from year to year, reaching a
peak in the first year after acquisition (CAN$2,051,476) – whereas the full sample shows
a peak in the second year – and slides insignificantly afterwards. Much of this slowdown
in total compensation observed in t+2, as compared to t+1, is due to reductions of 15%
and 30% in short-term bonuses and other short-term compensation, respectively. Overall,
CEOs in both samples doubled their total compensation over the investigation period.
Table 36. Descriptive statistics for the restricted sample of compensation data
Compensation Pre-M&A M&A Post-M&A

component t-3 t-2 t-1 t t+1 t+2 t+3
Salary Mean 390,266 388,610 436,030 466,376 508,812 539,571 571,846
Median 319,156 347,218 388,756 430,332 476,019 522,173 558,351
ST Bonus Mean 197,220 267,554 288,608 420,174 577,320 490,097 442,559
Median 91,115 141,279 169,942 293,002 523,056 293,706 337,481
Other ST Comp Mean 50,690 78,271 46,540 54,609 43,242 30,104 42,716
Median 0 0 0 0 0 0 0
Short Term Comp Mean 638,176 734,434 771,178 941,159 1,129,374 1,059,772 1,057,121
Median 526,750 562,065 778,564 749,006 993,041 856.860 858,537
Restricted Comp Mean 963 1,289 3,143 180 99 2,312 139
Median 0 0 0 0 0 0 0
LT Payouts Mean 10,018 3,458 21,267 28,799 57,634 81,628 20,000
Median 0 0 0 0 0 0 0
Stock Options Mean 400,697 447,499 397,282 528,791 858,974 797,151 841,161
Median 284,172 234,295 100,968 343,795 417,803 332,326 506,861
Long Term Comp Mean 410,019 450,085 421,067 557,193 916,995 884,570 861,876
Median 284,172 234,295 129,716 369,460 417,804 332,326 506,861
Total Comp Mean 1,053,407 1,189,696 1,176,012 1,493,153 2,051,476 1,946,342 1,928,577
Median 822,513 822,513 841,073 1,150,513 1,386,365 1,151,102 1,504,483
Salary and short-term bonus trends depicted in the restricted sample of data require
deeper understanding. First, even though the decline by 0.4% in salary between t–3 and
t–2 is insignificant, it is noteworthy for the sample of firms with the same CEO over the
seven years under study. An in-depth analysis of our database suggests a technical
explanation. Many companies offer their CEOs exactly the same salary over two
subsequent years, but when adjusting data for inflation and, converting to Canadian
dollars (if necessary, for companies that disclose their compensation data in other
currencies, like Barrick Gold Corporation), the salary of the most recent year appears to
be lower than that for the previous year. For example, Exco Technologies Inc. paid its
CEO, Mr. Brian Robins, the same salary, CAN$345,628, in 1998 (t–3) and 1999 (t–2), an
amount that once translated into 2004-Canadian dollars takes two different values –
CAN$383,900 and CAN$378,973 respectively. The salary of US$240,000 that Ultra
Petroleum Co. offered its CEO, Mr. Michael Watford, in both 1998 (t–3) and 1999 (t–2),
results in a difference of CAN$10,292 (CAN$391,866 in 1998 versus CAN$381,574 in
1999) after adjusting for inflation and accounting for the differences in exchange rates.
Second, the drop by 15% in short-term bonuses between t+1 and t+2 after continuous
growth over the four previous years is surprising. The qualitative data drawn from reports
on executive compensation reveal certain explanatory factors. For instance, according to
respective proxy statements, Hollinger’s CEO, Mr. Conrad Black, received a short-term
bonus of CAN$1,491,804 in 1997 (t+1), and no short-term bonus at all over the two
following years. The salary the company paid him in the year 1998 (t+2) appears to be
two times lower (CAN$682,591) than the salary from the previous year t+1 (1997),
CAN$1,275,047. Even though these extreme data taken from the same firm did not affect
salary trends between t+1 and t+2 in the restricted sample, they could be responsible for
the decreasing trends in short-term bonus data. These significant declines in these
components are due to the restructuring (effective January 1, 1998) of management
services arrangements between Hollinger, Ravelston (which is indirectly controlled by
Hollinger’s CEO, Mr. Conrad Black) and other companies in the Hollinger group that
reflect the transformation of Hollinger into an open-end investment corporation.
Since its restructuring, Hollinger’s business consists solely of the investment of its assets
in corporations, while Ravelston provides it with the necessary management services.
Pursuant to the Hollinger Management Agreements, the compensation committee is
delegated the authority to settle the annual management fee the company has to pay to
Ravelston (CAN$3,386,000 in 1998), which in turn determines the individual cash
compensation of Hollinger’s officers. Given that individuals providing services to
Hollinger are not in fact receiving compensation primarily for those services, Hollinger
Inc. does not provide salaries and bonuses to its executive officers as such. The figures
disclosed in 1997 under Hollinger’s CEO salary and bonus headings include amounts
paid both by Ravelston, relating to services rendered by Ravelston to Hollinger Inc., and
those received from Telegraph Group Ltd (a company from the Hollinger group), while
the 1998 figures reflect exclusively the salary and bonus paid to Mr. Black by Telegraph.
Mean changes in compensation values from year to year and t-tests of significance are
also computed for both samples of data. As shown in table 37, changes in salary levels
between the years t–2 and t–3, t–1 and t–2, t and t–1, and t+1 and t are statistically
significant (at least at p < 0.10 level) for both the full and restricted samples, while
changes between t+3 and t+2 are significant at p < 0.01 level for the latter sample but
not for the former. As far as changes in short-term bonuses are concerned, those between
t–2 and t–3, and t and t–1 are significant at p < 0.05, while changes between t+1 and t are
significant only for the restricted sample.
Significance levels of changes in other compensation components are marginal. The only
significant change is registered in other short-term compensation component between the
years t+3 and t+2 in the restricted sample (t-test = 1.72; p < 0.10), and in restricted
compensation component between t–1 and t–2 in the full sample (t-test = 1.76; p < 0.10).
There are no significant modifications between years for long-term payouts, while there
are only two statistically significant changes for stock options – one in the restricted
sample (between t+1 and t, t-test = 2.03; p < 0.05), and the other in the full sample
(between t–2 and t–3, t-test = 2.53; p < 0.05). Finally, regarding the composite measures
of compensation data, there are three significant changes for long-term compensation,
and five for short-term compensation and total compensation across both samples.
These significant year-to-year changes are particularly concentrated around cases where
comparisons are made between the year that immediately precedes (t–1) and follows
(t+1) the year of acquisition completion, and the year of deal completion itself (t). This
result confirms our implicit expectation that M&A transactions have a significant impact
on the magnitude of acquiring CEOs’ compensation. However, table 37 also reveals that
there are significant changes in compensation components between the years t–2 and t–3.
This is surprising as the years involved are distanced from the acquisition year.
Table 37. Results of t-test: changes in values of monetary compensation

components for both full and restricted samples
Compensation Sample Value Changes in the compensation values between the years
component t-2 vs. t-3 t-1 vs. t-2 t vs. t-1 t+1 vs. t t+2 vs. t+1 t+3 vs. t+2
∆ Salary Full Mean 26,964 34,959 47,552 37,519 29,823 20,511
t-test 2.06** 3.47*** 3.50*** 1.96* 1.65 1.51
Restricted Mean 30,247 39,779 30,347 42,436 31,063 40,421
t-test 1.70* 4.06*** 4.90*** 4.17*** 1.54 4.06***
∆ ST Bonus Full Mean 137,215 100,486 158,088 -98,766 17,795 -67,469
t-test 2.36** 1.40 2.15** -0.76 0.24 -0.55
Restricted Mean 111,858 27,926 131,566 157,145 -93,509 -38,775
t-test 3.30*** 0.71 2.08** 2.39** -1.03 -0.36
∆ Other ST Full Mean 36,908 72,812 -76,135 -6,215 83,318 -110,414
Comp t-test 1.48 0.77 -0.78 -0.49 0.87 -0.94
Restricted Mean 40,096 -33,150 8,068 -11,367 -12,285 16,668
t-test 0.85 -0.75 0.65 -0.80 -0.96 1.72*
∆ Short term Full Mean 201,087 208,257 129,505 -67,461 130,936 -157,372
Comp t-test 3.34*** 1.77* 1.01 -0.47 1.03 -0.91
Restricted Mean 182,201 34,556 169,981 188,215 -74,732 18,314
t-test 3.38*** 0.66 2.52** 2.50** -0.72 0.16
∆ Restricted Full Mean -37,165 38,054 33,314 56,626 51,969 10,503
Comp t-test -1.41 1.76* 1.34 1.21 0.77 0.17
Restricted Mean 584 1,929 -2,964 -80 2,210 -2,558
t-test 1.00 0.55 -0.94 -1.00 1.01 -1.00
∆ LT Payouts Full Mean -10,197 36,908 56,833 -69,485 234,469 -287,782
t-test -0.74 0.94 1.61 -0.99 1.08 -1.14
Restricted Mean -5,869 18,315 7,532 28,835 22,621 -75,232
t-test -0.73 0.94 1.30 0.87 1.28 -0.84
∆ Stock Full Mean 404,894 -130,398 246,131 19,937 -288,371 151,336
Options t-test 2.53** -0.58 1.39 0.06 -1.64 0.87
Restricted Mean 57,249 -95,933 125,732 332,601 -78,606 13,233
t-test 0.60 -1.38 1.52 2.03** -0.49 0.09
∆ Long term Full Mean 356,872 -46,621 345,274 6,874 6,259 -138,896
Comp t-test 2.55** -0.20 1.69* 0.02 0.02 -0.43
Restricted Mean 50,787 -70,896 131,060 363,635 -52,109 -70,758
t-test 0.54 -0.91 1.55 1.94* -0.35 -0.39
∆ Total Comp Full Mean 578,227 193,017 452,626 -82,728 133,565 -314,519
t-test 3.54*** 0.64 1.68* -0.17 0.41 -0.82
Restricted Mean 248,356 -53,514 296,069 551,382 -143,659 -70,762
t-test 2.13** -0.50 2.33** 2.76*** -0.79 -0.28
Levels of significance: *p < 0.10 **p < 0.05 ***p < 0.01
Table 38. T-statistic mean difference between the pre- versus post-acquisition
period for the full and restricted samples of compensation components
Component Mean S.D. t-test Sig.

Pre (< t) 500,154 317,362
Full 4.22 0.000
Post (≥ t) 620,201 328,842
Salary
Pre (< t) 405,954 275,950
Restricted 3.55 0.000
Post (≥ t) 519,400 259,629
Pre (< t) 413,986 722,370
Full 2.54 0.011
Post (≥ t) 601,569 919,229
ST Bonus
Pre (< t) 254,110 317,197
Post (≥ t) 484,198 562,482
Pre (< t) 98,223 582,153
Full -0.15 0.881
Post (≥ t) 91,138 504,422
Other ST Comp
Pre (< t) 58,789 201,790
Restricted -0.90 0.371
Post (≥ t) 42,742 93,954
Pre (< t) 1,012,363 1,106,502
Full 2.94 0.003
Post (≥ t) 1,312,908 1,203,376
Short term Comp
Pre (< t) 718,853 587,568
Post (≥ t) 1,046,340 749,203
Pre (< t) 25,252 165,651
Full 3.34 0.001
Post (≥ t) 149,100 539,795
Restricted Comp
Pre (< t) 1,859 13,573
Post (≥ t) 696 7,226
Pre (< t) 31,281 210,936
Full 1.19 0.235
Post (≥ t) 111,945 1,005,746
LT Payouts
Pre (< t) 11,753 78,782
Post (≥ t) 47,957 322,819
Pre (< t) 764,990 1,590,811
Full 1.87 0.062
Post (≥ t) 1,065,971 1,921,982
Stock Options
Pre (< t) 415,775 535,577
Post (≥ t) 753,697 994,877
Pre (< t) 822,670 1,735,102
Full 2.58 0.010
Post (≥ t) 1,333,656 2,480,465
Long term Comp
Pre (< t) 427,916 558,744
Post (≥ t) 803,210 1,184,545
Pre (< t) 1,841,220 2,469,406
Full 3.07 0.002
Post (≥ t) 2,655,787 3,259,638
Total Comp
Pre (< t) 1,144,652 1,004,816
Post (≥ t) 1,852,754 1,722,316
In order to see whether these changes in the magnitude of monetary compensation

components are statistically significant between the pre- and post-acquisition periods, the
two-tailed t-test of significance is performed for both the full and restricted samples.
Since the year t represents the year of acquisition completion and not acquisition
announcement, we decided to include this year in the post-acquisition period. The pre-
acquisition period therefore includes the years t–3, t–2, and t–1, while the post-
acquisition period comprises the years t, t+1, t+2, and t+3. Table 38 presents the means,
standard deviations, and significance levels of the t-statistic and the mean difference
between the pre- and post-acquisition periods for both samples of data.
The evidence shows that, due to generally consistent year-to-year increases in CEOs’
salaries, the average salary for CEOs of either the full sample (t = 4.22; p < 0.01) or the
restricted sample (t = 3.55; p < 0.01) is significantly higher in the post-acquisition period
than in the pre-acquisition period. T-statistics also reveal that mean short-term bonuses
among companies from the full sample (t = 2.54; p < 0.05) and companies with the same
CEO during the whole study period (t = 4.05; p < 0.01) increase significantly following
an acquisition.
As far as long-term compensation components are concerned, the acquisition does appear
to significantly affect restricted stock awards in the full sample and stock options in the
restricted sample. Hence, for the full sample, the value of restricted stock awards (t =
3.34; p < 0.01) is greater in the post-acquisition period, while in the restricted sample,
this value (t = -0.93; p = 0.352) is, on the contrary, lower (though insignificantly) than in
the pre-acquisition period. The acquisition impact on stock option grants is clearer in the
restricted sample than in the full sample. The proportion of CEOs receiving stock options
in the restricted sample increases significantly (by 81%) in the post-acquisition period (t
= 3.27; p < 0.01), while in the full sample, this proportion increases by only 39% (t =
1.87), an amount which is significant at p < 0.10 level. Finally, looking at the computed
short-term compensation, long-term compensation, and total compensation values, the t-
tests show significant increases (p < 0.01) for all three components in the post-
acquisition versus the pre-acquisition period, for both data samples.
(B) Attributes of executive compensation contracts
change in control transaction, are there any significant changes in the structure of
executive compensation contracts of acquiring firms?
Tables 39 and 40 present, for the full and restricted samples, the descriptive statistics of
the four dummy variables included in the group of specific executive compensation
arrangements. Even though all dummies depict an upward tendency, the existence of
these provisions is more significant in one sample than in the other. While the growth in
the use of employment agreements is greater in the restricted sample (12% over seven
years) than in the full sample (9%), the growth in the use of other three contractual
arrangements is more important in the sample of full data than in the restricted sample.
The presence of both a termination clause and change of control clause increased by 21%
during the period under study in the sample of all 80 companies, and by 17% and 14% in
the sample of companies with the same CEO. The percentage of firms adopting new
long-term incentive plans, such as differed share units (DSU), performance share units
(PSU), and phantom stock plans also rose steadily from year to year, resulting in an
overall increase of 28% in the full sample of firms, compared to 16% in the restricted
sample. For firms with the same CEO, the existence of an employment contract and the
addition of termination and change of control clauses grew in the pre-acquisition period,
reaching their highest values (56%, 53%, and 47%, respectively) in the first year after the
acquisition completion. These figures remained constant afterwards.
Table 39. Descriptive statistics of contractual arrangements (full sample)
Pre-M&A M&A Post-M&A

t-3 t-2 t-1 t t+1 t+2 t+3
Employment contract Mean 0.51 0.56 0.59 0.56 0.59 0.58 0.60
Median 1 1 1 1 1 1 1
Termination clause Mean 0.30 0.33 0.38 0.43 0.48 0.50 0.51
Median 0 0 0 0 0 0.5 1
Change of control clause Mean 0.31 0.36 0.39 0.41 0.44 0.50 0.52
Median 0 0 0 0 0 0.5 1
New LTIP Mean 0.10 0.10 0.16 0.19 0.24 0.35 0.38
Median 0 0 0 0 0 0 0
Table 40. Descriptive statistics of contractual arrangements (restricted sample)

t-3 t-2 t-1 t t+1 t+2 t+3
Employment contract Mean 0.44 0.52 0.53 0.51 0.56 0.55 0.56
Median 0 1 1 1 1 1 1
Termination clause Mean 0.33 0.40 0.42 0.47 0.53 0.52 0.50
Median 0 0 0 0 1 1 0.50
Change of control clause Mean 0.33 0.36 0.35 0.40 0.47 0.45 0.47
Median 0 0 0 0 0 0 0
New LTIP Mean 0.03 0.02 0.05 0.07 0.07 0.14 0.19
Median 0 0 0 0 0 0 0
Table 41. Changes in the contractual arrangements adoptions between years – for
both the full and restricted samples
Compensation Changes in contractual arrangements adoptions between years

Sample Value
component t-2 vs. t-3 t-1 vs. t-2 t vs. t-1 t+1 vs. t t+2 vs. t+1 t+3 vs. t+2
Full Mean 0.03 0.03 -0.04 0.03 0.01 0.02
∆ Employment New Adopters 3 3 0 4 2 2
contract Restricted Mean 0.03 0.00 -0.02 0.05 0.00 0.03
New Adopters 1 0 0 2 0 1
Full Mean 0.04 0.04 0.04 0.05 0.04 0.03
∆ Termination New Adopters 4 3 3 6 4 2
Clause Restricted Mean 0.08 0.00 0.05 0.05 0.00 0.03
Full Mean 0.07 0.04 0.01 0.03 0.05 0.06
∆ Change of New Adopters 5 4 4 5 5 4
control clause Restricted Mean 0.06 0.00 0.05 0.07 0.00 0.08
Full Mean 0.01 0.06 0.03 0.05 0.09 0.03
∆ New LTIP
Restricted Mean 0.00 0.02 0.02 0.00 0.07 0.06
From a statistical point of view, the descriptive data presented in tables 39 and 40 are not
representative, since they do not specifically account for the frequency of new adoptions
of these clauses or plans during a specific year. For instance, some companies might have
adopted one or all of these specific contractual attributes before the seven years under
investigation, and they may simply have continued to use them during this period. Other
firms may have abandoned one of these contractual compensation arrangements one year
to the next, years that are both included in the study period. Table 41 is designed to
present yearly changes in the adoption of these contractual compensation arrangements
in both the full and restricted samples of data.
When comparing year-to-year changes, only two negative values in means are observed:
this is the case for the change in employment contract adoption in both the full (–0.04)
and restricted (–0.02) samples of data between t and t–1. In other words, once these
contractual arrangements are adopted in acquiring companies, they continue to be used in
subsequent years (except for the employment contract, which was no longer used by
some acquirers in the year of transaction completion (t)). Though it is difficult to come to
a conclusion regarding the decreasing or increasing nature of the trends depicted in these
variables, the evidence shows that there is a clear tendency each year for their new
adoption by former non-user companies (see figures on new adopters in table 41).
Table 42. Mann-Whitney test between the pre- versus post-acquisition periods for
the full and restricted samples of contractual compensation arrangements
Component Sample Changes Mean S.D. Mann- Sig.

Whitney U
Pre (< t vs. t-1) 0.00 0.221
Full 24,299 0.519
Employment Post (> t+1 vs. t) 0.02 0.234
contract Pre (< t vs. t-1) 0.00 0.129
Restricted 7,140 0.180
Post (> t+1 vs. t) 0.02 0.156
Pre (< t vs. t-1) 0.04 0.217
Full 24,916 0.929
Termination Post (> t+1 vs. t) 0.04 0.259
clause Pre (< t vs. t-1) 0.04 0.200
Post (> t+1 vs. t) 0.03 0.180
Pre (< t vs. t-1) 0.04 0.271
Full 24,813 0.810
Change of Post (> t+1 vs. t) 0.05 0.284
control clause Pre (< t vs. t-1) 0.03 0.221
Post (> t+1 vs. t) 0.05 0.253
Pre (< t vs. t-1) 0.03 0.206
Full 24,469 0.247
Post (> t+1 vs. t) 0.06 0.237
New LTIP
Pre (< t vs. t-1) 0.02 0.182
Post (> t+1 vs. t) 0.04 0.200
Finally, in order to determine whether the changes from year to year in the structure of
executive compensation contracts are statistically significant between the pre- and post-
acquisition periods, the Mann-Whitney nonparametric test is performed for both data
samples. For this, the six types of annual changes in adoption of specific compensation
contracts attributes presented in table 41 are divided in two periods – changes between t
versus t–1, t–1 versus t–2, and t–2 versus t–3 – and included in the pre-acquisition
period, while changes between t+1 versus t, t+2 versus t+1, and t+3 versus t+2 are
included in the post-acquisition period. Table 42 presents the means, standard
deviations, and significance levels of the Mann-Whitney tests of difference in the
adoption frequency between pre- and post-acquisition periods for both samples of CEO
contractual compensation attributes.
Analysis shows that acquisition has no significant impact on the frequency of the
adoption of any of the four contractual arrangements of executive compensation. Even
though the means of the adoption frequencies are generally greater in the post-acquisition
period than in the pre-acquisition period, for both samples of data, these increases are not
statistically significant. The only exception relates to the adoption of a termination clause
variable in the restricted sample, for which the frequency mean diminished in the post-
acquisition period (0.03) compared to the pre-acquisition period (0.04). Overall, these
results suggest that acquiring companies that once adopted these compensation-related
clauses or plans continue to use them and that these adoptions do no seem to be
specifically linked to the merger or acquisition transaction.
5.1.2 Independent variables
Table 42a shows the descriptive statistics of the two independent variables used in this
thesis: the acquisition premium and the method of payment. Three acquisition premium
measures are retained in order to increase data robustness: premium paid one day, 10
days, and 20 days before the acquisition. The mean one-day-before-the-deal measure of
acquisition premium in both the full and restricted samples (26% and 27% respectively)
is generally more than 10% lower than its measure calculated 10 days (36.4% and
40.3%) or even 20 days (37.7% and 42.7%) prior to the deal. Further, as our data
suggest, three methods of payment were commonly used by sample firms in order to pay
for their acquisitions: 1) cash, 2) combination of cash and stock, and 3) stock. For
example, at the end of 1998, Quebecor paid CAN$21 (US$13.63) cash for one common
share of Sun Media Corporation plus the assumption of CAN$345 million (US$223,974
million) in liabilities. In October 1997, Reserve Royalty Corporation offered a
combination of either CAN$9.80 (US$7.091) cash for one Jordan Petroleum Ltd.
common share, or one new company common share for one Jordan Petroleum common
share. In 1997, Baytex Energy Ltd exchanged 0.48 of its class-A common share against
one common share of Dorset Exploration Ltd. Despite this heterogeneity of payment
methods, the evidence shows that a majority of acquirers, for both the full and restricted
samples, prefer to pay for their transactions using combinations of cash and stock (46%
and 50% respectively), rather than exclusively cash (23% and 21% respectively) or
exclusively stock (31% and 29% respectively).
Table 42a. Descriptive statistics of the two independent variables (both samples)
Method of Premium Premium Premium
Statistics payment* (1 day before) (10 days before) (20 days before)
Mean Full sample 2.08 0.260 0.364 0.377
Restricted sample 2.07 0.270 0.403 0.427
Median Full sample 2.00 0.189 0.253 0.305
Restricted sample 2.00 0.195 0.243 0.340
* 23% used cash, 46% - combination of cash & stock, and 31% - stock (full sample)
* 21% used cash, 50% - combination, and 29% - stock (restricted sample)
5.1.3 Mediating and control variables
Descriptive statistics for the different measures of firm size (control variable) and
performance (mediating variable) for both the full and restricted samples of data are
presented respectively in tables 43 and 44. The three measures of organisational size –
the natural logarithm of total assets, total sales and stock market capitalization – are
comparable between the two samples and increase in value from year to year. Stock
market return (RET) is increasing almost constantly in the pre-acquisition period (except
for the year t–2), but then decreases rapidly in the post-acquisition period, attaining its
lowest mean value in the year t+1 for the full sample (–10.42%) and in the year t+2 for
the restricted sample (–8.42%). As far as accounting performance is concerned, its trends
are comparable in both samples. The ROA mean values are highest one year before the
deal (t–1) in both samples, while they decrease in the post-acquisition period reaching
negative values in the full sample, as contrasted to the restricted one where these values
remain positive. The trends depicted in ROE are mixed, but mean values are positive
over the whole study period for both samples (except for the year t+2 in the full sample).
Table 43. Descriptive statistics of size and performance variables (full sample)

t-3 t-2 t-1 t t+1 t+2 t+3
Ln Assets Mean 20.65 20.87 21.10 21.57 21.69 21.83 21.90
Median 20.60 20.89 21.06 21.59 21.70 21.80 22.01
Ln Sales Mean 19.63 19.83 20.03 20.36 20.57 20.70 20.84
Median 19.82 20.19 20.50 20.68 20.90 21.10 21.35
Ln Stock Mk Capitalizat. Mean 20.54 20.67 20.93 21.16 21.14 21.20 21.35
Median 20.60 20.72 21.02 21.04 21.19 21.17 21.67
RET (%) Mean 11.83 0.38 19.48 10.48 -10.42 -9.80 -0.12
Median 13.85 -0.12 15.88 11.15 -5.53 -0.81 4.37
ROA (%) Mean 2.98 2.41 4.25 2.06 -3.90 -1.99 -0.25
Median 3.61 3.04 3.81 2.43 1.52 1.85 2.75
ROE (%) Mean 5.39 5.52 8.31 5.16 3.52 -3.13 10.31
Median 7.70 8.43 8.11 6.98 6.67 5.90 9.44
Table 44. Descriptive statistics of size and performance variables

(restricted sample)
t-3 t-2 t-1 t t+1 t+2 t+3
Ln Assets Mean 19.73 20.04 20.34 20.82 21.00 21.10 21.05
Median 19.86 20.34 20.60 20.90 21.07 21.27 21.18
Ln Sales Mean 18.56 18.80 19.05 19.44 19.70 19.79 19.83
Median 18.93 19.40 19.49 19.83 20.00 20.10 20.09
Ln Stock Mk Capitalizat. Mean 19.86 20.10 20.23 20.59 20.67 20.70 20.78
Median 20.11 20.36 20.11 20.55 20.60 20.67 20.75
RET (%) Mean 14.08 10.77 11.34 19.14 2.33 -8.52 -0.05
Median 14.96 0.78 -0.70 16.65 11.95 4.83 5.55
ROA (%) Mean 3.47 4.00 4.06 2.58 0.65 0.08 2.39
Median 3.80 4.16 4.13 2.47 3.44 3.31 3.78
ROE (%) Mean 6.72 6.90 6.90 5.09 5.83 5.55 10.60
Median 8.07 8.50 7.57 5.64 9.06 7.10 10.46
5.1.4 Moderating variable
Tables 45 and 46 present the descriptive statistics (mean, median, minimum, and
maximum) for the composite measure of structural board independence (SBI) for both
full and restricted samples of data, respectively.
Table 45. Descriptive statistics for the composite SBI variable (full sample)

t-3 t-2 t-1 t t+1 t+2 t+3
SBI Mean 4.93 5.05 4.89 4.65 4.61 4.53 4.61
Median 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Minimum 1 1 1 1 2 2 1
Maximum 8 9 9 9 9 7 7
Table 46. Descriptive statistics for the composite SBI variable (restricted sample)

t-3 t-2 t-1 t t+1 t+2 t+3
SBI Mean 5.11 4.78 4.56 4.44 4.26 4.19 4.15
Median 5.00 5.00 5.00 4.00 4.00 4.00 4.00
Minimum 1 1 1 1 2 2 1
Maximum 8 9 8 8 7 7 7
As shown in table 45, the means and medians of the SBI composite variable for the full
sample are fairly stable over the seven years under study. These data suggest that full-
sample companies did not encounter any significant changes in structural board
independence characteristics over the investigation period. The evidence shows,
however, that in the restricted sample of data (see table 46), the board of directors
becomes increasingly dependent on management (variation in mean values between 5.11
and 4.15 and in median values between 5 and 4), resulting in an overall dependency
growth of over 20%. This trend could probably be explained by the increasing tenure of
the same CEO within the sample firms. Since CEO’s continuous presence at the
company’s head increases his in-job experience and standing within the company and
business community, he is thought to be able to expand his influence and affect board of
directors’ decisions in his favour more easily.
5.1.5 Correlations
Table 47 presents the means, standard deviations and cross-correlation matrix for the
whole set of variables used in this thesis.
Table 47. Correlations between variables used in regression models

Variable Mean S.D. 1 2 3 4 5 6 7 8 9 10
1. Mode of payment 2.22 0.80
2. Premium (1day) 0.26 0.30 -0.083
3. Premium (10 d.) 0.36 0.41 -0.093* 0.825**
4. Premium (20 d.) 0.38 0.37 -0.030 0.789** 0.950**
5. Ln total assets 21.4 2.07 0.007 -0.133** 0.000 -0.014
6. Ln total sales 20.3 3.05 0.021 -0.316** -0.136** -0.105* 0.748**
7. Ln stock capitaliz 20.9 1.77 0.029 -0.012 0.104* 0.095* 0.883** 0.678**
8. RET 1.79 53.6 0.036 -0.052 -0.024 -0.026 -0.058 -0.032 0.117*
9. ROA 0.82 13.2 0.013 -0.146** -0.050 -0.053 0.014 0.074 0.120** 0.346**
10. ROE 11.5 155.6 0.059 -0.033 -0.023 -0.012 -0.089* -0.051 -0.057 0.082 -0.160**
11. Employ contract 0.57 0.50 0.051 0.108* 0.084 0.096* -0.126** 0.019 -0.078 0.010 -0.012 0.049
12. Terminat. clause 0.42 0.49 -0.109* 0.137** 0.026 0.049 -0.228** -0.254** -0.216** -0.013 -0.055 -0.051
13. Change/control 0.42 0.49 0.034 0.114* 0.103* 0.156** 0.018 -0.049 0.026 -0.112* -0.148** -0.082
14. New LTIP 0.21 0.41 -0.029 -0.046 0.009 0.023 0.530** 0.397** 0.525** -0.049 -0.004 -0.026
15. Salary 568,135 329,042 -0.157** -0.020 0.082 0.085 0.699** 0.588** 0.624** -0.070 -0.026 -0.009
16. ST Bonus 520,212 843,934 0.018 0.048 0.039 0.049 0.347** 0.283** 0.397** 0.037 0.083 0.003
17. Other ST Comp 94,211 538,991 0.003 -0.043 -0.015 -0.023 0.076 0.038 0.054 0.007 -0.034 -0.017
18. Short T Comp 1,182,558 1,170,805 -0.031 0.008 0.045 0.048 0.481** 0.386** 0.486** 0.012 0.037 -0.008
19. Restricted Comp 95,652 425,411 -0.081 -0.020 0.015 0.038 0.301** 0.200** 0.317** 0.033 0.029 -0.001
20. LT Payouts 77,133 771,306 0.002 0.045 -0.010 -0.025 0.086* 0.046 0.086* 0.097* -0.016 -0.005
21. Stock Options 938,426 1,793,656 -0.089 0.093* 0.065 0.094* 0.407** 0.285** 0.481** -0.076 -0.086 -0.041
22. Long T Comp 1,117,119 2,208,271 -0.086 0.088 0.053 0.074 0.422** 0.288** 0.486** -0.019 -0.070 -0.034
23. Total Comp 2,310,604 2,975,432 -0.073 0.068 0.056 0.073 0.506** 0.368** 0.556** -0.011 -0.036 -0.026
24. SBI 4.94 1.43 0.079 0.022 0.022 -0.020 0.081 -0.033 0.136** 0.022 -0.086 -0.116**
Variable 11 12 13 14 15 16 17 18 19 20 21 22 23
12. Terminat. clause 0.597**
13. Change/control 0.421** 0.418**
14. New LTIP -0.087* -0.075 0.036
15. Salary -0.142** -0.229** 0.009 0.502**
16. ST Bonus -0.013 -0.128** -0.019 0.147** 0.323**
17. Other ST Comp 0.052 -0.047 0.093* 0.119** 0.186** 0.016
18. Short T Comp -0.026 -0.179** 0.032 0.302** 0.599** 0.819** 0.524**
19. Restricted Comp -0.041 0.053 -0.017 0.412** 0.302** 0.041 0.008 0.118**
20. LT Payouts -0.080 -0.072 -0.015 0.053 0.081 0.188** -0.002 0.157** -0.023
21. Stock Options -0.123** -0.072 0.128** 0.314** 0.406** 0.526** 0.021 0.503** 0.086 0.260**
22. Long T Comp -0.139** -0.075 0.094* 0.355** 0,.418** 0.503** 0.017 0.488** 0.258** 0.563** 0.922**
23. Total Comp -0.116** -0.129** 0.082 0.384** 0.548** 0.700** 0.223** 0.762** 0.239** 0.481** 0.885** 0.937**
24. SBI -0.096* -0.067 0.101* 0.071 -0.085 -0.062 0.017 -0.061 -0.006 -0.008 0.067 0.050 0.016
*Correlation is significant at the 0.05 level (2-tailed) **Correlation is significant at the 0.01 level (2-tailed)
The Pearson correlation results regarding compensation association with firm size and
performance ratings are not surprising. It appears that acquiring companies’ size, whether
measured as natural logarithm of total assets, of total sales, or of stock market
capitalization, is significantly and positively correlated, with different monetary
components of executive compensation. The correlation coefficients between the three
measures of organization size and salary are respectively r = 0.699; r = 0.588; and r =
0.624 (p < 0.01), while the correlations of these measures with total compensation are r =
0.506; r = 0.368; and r = 0.558 (p < 0.01). These coefficients tend to support previous
research results which postulate that executive compensation increases are largely
determined by increases in corporate size. The only compensation component which is
positively but not significantly correlated with any of the three organization size
measures is “other short-term compensation”. Neither stock market performance (RET)
nor the two measures of accounting performance (ROA and ROE) resulted in any
significant correlation with different monetary components of CEO compensation.
Moreover, the correlation coefficients are generally negative, as in the case of the
correlations between different measures of firm performance (RET, ROA, ROE) and the
total compensation component (r = –0.011; r = –0.036; r = –0.026; respectively). The
only compensation component which is positively and significantly correlated with stock
market returns is the “long-term payouts” component (r = 0.097; p < 0.05).
Correlations between organization size and performance and specific attributes of

executive compensation contracts are not uniform. The three measures of firm size are
correlated significantly at p < 0.01 level with the adoption of termination clauses and
new long-term incentive plans, but these coefficients are all negative for the first
component (r = –0.228; r = –0.254; r = –0.216; respectively), while they are all positive
for the second (r = 0.530; r = 0.397; r = 0.525; respectively). The change of control
clause variable is not correlated significantly with any of the firm size measures, and the
employment agreement variable is negatively and significantly correlated with the firm
size measured as the natural logarithm of total assets (r = –0.126, p < 0.01). The four
attributes of compensation contracts are generally negatively but not significantly
correlated with stock market and accounting performance. The only exception refers to
the change of control clause, which is negatively and significantly correlated with both
RET (r = –0.112; p < 0.05) and ROA (r = –0.148; p < 0.01).
The correlation between the two independent variables (acquisition premium and method
of payment) and the different components of executive compensation are mixed. Table
47 shows that only one contractual arrangement (termination clause) and one monetary
compensation component (salary) resulted in a negative and significant correlation with
method of payment variable (r = –0.109; p < 0.05 and r = –0.157; p < 0.01; respectively).
In general, the compensation components are not significantly correlated with any of the
three measures of acquisition premium (calculated one day, ten days, and twenty days
before the acquisition), with a few exceptions, found in some positive and significant
correlations: between the employment agreement adoption (stock options) and the one-
day and twenty-days before the acquisition measures of control premium (p < 0.05);
between the addition of a termination clause and the premium calculated one-day before
the transaction (r = 0.137, p < 0.01); and between the change of control clause and the
three measures of control premium (r = 0.114; p < 0.05 for one-day; r = 0.103; p < 0.05
for ten-days; and r = 0.156, p < 0.01 for twenty-days before the deal, respectively).
The significance of correlations between the moderating variable (SBI) and the different
components of executive compensation is limited. The only significant coefficients at the
p < 0.05 level refer to the correlations established between structural board independence
and the two compensation arrangements of executive contracts – the employment
agreement (r = –0.096) and change of control clause (r = 0.101).
A brief overview of the correlation matrix reveals that, with only a few exceptions, there
is no potential for multicollinearity problems. There are some monetary compensation
components which are highly correlated, such as long-term compensation and stock
options, total compensation and long-term compensation, short-term compensation and
short-term bonus, total compensation and short-term bonus – all with an r value higher
than 0.700. The CEO salary seems to be too highly correlated to the natural logarithm of
total assets (r = 0.699) and to the natural logarithm of stock market capitalization (r =
0.624). However, these high values of correlation coefficients are not so problematic,
since they do not refer to correlations between independent variables.
Not surprisingly, the three measures of the acquisition premium (and the three measures
of firm size) are highly correlated among them, resulting in r values higher than 0.678.
Since multicollinearity can weaken statistical analysis through a reduction of degrees of
freedom error, making it difficult to partition the individual effects of the independent
variables, this problem should be solved. The multiple measures of the same independent
variable were used in order to enhance data robustness, but since they measure the same
thing they are not used in further multivariate analyses at the same time. Moreover, in
subsequent regression analyses we produce the tolerance values and the variance
inflation factors (VIF) to measure multicollinearity between the explanatory factors. As
reported in following sections, these indicators’ results (both tolerance value and VIF are
close to 1) suggest that multicollinearity does not cause any problems in this research.
5.2 LINEAR REGRESSION RESULTS
5.2.1 Testing the direct effect of transactional characteristics on executive

compensation
In this section, empirical responses are provided for the research question (1.2) of this
thesis. Results from the different regression models used to test the direct effect of
control premium or method of payment on monetary magnitude of executive
compensation components are presented. Our main objective with this multivariate
analysis is to determine whether our empirical findings corroborate the two research
hypotheses (1a and 1b) associated with this question.
The regression equation used to test the direct relationship between the two transactional
characteristics and different monetary compensation components has the following four
characteristics. First, the control premium and method of payment are included
simultaneously in the equation, since these transactional terms are related to the same
M&A deal and can have a joint influence over executive compensation. Second, given
that it is hypothesized that deal characteristics directly affect CEO compensation levels,
no measure of profitability is included in the model at this stage, though it is important to
control for company size. Third, as the control premium and method of payment
constitute single observations occurring in year t, they are expected to affect
compensation levels in the post-acquisition period. For this, two interaction terms are
computed – Premium*Post and Method*Post – where “Post” refers to all three post-
acquisition years, including the year of acquisition completion (t). Additional analysis
(not reported here) conducted with the “Post” that included only the three post-
acquisition years (t+1, t+2, t+3), gave similar results. Fourth, specific indicator variables
are included in the regression equation in order to control for year-specific fixed effects;
each year included in the study (from 1992 to 2004) is assigned an indicator variable that
takes a value of 1, if the observation pertains to the specified year and a value of 0,
otherwise. Coefficients for these variables should capture most environment aspects –
not otherwise taken into account – that could influence executive compensation amounts.
This econometric approach has been widely used in previous compensation research
(Renaud et al., 2004). The final regression equation for CEO salary as a dependent
variable can be summarized as follows: Ln Salary = β0 + β1Premium*Post +
β2LnAssets*Post + β3Method*Post + β4LnAssets + β5Years(1992-2004).
The regression results for salary, short-term bonus, and short-term compensation are
presented in table 48; the results for stock options, long-term compensation, and total
compensation are reported in table 49. Some components of short-term compensation
and long-term compensation are considered separately because of their different
attributes and determination processes. According to St-Onge et al. (2001), boards of
directors award stock options and cash incentives differently. Whereas the level of the
award may be related to past performance and based on an executive’s salary, it is also
common for boards to grant stock options as incentives for better performance in the
future.
Table 48. Regression results testing the direct effect of the control premium /
method of payment on executive compensation (salary, short-term bonus, and
short-term compensation)
Explanatory Ln Salary Ln ST Bonus Ln ST Compensation
variables full restricted full restricted full restricted
Constant 6.00 (8.42)‡ 3.72 (2.86)‡ -2.86 (-1.11)‡ -8.43 (-2.51)‡ 8.24 (27.58)‡ 8.21 (19.91)‡
Premium*Post -1.65 (-5.93)‡ -2.18 (-5.28)‡ -2.11 (-2.09)† -1.94 (-1.83)† 0.04 (0.32) 0.08 (0.62)
LnAssets*Post 0.05 (6.22)‡ 0.10 (4.07)‡ -0.11 (-2.31)‡ -0.11 (-1.67)† -0.001 (-0.98) 0.008 (1.04)
Method*Post -0.24 (-2.15)† -0.66 (-3.31)‡ 1.22 (2.97)‡ 0.50 (0.97) -0.004 (-0.08) -0.15 (-2.35)‡
LnAssets 0.32 (9.74) 0.42 (6.66)‡ 0.56 (4.75)‡ 0.96 (5.89)‡ 0.25 (18.36)‡ 0.25 (12.48)‡
Adj. R² 25.3% 27.2% 9.2% 15% 47.2% 44.7%
F-statistic 11.9‡ 7.55‡ 4.26‡ 4.11‡ 29.76‡ 15.16‡
N 516 281 516 281 516 281
Notes:
Year-specific coefficients are not reported
Values are independent variable coefficients with t-statistic in parentheses
ST Comp = Salary + ST Bonus + Other ST Comp
Levels of significance: * p < 0.10 † p < 0.05 ‡ p < 0.01
Table 49. Regression results testing the direct effect of the control premium /
method of payment on executive compensation (stock options, long-term
compensation, and total compensation)
Explanatory Ln Stock Options Ln LT Compensation Ln Total Compensation
Constant -7.35 (-2.66)‡ -13.98 (-3.65)‡ -10.51 (-4.01)‡ -14.81 (-3.91)‡ 7.05 (20.75)‡ 7.29 (14.93)‡
Premium*Post -0.71 (-0.66) -0.59 (-0.51) -0.71 (-0.70) -0.58 (-0.50) 0.05 (0.36) 0.07 (0.46)
LnAssets*Post -0.03 (-0.53) -0.08 (-1.20) -0.05 (-0.96) -0.09 (-1.31)* -0.01 (-1.14) 0.006 (0.64)
Method*Post 0.67 (1.55)* 1.16 (2.07)† 0.74 (1.81)† 1.20 (2.16)† -0.001 (-0.08) -0.11 (-1.59)*
LnAssets 0.82 (6.44)‡ 1.16 (6.16)‡ 0.98 (8.06)‡ 1.20 (6.47)‡ 0.33 (21.07)‡ 0.32 (13.33)‡
Adj. R² 9.3% 12.6% 14.1% 14.1% 54.9% 47%
F-statistic 4.13‡ 3.39‡ 6.05‡ 3.71‡ 38.46‡ 2.66‡
N 493 266 493 266 493 260
Notes:
LT Comp = Stock options + LTIP (Restricted Comp + LT payouts)
Total Comp = ST Comp + LT Comp
The tested regression model is statistically significant for each dependent variable as
reported by the F-statistic test, and the R² and adjusted R² figures are very close to each
other. Results from diagnostic tests do not reveal autocorrelation (the Durbin-Watson test
statistic is always close to the value 2, meaning that the residuals are uncorrelated) or
multicollinearity (variance inflation factors and tolerance values are close to the value 1)
problems that would significantly affect the findings.
(A) Direct effect of acquisition premium (hypothesis 1a)
Hypothesis 1a: The magnitude of the acquisition premium produces a negative effect
on CEO compensation.
In this subsection, findings related to the direct effect of the magnitude of acquisition
premium on different monetary components of CEO compensation are reported for both
samples. When comparing full and restricted samples of data, we observe that patterns of
signs and significance levels are similar. As shown in tables 48 and 49, the regression
findings partially corroborate the relationship suggested in hypothesis 1a. There is a
positive but not significant association between the control premium and short-term
compensation and total compensation components for both samples (finding that is not in
line with hypothesis 1a). And, for both samples of data there is a negative link between
the magnitude of acquisition premium paid by acquiring firms and the following
compensation components: salary, short-term bonus, stock options, and long-term
compensation. This last finding suggests that executives who manage to negotiate and
pay to target shareholders a lower acquisition premium benefit from higher levels of
these compensation components. And vice-versa: the higher the premium paid, the lower
the levels of these executive compensation components.
It is worth noting that the level of statistical significance varies according to a given
compensation component. For example, links between salary / short-term bonus and
magnitude of control premium are significant at a p < 0.01 / p < 0.05 levels respectively
for both samples of data (β1 = –1.65 and t = –5.93 / β1 = –2.11, and t = –2.09 for the full
and β1 = –2.18 and t = –5.28 / β1 = –1.94 and t = –1.83 for the restricted sample). The
relationships between the acquisition premium and stock options and long-term
compensation are negative but not statistically significant (p > 0.10) in both samples.
Two general observations can be drawn from these findings: 1) The magnitude of
acquisition premium has a greater negative impact on compensation components taken
separately than as a group (short-term compensation and total compensation). 2) There is
more significant support for hypothesis 1a for short-term compensation components
considered separately (salary and short-term bonus) than for the long-term compensation
component (stock options) and the group itself. Moreover, the modest adjusted R² values,
especially for stock options (9.3% in the full and 12.6% in the restricted samples),
suggest that there may be other variables not included in the regression model that could
explain variations in CEO compensation. Table 50 provides a synthesis of findings with
respect to hypothesis 1a.
Table 50. Levels of statistical support for hypothesis 1a
Hypothesis 1a: predicted sign / obtained sign for control premium (* p < 0.10)
Samples Salary ST Bonus ST Comp Options LT Comp Total Comp
Full – / –* – / –* –/+ –/– –/– –/+
Restrict. – / –* – / –* –/+ –/– –/– –/+
(B) Direct effect of method of payment (hypothesis 1b)
Hypothesis 1b: Acquisitions through share exchanges (rather than in cash) produce a
negative effect on CEO compensation.
In this subsection, findings related to the direct effect of the method of payment on
different monetary components of executive compensation are presented for both
samples of data. As reported in tables 48 and 49, the empirical results are mixed and
only partially corroborate the relationship predicted in hypothesis 1b. The evidence also
shows that the restricted sample of data produces more significant results than the full
sample. Three compensation components are in line with our expectations, depicting a
negative and generally significant (p < 0.10) association with the payment through share
exchanges variable. This is the case for salary (β1 = –0.24; t = –2.15; and β1 = –0.66; t =
–3.31), short-term compensation (β1 = –0.004; t = –0.08; and β1 = –0.15; t = –2.35), and
total compensation (β1 = –0.001; t = –0.08; and β1 = –0.11; t = –1.59) for both the full
and restricted samples, respectively. As predicted in hypothesis 1b, this means that
executives who manage to negotiate and finance their acquisitions with cash are likely to
receive higher levels of salary, short-term compensation, and total compensation than
those CEOs who made payments in stock.
Focusing on short-term bonus, stock options, and long-term compensation, these

compensation components appear to display a positive association with the method of
payment variable. Thus, transactions financed through share exchanges positively affect
the magnitude of the CEO short-term bonus, a relationship that is significant (p < 0.01) in
the full sample but not significant (p > 0.10) in the restricted sample of data. In light of
these results, the values of stock option grants (β1 = 0.67; t = 1.55; and β1 = 1.16; t =
2.07) and long term compensation (β1 = 0.74; t = 1.81; and β1 = 1.20; t = 2.16) are
positively and significantly affected by acquisition payments in equity, in both the full
and restricted samples, respectively. These observations contradict the expectations in
hypothesis 1b. Once again, as suggested by the small adjusted R² values ranging from
9.2% for the short-term bonus to 14.1% for the long-term compensation component in
the full sample, more explanatory factors need to be integrated in the model in order to
better understand these compensation components. Table 51 provides a synthesis of the
empirical findings related to the hypothesis 1b.
Table 51. Levels of statistical support for hypothesis 1b
Hypothesis 1b: predicted sign / obtained sign for method of payment (* p < 0.10)
Full – / –* – / +* –/– – / +* – / +* –/–
Restrict. – / –* –/+ – / –* – / +* – / +* – / –*
5.2.2 Testing the mediating effect of performance on the indirect relation

between transactional characteristics and CEO compensation
CEO compensation of acquiring firms?
Our main objective with this section is to provide empirical responses to the research
question (1.3). Two research hypotheses are associated with this question, hypotheses 2a
and 2b; the regression results reported hereinafter indicate if there is any support for the
indirect effect of the magnitude of control premium and method of payment (through
firm performance) on CEO compensation levels.
Since transactional characteristics are expected to affect executive compensation through

firm performance ratings (see “empirical model” section, chapter 4), we adopted the
mediating-variable approach suggested by Baron and Kenny (1986). In order to test
hypotheses 2a and 2b, we performed an ordinary-least-square regression with
performance ratings as the dependant variable. The explanatory variables are the same as
those included in the regression equation testing the direct link between the magnitude of
acquisition premium or method of payment and executive compensation components
(see section 5.2.1). Both stock market (RET) and accounting performance (ROE and
ROA) measures are considered for empirical tests. Even though ROA is not included in
the final regression, results for this accounting performance measure are presented for the
purpose of comparison. The regression equation testing the relationship between firm
performance and acquisition premium or method of payment can be resumed as follows:
RET / ROE / ROA = β0 + β1Premium*Post + β2LnAssets*Post + β3Method*Post +
β4LnAssets + β5Years(1992-2004).
As shown in table 52, significant links exist between firm performance ratings and
transactional characteristics. These findings are similar for the two samples of data. A
negative relationship is shown between the magnitude of acquisition premium and
different measures of firm performance in both samples. For instance, in the full sample
of data, the control premium coefficients – where ROE is used as dependent variable –
are: β1 = –12.04; t = –2.38; and p < 0.01. It should be noted that the negative premium
link with stock market performance is not statistically significant (p > 0.10), while the
link with both accounting measures of profitability are significant for both samples.
These results suggests that the higher the magnitude of control premium paid by the
acquiring firm, the lower the performance ratings of the firm will be in the post-
acquisition period. This is consistent with the preliminary assumption of hypothesis 2a.
Table 52. Regression results testing the relationship between performance ratings
(RET / ROE / ROA) and the acquisition premium or method of payment
Explanatory Stock market performance Accounting performance

variables RET ROE ROA
full restricted full restricted full restricted
Constant -16.72 (-0.66) -15.05 (-0.43) -23.00 (-1.74)† -19.53 (-1.96)† -7.58 (-1.18) -10.67 (-1.55)*
Premium*Post -11.15 (-1.15) -3.08 (-0.29) -12.04 (-2.38)‡ -6.22 (-2.05)† -6.95 (-2.72)‡ -4.36 (-1.96)†
LnAssets*Post -0.63 (-1.32)* -0.31 (-0.49) 0.29 (1.16) -0.08 (-0.43) -0.09 (-0.73) -0.12 (-0.94)
Method*Post 3.01 (0.77) 2.43 (0.47) -5.21 (-2.53)‡ -1.58 (-1.07) -0.56 (-0.54) -1.10 (-1.03)
LnAssets -0.33 (-0.28) -0.84 (-0.49) 1.16 (1.91)† 0.95 (1.97)† 0.36 (1.21) 0.50 (1.50)*
Adj. R² 10.9% 17.3% 5.8% 13.7% 3.5% 9.8%
F-statistic 4.90‡ 4.62‡ 2.91‡ 3.69‡ 2.20‡ 2.96‡
N 511 278 500 273 530 290
Notes:
Regarding the method of payment, multivariate results are less uniform across the
different performance measures’ subgroups. There is a positive relation with stock-
market performance in both the full and restricted samples (β3 = 3.01; t = 0.77 and β3 =
2.43; t = 0.47 respectively), but this is not statistically significant (p > 0.10). And, a
negative relation is depicted with both accounting measures of firm performance. The
method of payment association with ROE is statistically significant at a p < 0.01 level in
the full sample, but it is not significant in the restricted sample. The negative link with
ROA is not significant in either sample. In other words, an acquisition payment made
through share exchanges is more likely to translate into lower levels of ROE and ROA
(rather than RET) as result of an acquisition. Overall, these findings give partial support
to the preliminary assumption of hypothesis 2b, suggesting that accounting performance
is more likely to be explained, as predicted, by the method of payment variable than the
stock market measure of performance.
In order to be able to give a complete response to the research question (1.3), another
ordinary-least-squares regression has to be performed with executive compensation
components as the dependent variables. Since it is hypothesized in 2a and 2b that deal
characteristics affect CEO compensation through firm performance, two measures of
firm profitability (RET and ROE) are added to the model testing the direct effect of deal
characteristics on executive compensation. Considering RET and ROE separately allows
us to verify the sensitivity of different CEO compensation components to both stock
market and accounting performance measures (Engel et al., 2002).
Table 53. Regression results testing the mediating effect of firm performance on the
indirect relation between transactional characteristics and executive compensation

Intercept 5.80 (7.80)‡ 3.08 (2.26)‡ -1.69 (-0.65) -6.84 (-2.13)† 8.24 (26.94)‡ 8.25 (19.38)‡
Premium*Post -1.67 (-5.86)‡ -2.07 (-4.98)‡ -1.68 (-1.69)† -1.38 (-1.41)* 0.07 (0.65) 0.11 (0.83)
LnAssets*Post 0.05 (3.52)‡ 0.10 (4.13)‡ -0.10 (-2.14)‡ -0.07 (-1.20) -0.006 (-1.09) 0.008 (1.07)
Method*Post -0.26 (-2.22)‡ -0.66 (-3.28)‡ 1.24 (3.07)‡ 0.41 (0.85) 0.001 (0.01) -0.14 (-2.27)‡
LnAssets 0.33 (9.64)‡ 0.44 (6.68)‡ 0.53 (4.48)‡ 0.85 (5.43)‡ 0.25 (17.92)‡ 0.24 (11.89)‡
RET 0.001 (0.80) 0.002 (0.88) 0.02 (3.98)‡ 0.01 (2.51)‡ 0.001 (1.04) -0.0009 (-0.11)
ROE -0.001 (-0.51) 0.01 (1.49)* 0.01 (1.80)† 0.09 (4.72)‡ 0.001 (0.92) 0.005 (1.75)†
Adj. R² 25.3% 28.7% 12.9% 24.1% 46.5% 43.3%
F-statistic 10.40‡ 7.07‡ 5.10‡ 5.78‡ 25.09‡ 12.53‡
N 500 273 500 273 500 273
Notes:
Firm performance coefficients in the following regression test their mediating role in the
relationship between acquisition premium or method of payment and executive
compensation components: COMP = β0 + β1Premium*Post + β2LnAssets*Post +
β3Method*Post + β4LnAssets + β5RET + β6ROE + β7Years(1992-2004). If consistent with
hypothesis 2a, the magnitude of acquisition premium affects CEO compensation only
through firm performance ratings, the coefficients for firm performance should be
significantly greater than 0, while the coefficient for control premium should equal 0. If
consistent with hypothesis 2b, the method of payment affects CEO compensation only
through firm performance, the coefficients for firm performance should be significantly
greater than 0, while the coefficient for method of payment should equal 0. The
regression results for both deal-specific characteristics are presented in tables 53 and 54.
Table 54. Regression results testing the mediating effect of firm performance on the
indirect relation between transactional characteristics and executive compensation

Intercept -7.67 (-2.73)‡ -12.88 (-3.29)‡ -11.05 (-4.16)‡ -13.74 (-3.55)‡ 7.03 (20.53)‡ 7.41 (15.05)‡
Premium*Post -1.04 (-0.97) -0.61 (-0.51) -1.01 (-0.98) -0.59 (-0.52) 0.06 (0.43) 0.10 (0.68)
LnAssets*Post -0.01 (-0.25) -0.08 (-1.13) -0.03 (-0.63)† -0.09 (-1.25) -0.006 (-0.98) 0.006 (0.67)
Method*Post 0.53 (1.20) 1.10 (1.95)† 0.59 (1.42)* 1.13 (2.03)† -0.007 (-0.13) -0.11 (-1.54)*
LnAssets 0.84 (6.47)‡ 1.16 (6.03)‡ 1.00 (8.17)‡ 1.20 (6.35)‡ 0.33 (20.98)‡ 0.31 (13.17)‡
RET 0.01 (2.77)‡ 0.02 (2.52)‡ 0.02 (3.68)‡ 0.02 (2.61)‡ 0.002 (3.11)‡ 0.001 (1.50)*
ROE -0.03 (-2.66)‡ 0.003 (0.12) -0.03 (-2.91)‡ 0.003 (0.12) -0.001 (-0.58) 0.006 (1.84)†
Adj. R² 10.4% 13.3% 16.1% 14.8% 55.2% 47.5%
F-statistic 4.07‡ 3.19‡ 6.09‡ 3.51‡ 33.81‡ 14.00‡
N 480 260 480 260 480 260
Notes:
(A) Indirect effect of acquisition premium (hypothesis 2a)
Hypothesis 2a: For acquiring firms, the magnitude of acquisition premium produces
a negative effect on CEO compensation through firm performance.
Main analysis: In this section, results referring to the mediating effect of firm
performance on indirect relation between acquisition premium and different CEO
compensation components are presented. As reported in tables 53 and 54, the empirical
findings are mixed and only partially corroborate hypothesis 2a. Among executive
compensation components, total compensation seems to give the strongest support to
hypothesis 2a. Indeed, the regression coefficients for both RET and ROE are overall
positive and significant, while the control premium coefficient is not significantly
different from zero. In the short-term compensation component, the acquisition premium
coefficients are close to zero; the only significantly positive (p < 0.05) coefficient for
firm performance is for ROE in the restricted sample (β6 = 0.005; t = 1.75).
There is further support for hypothesis 2a in the case of executive short-term bonus. In
the restricted sample, a higher CEO short-term bonus is explained by better stock market
(β5 = 0.01; t = 2.51; p < 0.01) and accounting (β6 = 0.09; t = 4.72; p < 0.01) performance
ratings of acquiring firms. However, the acquisition premium coefficient in this sample is
still statistically significant at a p < 0.10 level (β1 = –1.38; t = –1.41). Furthermore, both
stock options and long-term compensation components are positively and significantly
associated with RET, but negatively and significantly with ROE in the full sample. It
should be noted that in these latter cases, the control premium coefficients are not
significantly lower than zero. The salary component in the full sample does not seem to
strongly confirm hypothesis 2a. In the restricted sample, however, this compensation
component displays a significantly positive association with ROE, while its negative link
with acquisition premium remains statistically significant (p < 0.01).
Four general conclusions can be drawn from these findings related to the mediating
effect of firm performance on premium-compensation association: 1) The restricted
sample produces results more consistent with hypothesis 2a than does the full sample –
across all dependent variables. 2) Executive salaries offer less support to hypothesis 2a
than do short-term bonuses and stock options, since salaries are fixed and not contingent
on firm performance, as are the variable compensation components (e.g., short-term
bonuses and stock options). 3) Higher short-term compensation granted to CEOs is due
to better performance rating measured as an accounting ratio, while higher long-term
compensation rates are explained by an increased stock market measure of profitability.
4) Even though the mediating effect of firm performance is strong, the significant
negative values of control premium, especially for short-term bonuses, suggest that the
direct effect of this deal characteristic is still present. This means that the negative effect
of acquisition premium on CEO short-term bonus is the result not only of firm
performance but also other factors not considered in this regression model. Table 55
provides a synthesis of these findings with respect to hypothesis 2a.
Hypothesis 2a: predicted / obtained signs for RET, ROE (* p < 0.10)
Full + / +, – + / +*, +* + / +, + + / +*, –* + / +*, –* + / +*, –
Restrict. + / +, +* + / +*, +* + / –, +* + / +*, + + / +*, + + / +*, +*
Control premium insignificant Premium significant at p < 0.10
Additional analysis: An additional, multivariate analysis was performed to shed more

light on compensation-performance association according to the magnitude of acquisition
premium paid. The regression equation is designed to capture the pre-acquisition effect
of firm performance and the resulting shift in this effect after an acquisition. Simple
profitability terms (RET and ROE) capture their pre-merger effects, while the interaction
terms (RET*Post and ROE*Post) account for the change in the compensation-
performance relationship between the pre- and post-acquisition periods. For this
additional analysis, we decided to separate the year of acquisition (t) from the post-
transaction years. The term “Post” in this regression model therefore refers to the three
post-acquisition years (t+1, t+2, and t+3), excluding the acquisition year itself (t). The
regression equation for salary as a dependent variable can be summarized as follows:
LnSalary = β0 + β1LnAssets + β2RET + β3ROE + β4LnAssets*Post + β5RET*Post +

β6ROE*Post.
In order to be able to account for the indirect effect of the magnitude of acquisition
premium on executive compensation, both the full and restricted samples are divided into
two subgroups: firms that paid a high control premium and those that paid a low one. The
median value of acquisition premium measured one day before the deal is used when
splitting the research samples into subgroups. Additional analysis using the other two
measures of acquisition premium (10 days and 20 days before the deal) produces equal
results. Similar sample cuts are used in the two most recent studies linking executive
compensation with merger activity. Bliss and Rosen (2001) divide their sample banks
into high- and low-merger banks, using the average level of merger activity over the
sample period, with 16 banks in each group. Wright et al. (2002) place their sample firms
into two groups: one with vigilantly-monitored firms (77 firms) and the other with
weakly-monitored firms (94 firms).
Once each sample was divided into two subgroups, the test of significance of difference
in performance coefficients across the control premium partition is performed (Engel et
al., 2002). Tables 56 through 62 report all findings for both the full and restricted
samples of data. Diagnostic test results do not reveal any multicollinearity (variance
inflation factors) or autocorrelation (Durbin-Watson) problems.
As shown in table 56, regression results with salary as the dependent variable are similar
across the full and restricted samples of data. In the restricted sample, β1 values for both
the low-premium and high-premium subgroups are significantly positive, at a p < 0.01
level (β1 = 0.204; t = 8.24 and β1 = 0.778; t = 6.56, respectively). These results suggest
that executive salary is contingent upon firm size in both subgroups prior to the
acquisition. However, different performance coefficients need to be examined in order to
determine whether the regression results are in line with hypothesis 2a. RET coefficients
are significantly positive in the high-premium subgroups of both the full (β2 = 0.009; t =
2.41; p < 0.01) and restricted (β2 = 0.016; t = 2.75; p < 0.01) samples. The RET
coefficients in low-premium subgroups are negative and, as the t-tests suggest, they are
significantly lower (p < 0.01) than in the high-premium subgroups. ROE coefficients are
positive but not significant in high-premium subgroups in both samples. These findings
mean that before the deal, executive salary is more performance-contingent in the high-
premium subgroup than in the low-premium subgroup. The hypothesis 2a is therefore
confirmed.
Table 56. Regression results of Ln Salary for low versus high acquisition premia
(one day before the deal)
Dependent variable: Ln Salary
Explanatory Full sample Restricted sample
variables Low premium High premium Low premium High premium
Intercept 8.393 (26.52)‡ 1.828 (1.31)* 8.744 (17.04)‡ -3.833 (-1.59)*
Ln Assets 0.217 (14.55)‡ 0.512 (7.63)‡ 0.204 (8.24)‡ 0.778 (6.56)‡
RET -0.001 (-1.02) 0.009 (2.41)‡³ -0.001 (-1.41)* 0.016 (2.75)‡³
ROE 0.003 (0.77) 0.001 (0.10) -0.008 (-1.13) 0.013 (0.58)
Ln Assets*Post 0.003 (0.94) -0.002 (-0.17) -0.005 (-0.99) -0.009 (-0.42)
RET*Post 0.000 (0.06) -0.014 (-2.64)‡³ 0.001 (0.47) -0.031 (-3.41)‡³
ROE*Post 0.000 (-0.05) 0.001 (0.08) 0.013 (1.50)* 0.011 (0.40)
Adjusted R² 51% 22% 39% 30%
Model: F-statistic 44.13‡ 12.44‡ 14.82‡ 11.00‡
N of observations 246 246 132 139
Notes:
Values are independent variable coefficients with the t-statistic in parentheses
One-tailed test of significance of difference in performance coefficients across the control premium
partition (low versus high premium): ¹ p < 0.10 ² p < 0.05 ³ p < 0.01
The interaction terms for firm profitability allow the performance-salary relation changes
between the pre- and post-deal periods to be verified. ROE*Post coefficients are still
positive but not significant in the high-premium subgroup in both samples. The
RET*Post coefficients are significantly negative and different (p < 0.01) from the
coefficients in the low-premium subgroups. These results suggest that in the high-
premium subgroup, the relation between salary and stock market performance is weaker
in the post-acquisition period than in the pre-deal one. This is not surprising, since salary
is a fixed compensation component and not expected to vary according to the changing
firm performance ratings.
Table 57. Regression results of Ln ST Bonus for low versus high acquisition premia
(one day before the deal)
Dependent variable: Ln ST Bonus
Intercept -2.248 (-0.66) 2.133 (0.59) -6.831 (-1.40)* -9.489 (-2.46)‡
Ln Assets 0.539 (3.37)‡ 0.354 (2.05)† 0.761 (3.24)‡ 0.977 (5.14)‡
RET 0.012 (1.41)* 0.011 (1.14) 0.006 (0.69) 0.010 (1.06)
ROE 0.111 (3.17)‡ 0.095 (2.67)‡ 0.229 (3.38)‡ 0.094 (2.52)‡²
Ln Assets*Post 0.037 (1.13) 0.025 (0.77) -0.013 (-0.27) -0.048 (-1.37)*
RET*Post 0.040 (2.77)‡ 0.010 (0.77)¹ 0.033 (1.87)† 0.013 (0.88)
ROE*Post -0.109 (-2.79)‡ -0.092 (-2.43)‡ -0.123 (-1.48)* -0.018 (-0.41)
Adjusted R² 16.3% 7.4% 24% 29%
Notes:
Table 57 reports the regression results obtained in a model with the CEO short-term
bonus as the dependent variable. Once again, findings are similar across the full and
restricted samples of data, suggesting that in the pre-acquisition period executive short-
term bonuses are more contingent on accounting than on stock market performance in
both subgroups. The positive ROE coefficients are all significant at a p < 0.01 level, and
the only significant RET coefficient is that for the full-sample low-premium subgroup (β2
= 0.012; t = 1.41; p < 0.10). These results are in line with hypothesis 2a.
As result of an acquisition, the association between short-term bonus and RET is positive
though not significant in the high-premium subgroups of both samples. The ROE*Post
coefficient is negative in high-premium subgroups in both samples but significant only in
the full sample (p < 0.01). This finding suggests that the strong positive short-term
bonus-ROE association before an acquisition in the high-premium subgroup of the full
sample diminishes significantly as a result of a change of control transaction. In order to
verify whether similar findings would be produced with the use of another measure of
control premium variable, the same analysis is performed, using a “20 days before the
deal” metric of acquisition premium. The regression results reported in table 58 are
comparable to those reported in table 57, where a “one day before the deal” measure of
control premium was used.
Table 58. Regression results of Ln ST Bonus for low versus high acquisition premia
(20 days before the deal)
Intercept -2.883 (-0.76) 1.313 (0.40) -9.636 (-1.91)† -10.021 (-2.52)‡
Ln Assets 0.542 (3.01)‡ 0.420 (2.69)‡ 0.887 (3.72)‡ 1.000 (5.05)‡
RET 0.014 (1.71)† 0.008 (0.84) 0.014 (1.53)* 0.003 (0.28)
ROE 0.139 (3.91)‡ 0.074 (2.12)† 0.244 (4.36)‡ 0.093 (2.22)†²
Ln Assets*Post 0.086 (2.73)‡ -0.026 (-0.80) 0.013 (0.31) -0.060 (-1.57)*
RET*Post 0.028 (2.23)† 0.013 (0.90) 0.048 (2.79)‡ 0.014 (0.97)¹
ROE*Post -0.153 (-3.98)‡ -0.066 (-1.78)† -0.181 (-2.53)‡ -0.009 (-0.17)¹
Adjusted R² 19% 7% 34% 24%
Notes:
Focusing on the regression results with short-term compensation as the dependent

variable presented in table 59, in the pre-deal period we find that the regression
coefficients for both RET and ROE are positive in the high-premium subgroups across
the samples. In the restricted sample, the RET coefficient is significantly greater (p <
0.10) in the high-premium subgroup than in the low-premium subgroup. In the same
sample, the short-term compensation association with RET diminishes insignificantly as

result of an acquisition, while its positive association with ROE becomes significantly
stronger at p < 0.10 level in the high premium subgroup. Overall, these results are fairly
consistent with hypothesis 2a, especially in the restricted sample of data.
Table 59. Regression results of Ln Short Term Compensation for low versus high
Dependent variable: Ln Short Term Compensation
Intercept 7.914 (17.34)‡ 8.534 (22.94)‡ 8.509 (11.40)‡ 8.604 (20.34)‡
Ln Assets 0.261 (12.15)‡ 0.240 (13.46)‡ 0.232 (6.43)‡ 0.238 (11.39)‡
RET -0.001 (-0.48) 0.001 (0.59) -0.001 (-1.04) 0.001 (1.31)*¹
ROE 0.007 (1.49)* 0.004 (1.10) 0.005 (0.49) 0.001 (0.31)
Ln Assets*Post 0.009 (1.98)† 0.004 (1.14) 0.001 (0.19) 0.005 (1.23)
RET*Post 0.003 (1.61)* -0.0001 (-0.19)¹ 0.003 (1.07) -0.001 (-0.87)¹
ROE*Post -0.006 (-1.14) -0.003 (-0.75) 0.008 (0.64) 0.007 (1.40)*
Adjusted R² 44% 46% 32% 55%
Notes:
The evidence shows that stock options payments (see table 60) in the pre-acquisition
period are more contingent upon stock market than accounting performance in the high-
premium subgroups. These findings are statistically significant only in the full sample,
not in the restricted sample. As result of an acquisition, the positive association between
stock market profitability and stock options is maintained more significantly in the high-
premium than in the low-premium subgroups of both samples. Finally, the ROE*Post
coefficients are positive in the high-premium subgroups of the full (β6 = 0.091; t = 2.33;
p < 0.05) and restricted (β6 = 0.054; t = 0.99; p > 0.10) samples. This means that in these
subgroups, the association between stock options and accounting performance increases
as result of an acquisition. As with short-term bonus component, stock options represent
the variable component of CEO compensation; thus, stock options (rather than salary) are
more likely to be contingent on firm performance. Overall, these regression results
provide some support for hypothesis 2a.
Table 60. Regression results of Ln Stock Options for low versus high acquisition
Dependent variable: Ln Stock Options

Intercept -12.850 (-3.44)‡ -6.234 (-1.65)* -16.238 (-2.63)‡ -13.014 (-2.75)‡
Ln Assets 1.089 (6.18)‡ 0.785 (4.32)‡ 1.262 (4.21)‡ 1.145 (4.88)‡
RET 0.009 (0.98) 0.017 (1.66)† 0.010 (0.90) 0.013 (1.13)
ROE -0.091 (-2.34)‡ -0.111 (-2.99)‡ 0.054 (0.65) -0.040 (-0.88)
Ln Assets*Post -0.023 (-0.63) 0.018 (0.51) -0.033 (-0.57) -0.004 (-0.09)
RET*Post -0.024 (-1.54)* 0.015 (1.07)² -0.019 (-0.90) 0.023 (1.32)*¹
ROE*Post 0.069 (1.59)* 0.091 (2.33)† -0.052 (-0.51) 0.054 (0.99)¹
Adjusted R² 14% 12% 9% 18%
Notes:
Focusing on the regression model where long term compensation is used as the
dependent variable (see table 61), the results are very similar to those produced by the
stock options component of CEO compensation. This is not striking, since stock options
constitute the largest part of the long-term compensation component.
Table 61. Regression results of Ln Long Term Compensation for low versus high
Dependent variable: Ln Long Term Compensation

Intercept -15.038 (-4.27)‡ -9.794 (-2.71)‡ -17.241 (-2.85)‡ -13.478 (-2.84)‡
Ln Assets 1.198 (7.21)‡ 0.961 (5.53)‡ 1.318 (4.49)‡ 1.169 (4.97)‡
RET 0.011 (1.30)* 0.020 (2.08)† 0.009 (0.85) 0.014 (1.23)
ROE -0.064 (-1.75)† -0.094 (-2.65)‡ 0.064 (0.79) -0.040 (-0.87)¹
Ln Assets*Post -0.007 (-0.22) 0.026 (0.79) -0.040 (-0.72) -0.003 (-0.08)
RET*Post -0.025 (-1.65)† 0.016 (1.18)² -0.019 (-0.89) 0.022 (1.23)¹
ROE*Post 0.037 (0.92) 0.073 (1.95)† -0.063 (-0.64) 0.055 (1.00)¹
Adjusted R² 18% 16% 11% 18%
Notes:
Finally, findings related to the total compensation component presented in table 62

suggest a significantly higher positive association with RET in the high-premium
subgroup as compared to the low-premium subgroup in the pre-acquisition period.
Moreover, this positive association is maintained as a result of an M&A transaction.
Although the total compensation association with ROE is negative in high-premium
subgroups of both samples in the pre-acquisition period, the positive ROE*Post
coefficients indicate that total compensation becomes more contingent on accounting
performance in the post-deal period than in the pre-deal period. Overall, these results
tend to corroborate hypothesis 2a.
Table 62. Regression results of Ln Total Compensation for low versus high
Dependent variable: Ln Total Compensation

Intercept 6.358 (13.29)‡ 7.236 (15.45)‡ 6.984 (8.49)‡ 7.872 (14.38)‡
Ln Assets 0.357 (15.85)‡ 0.327 (14.56)‡ 0.324 (8.12)‡ 0.295 (10.86)‡
RET 0.000 (-0.23) 0.003 (2.05)†² -0.001 (-0.74) 0.003 (2.49)‡³
ROE -0.002 (-0.32) -0.006 (-1.30)* 0.012 (1.06) -0.003 (-0.55)¹
Ln Assets*Post 0.008 (1.79)† 0.004 (0.96) 0.001 (0.16) 0.006 (1.15)
RET*Post 0.002 (0.88) 0.001 (0.58) 0.000 (0.09) -0.001 (-0.43)
ROE*Post 0.002 (0.27) 0.006 (1.27) 0.003 (0.21) 0.012 (1.85)†
Adjusted R² 56% 50% 41% 54%
Notes:
(B) Indirect effect of method of payment (hypothesis 2b)
Hypothesis 2b: For acquiring firms, acquisitions through share exchanges (rather
than in cash) produce a negative effect on CEO compensation
through firm performance.
Main analysis: In this section, the regression results reported in tables 53 and 54 are
briefly discussed with respect to the mediating effect of firm performance on the indirect
link between method of payment and different executive compensation components. As
previously argued, the logic of presenting some components of short-term compensation
and long-term compensation separately resides in their different attributes and
determination processes (St-Onge et al., 2001).
Overall, the regression results are mixed and only partially confirm the relationship
hypothesized in 2b. It should be noted, as before, that findings differ depending on a
specific executive compensation component. The most significant support for hypothesis
2b seems to be afforded by the short-term bonus component, especially in the restricted
sample. Hence, both the RET and ROE coefficients are significantly positive (p < 0.01),
while the method of payment coefficient is not significantly different from zero. In other
words, in those acquiring firms that financed their M&A deals in cash, executives benefit
from higher levels of short-tem bonus payments due to better firm performance ratings.
In the full sample, however, though the short-term bonus positive association with ROE
and RET is significant, the method of payment coefficient is strikingly positive and
significant at a p < 0.01 level.
Findings concerning the stock options and long-term compensation components are
mixed. In the full sample, these CEO compensation variables depict a positive
association with RET, but a negative one with ROE – both significant at a p < 0.01 level.
The method of payment variable in this sample is only marginally significant for the
long-term compensation component. Overall, these results mean that stock options and
other long-term payments made to executives are contingent more on the stock market
than on accounting performance. In the restricted sample, both RET and ROE
coefficients are positive, the former significantly so at a p < 0.01 level, while the method
of payment coefficients are surprisingly positive and significant at a p < 0.05 level. It has
also be noted that much of the variance in these dependent variables (stock options and
long-term compensation) remains unexplained, as reported by modest F-statistic and
adjusted R² values. More explanatory factors are needed to be integrated in the regression
model in order to account for variations in these compensation components.
Since salary is a fixed compensation component and not expected to vary according to
firm performance ratings, it is not surprising that RET and ROE coefficients are not
statistically significant for this component. The only exception refers to marginally
significant and positive ROE coefficient (β6 = 0.01; t = 1.49; p < 0.10) in the restricted
sample. Short-term compensation and total compensation association with performance
is generally positive, but more significant for the total compensation component. Overall,
these results partially confirm the moderating effect of firm performance, hypothesized in
2b, since the significance levels are not uniform across the samples. It should be noted
that for salary, short-term compensation and total compensation components, the method
of payment coefficients remain significantly negative. This means that the method of
payment affects these CEO compensation variables not only through firm performance
but also through other (yet to be considered) explanatory factors. Table 63 provides a
synthesis of empirical findings related to hypothesis 2b.
Hypothesis 2b: predicted / obtained signs for RET, ROE (* p < 0.10)
Full + / +, – + / +*, +* + / +, + + / +*, –* + / +*, –* + / +*, –
Restrict. + / +, +* + / +*, +* + / –, +* + / +*, + + / +*, + + / +*, +*
Method of payment insignificant Method significant at p < 0.10
Additional analysis: In order to be able to capture the pre-acquisition relation between

firm performance and executive compensation components and the change in this
relation as a result of an acquisition, depending on the method of payment used, an
additional multivariate analysis is performed. As with the control premium case, the
following regression model is tested: COMP = β0 + β1LnAssets + β2RET + β3ROE +
β4LnAssets*Post + β5RET*Post + β6ROE*Post. Aiming to account for the indirect effect
of method of payment on CEO compensation, each research sample is split into two
subgroups: 1) companies that paid for their acquisitions in cash, and 2) companies that
paid using either a combination of cash and stock or share exchanges. These sample-cuts
are fairly common in the literature on executive compensation and acquisition activity
(Bliss and Rosen, 2001; Wright et al., 2002). The test of significance of difference in
performance coefficients across the method of payment partition (Engel et al., 2002) is
then performed. Tables 64 through 69 show all regression results for both the full and
restricted samples of data. The diagnostic tests do not reveal any autocorrelation (Durbin-
Watson) or multicollinearity (variance inflation factors) problems in the model used.
Table 64. Regression results of Ln Salary for cash vs. comb. & stock payment

variables Cash Comb. & Stock Cash Comb. & Stock
Intercept 9.642 (30.53)‡ 3.354 (3.59)‡ 7.966 (13.62)‡ -0.482 (-0.30)
Ln Assets 0.169 (11.34)‡ 0.439 (9.85)‡ 0.258 (8.92)‡ 0.612 (7.83)‡
RET 0.001 (0.57) 0.006 (2.56)‡ 0.001 (0.68) 0.009 (2.61)‡
ROE 0.000 (-0.13) 0.006 (0.57) -0.001 (-0.27) 0.024 (1.28)*
Ln Assets*Post 0.003 (0.96) 0.001 (0.06) -0.003 (-0.66) -0.002 (-0.14)
RET*Post -0.001 (-1.05) -0.011 (-2.95)‡¹ -0.001 (-0.78) -0.024 (-3.70)‡²
ROE*Post 0.002 (0.65) -0.003 (-0.29) 0.003 (0.54) -0.002 (-0.09)
Adjusted R² 57% 23% 58% 28%
Model: F-statistic 26.06‡ 19.65‡ 14.63 14.37
Notes:
One-tailed test of significance of difference in performance coefficients across the method of payment
partition (cash versus combination & stock): ¹ p < 0.10 ² p < 0.05 ³ p < 0.01
Table 65. Regression results of Ln ST Bonus for cash vs. comb. & stock payment

Intercept 9.402 (1.66)† -3.871 (-1.46)* 17.317 (1.61)* -12.094 (-4.10)‡
Ln Assets -0.056 (-0.21) 0.649 (5.14)‡ -0.441 (-0.83) 1.084 (7.51)‡
RET 0.007 (0.42) 0.013 (2.01)† 0.012 (0.58) 0.014 (2.13)†
ROE 0.195 (3.73)‡ 0.063 (2.28)†² 0.355 (4.12)‡ 0.055 (1.57)*³
Ln Assets*Post 0.023 (0.41) 0.022 (0.92) 0.032 (0.42) -0.059 (-2.09)†
RET*Post 0.029 (1.16) 0.016 (1.60)* 0.007 (0.25) 0.022 (1.79)†
ROE*Post -0.182 (-3.16)‡ -0.060 (-2.01)†² -0.266 (-2.37)† 0.029 (0.71)³
Adjusted R² 0.12 0.13 0.23 0.34
Notes:
One-railed test of significance of difference in performance coefficients across the method of payment
The regression results, where salary is used as dependent variable, are interesting (see
table 64). In the restricted sample, companies that pay through share exchanges link
CEO salary closely to both stock market returns (β2 = 0.009; t = 2.61; p < 0.01) and
accounting performance (β3 = 0.024; t = 1.28; p < 0.10) in the pre-acquisition period,
which is not the case for the cash-payers (where β2 and β3 are not significant). These
results are consistent with predictions from hypothesis 2b. Further, both RET*Post and
ROE*Post coefficients are negative for equity-payers across the samples, but only the
former coefficients are significant at a p < 0.01 level. These findings suggest that the
salary association with firm performance (particularly with RET) is lower in the post-
acquisition period than in the pre-acquisition period.
Table 66. Regression results of Ln Short Term Compensation for cash versus
Intercept 9.942 (20.58)‡ 7.718 (22.07)‡ 8.008(8.95)‡ 8.007 (18.42)‡
Ln Assets 0.176 (7.75)‡ 0.273 (16.37)‡ 0.280(6.31)‡ 0.256 (12.03)‡
RET 0.001 (0.62) 0.000 (-0.15) 0.002(1.05) 0.000 (0.19)
ROE 0.009 (1.93)† 0.004 (1.05) 0.017(2.39)‡ -0.0001 (-0.09)²
Ln Assets*Post 0.006 (1.34)* 0.006 (1.76)† 0.003(0.41) 0.004 (1.00)
RET*Post 0.000 (0.14) 0.002 (1.28)* -0.001(-0.53) 0.002 (0.86)
ROE*Post -0.006 (-1,32)* -0.004 (-1,01) -0.007(-0,75) 0.008 (1.27)*¹
Adjusted R² 41% 46% 47% 47%
Notes:
Focusing on the regression model, where short-term bonus is used as the dependent
variable (see table 65), it should be noted that through the pre-acquisition period, stock-
payers in both samples link short-term bonus payments to both measures of firm
profitability, whereas cash-payers link short-term bonus payments to accounting measure

of performance (ROE). As result of an acquisition, these positive links are maintained in
the combination and stock subgroup of the restricted sample, a finding that corroborates
hypothesis 2b. In the full sample, a short-term bonus positive association with stock
market performance is also maintained in the post-acquisition period for the subgroup of
equity-payers. This is not the case, however, for the accounting measure of profitability,
because the negative ROE*Post coefficient (β6 = –0.060; t = –2.01; p < 0.05) for the
restricted sample equity-payers means that the short-term bonus relation with ROE is
lower in the post-acquisition period than in the pre-acquisition period.
Table 67. Regression results of Ln Stock Options for cash versus combination and
stock method of payment
Intercept -13.043 (-2.34)† -7.868 (-2.60)‡ -24.927 (-1.94)† -10.474 (-2.77)‡
Ln Assets 1.099 (4.18)‡ 0.860 (5.95)‡ 1.670 (2.63)‡ 1.024 (5.50)‡
RET -0.017 (-1.02) 0.018 (2.44)‡² 0.007 (0.26) 0.113 (1.62)*
ROE -0.055 (-1.05) -0.117 (-3.71)‡¹ 0.087 (0.85) -0.049 (-1.13)²
Ln Assets*Post -0.040 (-0.72) 0.013 (0.46) -0.128 (-1.40)* -0.001 (-0.04)
RET*Post 0.040 (1.64)* -0.004 (-0.36)² 0.022 (0.66) -0.006 (-0.37)
ROE*Post 0.049 (0.86) 0.100 (2.97)‡¹ 0.037 (0.28) 0.046 (0.89)
Adjusted R² 11% 12% 14% 13%
Model: F-statistic 3.32‡ 8.86‡ 2.57† 5.82‡
Notes:
The performance coefficients with the short-term compensation variable (see table 66)
are not significant in the pre-acquisition period for the combination and stock subgroups
of both restricted and full samples. The significantly positive RET*Post coefficient (β5 =
0.002; t = 1.28; p < 0.10) for equity-payers in the full sample suggests that short-term
compensation association with stock market performance is higher in the post-acquisition

than in the pre-acquisition period. Similarly, the positive and significant ROE*Post
coefficient (β5 = 0.008; t = 1.27; p < 0.10) for the combination and stock subgroup in the
restricted sample means that the short-term compensation relation with accounting
profitability is higher in the post-deal than in the pre-deal period. The t-test also shows
that the ROE*Post coefficients are different at the p < 0.10 level across the method of
payment partition in the restricted sample. Hypothesis 2b is therefore confirmed.
Table 68. Regression results of Ln Long Term Compensation for cash versus
Intercept -17.555 (-3.36)‡ -9.966 (-3.45)‡ -24.927 (-1.94)† -11.157 (-2.99)‡
Ln Assets 1.320 (5.36)‡ 0.965 (6.98)‡ 1.670 (2.63)‡ 1.063 (5.80)‡
RET -0.009 (-0.57) 0.019 (2.76)‡² 0.007 (0.26) 0.013 (1.62)*
ROE -0.022 (-0.45) -0.101 (-3.34)‡² 0.087 (0.85) -0.045 (-1.04)²
Ln Assets*Post -0.029 (-0.56) 0.025 (0.96) -0.128 (-1.40)* -0.006 (-0.18)
RET*Post 0.035 (1.55)* -0.003 (-0.27)¹ 0.022 (0.66) -0.006 (-0.41)
ROE*Post 0.011 (0.21) 0.083 (2.58)‡² 0.037 (0.28) 0.042 (0.83)
Adjusted R² 18.4% 15% 13.8% 14%
Model: F-statistic 5.2‡ 11.62‡ 2.57† 6.32‡
Notes:
As reported in table 67, the evidence is mixed for stock options in the pre-acquisition
period. Thus, during this period equity-payers link stock option grants more closely to
the stock market performance and less closely to the accounting profitability in both
samples. As result of an M&A transaction, the positive association between stock options
and RET is maintained in combination and stock subgroups of both samples. More
interestingly, the significantly positive ROE*Post coefficient (β6 = 0.100; t = 2.97; p <
0.01) for equity-payers of the full sample suggests that the ‘stock options–accounting
performance’ relation is higher in the post-acquisition period than in the period preceding
the acquisition. The ROE*Post coefficients in this sample are also significantly different
(p < 0.10) across the method of payment partition. Overall, these findings provide partial
support for hypothesis 2b. Furthermore, the patterns of signs and significance levels in
the regression model where long-term compensation is used as the dependent variable
(see table 68) are similar to those obtained for the stock options component.
Table 69. Regression results of Ln Total Compensation for cash versus

Intercept 7.463 (13.47)‡ 6.712 (16.51)‡ 6.599 (6.42)‡ 7.230 (13.46)‡
Ln Assets 0.316 (12.11)‡ 0.345 (17.76)‡ 0.362 (7.11)‡ 0.316 (11.95)‡
RET 0.001 (0.59) 0.001 (0.90) 0.004 (2.16)† 0.000 (0.31)¹
ROE 0.000 (-0.06) -0.005 (-1.21) 0.014 (1.69)† 0.001 (0.22)
Ln Assets*Post 0.010 (1.76)† 0.006 (1.54)* 0.007 (0.98) 0.004 (1.78)
RET*Post 0.002 (0.98) 0.002 (1.50)* -0.001 (-0.55) 0.001 (0.41)
ROE*Post 0.000 (0.04) 0.005 (1.00) -0.003 (-0.33) 0.007 (0.95)
Adjusted R² 60% 51% 46% 74%
Notes:
Finally, the regression results for the total compensation component (see table 69) report
a generally positive (except for the ROE in the full sample) but not significant
association between different performance measures in the combination and stock
subgroups. The significantly positive RET*Post coefficient in the full sample (β5 =
0.002; t = 1.50; p < 0.10) represents the only exception, which suggests that the ‘total
compensation – stock market performance’ relation for equity-payers is higher after an
acquisition than before. In light of these findings, it can be concluded that only the
patterns of signs and not those of significance levels for the total compensation
component are consistent with the assumptions hypothesized in 2b.
5.2.3 Testing the moderating effect of structural board independence on the

direct link between transactional characteristics and CEO compensation
(firm performance or size) and the executive compensation of acquiring companies?
Our main objective in this section is to provide the first part of empirical responses to the
research question (1.4), concerning the moderating SBI effect on the relation between the
magnitude of acquisition premium or method of payment and executive compensation.
However, before testing the moderating effect of SBI on the direct link between deal
characteristics and CEO compensation, we thought it would be interesting to see whether
SBI itself has any direct effect on executive compensation. In order to do this, the
structural board independence variable is added to the regression model previously used
to test the direct effect of transactional characteristics on executive compensation
components. The final regression equation has the same features as the previous one and
can be resumed as follows: COMP = β0 + β1Premium*Post + β2LnAssets*Post +
β3Method*Post + β4LnAssets + β5SBI + β6Years(1992-2004).
Different diagnostic tests (Durbin-Watson, variance inflation factors) do not reveal any
autocorrelation or multicollinearity problems. The regression results reported in tables
70 and 71 permit us to verify whether there is any significant direct effect of structural
board independence on the monetary components of executive compensation in
acquiring companies.
Table 70. Regression results testing SBI direct effect on executive compensation
Intercept 7.03 (9.15)‡ 5.44 (4.03)‡ -1.97 (-0.70) -7.10 (-1.97)† 8.62 (26.92)‡ 8.95 (21.06)‡
Premium*Post -1.68 (-6.04)‡ -2.22 (-5.57)‡ -2.13 (-2.11)† -2.03 (-1.92)† 0.03 (0.32) 0.06 (0.49)
LnAssets*Post 0.04 (3.32)‡ 0.09 (4.01)‡ -0.12 (-2.38)‡ -0.11 (-1.66)† -0.007 (-1.23) 0.007 (0.97)
Method*Post -0.26 (-2.30)‡ -0.72 (-3.70)‡ 1.19 (2.89)‡ 0.41 (0.79) -0.01 (-0.22) -0.17 (-2.82)‡
LnAssets 0.31 (9.46)‡ 0.42 (6.66)‡ 0.55 (4.52)‡ 0.88 (5.27)‡ 0.25 (17.99)‡ 0.24 (12.17)‡
SBI -0.18 (-4.23)‡ -0.33 (-4.77)‡ -0.09 (-0.59) -0.33 (-1.75)† -0.06 (-3.53)‡ -0.11 (-5.10)‡
Adj. R² 27.6% 32.8% 8.2% 14% 47.6% 47.5%
F-statistic 12.26‡ 8.91‡ 3.63‡ 3.65‡ 27.87‡ 15.71‡
N 504 277 504 277 504 277
Notes:
Table 71. Regression results testing SBI direct effect on executive compensation
Intercept -9.45 (-3.19)‡ -16.30 (-3.98)‡ -10.25 (-4.37)‡ -17.01 (-4,20)‡ 7.42 (20.35)‡ 8.01 (15.83)‡
Premium*Post -0.81 (-0.76) -0.54 (-0.46) -0.84 (-0.83) -0.53 (-0,46) 0.03 (0.29) 0.05 (0.37)
LnAssets*Post -0.02 (-0.46) -0.08 (-1.11) -0.05 (-0.92) -0.08 (-1,22) -0.009 (-1.39)* 0.005 (0.53)
Method*Post 0.70 (1.63)* 1.20 (2.12)† 0.77 (1.89)† 1.24 (2.21)† -0.009 (-0.16) -0.14 (-1.96)†
LnAssets 0.86 (6.71)‡ 1.14 (5.95)‡ 1.02 (8.37)‡ 1.18 (6.25)‡ 0.33 (21.05)‡ 0.31 (13.18)‡
SBI 0.29 (1.71)† 0.33 (1.60)* 0.21 (1.32)* 0.31 (1.52)* -0.06 (-3.06)‡ -0.11 (-4.39)‡
Adj. R² 9.6% 12% 14.7% 13.3% 55.8% 49.2%
F-statistic 4.03‡ 3.09‡ 5.87‡ 3,37‡ 36.86‡ 15.91‡
N 483 263 483 263 483 263
Notes:
Values are independent variable coefficients the with t-statistic in parentheses
In light of previous research results on this topic (for a detailed literature review see St-
Onge et al., 2001), we expected the SBI to have a negative impact on executive
compensation. In other words, in those companies where boards of directors are
structurally more independent from management, executives are granted lower
compensation amounts than where the SBI is more dependent. The regression results
uniformly confirm this assumption for salary, short-term bonus, short-term compensation
and total compensation components, where SBI coefficients are significantly negative
across the samples. It should be noted, however, that SBI coefficients are positive and
significant at the p < 0.10 level for stock options and long-term compensation
components in both samples. Though the F-statistic values are very low for these latter
models, these findings seem to suggest that an independent board of directors cannot
affect, as predicted, the long-term compensation components of acquiring executives.
Table 72. Regression results testing the moderating SBI effect on the direct relation
between the control premium and executive compensation

Intercept 6.11 (8.28)‡ 4.95 (3.92)‡ -1.32 (-0.45) -6.19 (-1.67)† 8.62 (25.62)‡ 8.77 (20.15)‡
Premium*Post 6.16 (7.27)‡ 6.01 (5.08)‡ -0.59 (-0.17) -4.21 (-1.22) 0.29 (0.76) -0.42 (-1.03)
LnAssets*Post 0.01 (1.04) 0.03 (1.41)* -0.13 (-2.48)‡ -0.09 (-1.39)† -0.008 (-1.38)* 0.01 (1.61)*
Method*Post -0.55 (-2.85)‡ -0.64 (-2.29)‡ 0.53 (0.69) -0.17 (-0.21) -0.04 (-0.49) -0.02 (-0.23)
LnAssets 0.33 (10.77)‡ 0.39 (6.96)‡ 0.55 (4.49)‡ 0.88 (5.29)‡ 0.25 (17.95)‡ 0.24 (12.28)‡
SBI -0.07 (-1.31)* -0.15 (-1.67)† -0.22 (-0.99) -0.53 (-2.05)† -0.07 (-2.64)‡ -0.08 (-2.54)‡
Prem*Post*SBI -1.74 (-9.64)‡ -1.86 (-7.21)‡ -0.37 (-0.52) 0.45 (0.60) -0.06 (-0.70) 0.12 (1.34)*
Meth*Post*SBI 0.13 (3.34)‡ 0.12 (1.92)† 0.16 (1.03) 0.11 (0.61) 0.01 (0.53) -0.05 (-2.15)†
Adj. R² 39.3% 44.5% 8% 13.9% 47.4% 48.1%
F-statistic 18.1‡ 12.63‡ 3.3‡ 3.34‡ 24.9‡ 14.45‡
N 504 277 504 277 504 277
Notes:
In order to verify any significant support for hypotheses 3a and 3b, the moderating
variable approach proposed by Baron and Kenny (1986) is used. For this, two interaction
variables between independent predictors (control premium and method of payment) and
moderator (SBI) are computed. The final regression equation is presented as follows:
COMP = β0 +β1Premium*Post +β2LnAssets*Post + β3Method*Post + β4LnAssets +
β5SBI + β6Premium*Post*SBI + β7Method*Post*SBI + β8Years(1992-2004). The interaction
terms for ‘Premium*Post*SBI’ or ‘Method*Post*SBI’ are designed to capture the
moderating effect of SBI on the direct relation between control premium or method of
payment and executive compensation. Diagnostic tests do not reveal any major
autocorrelation or multicollinearity problems in this model. The regression results for
different compensation components are presented in tables 72 and 73.
Table 73. Regression results testing the moderating SBI effect on the direct relation
between the control premium and executive compensation
(stock options, long-term, and total compensation)

Intercept -8.92 (-2.87)‡ -16.17 (-3.81)‡ -11.69 (-3.97)‡ -16.91 (-4.04)‡ 7.37 (19.25)‡ 7.89 (15.09)‡
Premium*Post -4.43 (-1.26)* -3.04 (-0.79) -3.87 (-1.16) -3.18 (-0.84) 0.49 (1.12) -0.01 (-0.02)
LnAssets*Post -0.01 (-0.17) -0.06 (-0.77) -0.03 (-0.66) -0.07 (-0.85) -0.01 (-1.62)† 0.006 (0.65)
Method*Post 0.75 (0.94) 1.15 (1.27) 0.72 (0.95) 1.21 (1.35)* -0.02 (-0.21) -0.06 (-0.54)
LnAssets 0.85 (6.65)‡ 1.14 (5.96)‡ 1.01 (8.30)‡ 1.19 (6.26)‡ 0.33 (21.06)‡ 0.31 (13.13)‡
SBI 0.21 (0.92) 0.26 (0.91) 0.13 (0.58) 0.25 (0.87) -0.06 (-1.94)† -0.09 (-2.51)‡
Prem*Post*SBI 0.80 (1.06) 0.56 (0.67) 0.66 (0.93) 0.59 (0.72) -0.10 (-1.08) 0.02 (0.19)
Meth*Post*SBI -0.04 (-0.25) -0.03 (-0.15) -0.02 (-0.09) -0.04 (-0.19) 0.007 (0.32) -0.02 (-0.83)
Adj. R² 9.5% 11.4% 14.5% 12.8% 55.8% 48.9%
F-statistic 3.66‡ 2.78‡ 5.29‡ 3.02‡ 32.99‡ 14.21‡
N 483 263 483 263 483 263
Notes:
(A) Moderating SBI effect on the direct relation between the acquisition premium
and CEO compensation (hypothesis 3a)
negative relation between the magnitude of the acquisition premium
and CEO compensation.
In this section, results related to the moderating SBI effect on the direct link between the
magnitude of control premium and different CEO compensation components are briefly
discussed. The moderating SBI effect from hypothesis 3a is supported if the interaction
term ‘Premium*Post*SBI’ is significantly negative. The evidence reported in tables 72
and 73 suggests that among all executive compensation components, salary seems to give
the strongest support for hypothesis 3a. Indeed, the interaction coefficient for this
component is negative and significant at a p < 0.01 level in both the full (β6 = –1.74; t =
–9.64) and restricted (β6 = –1.86; t = –7.21) samples of data. In other words, this finding
means that in those acquiring companies where the board of directors is structurally
independent from management, executives are likely to receive lower salaries when they
choose to pay a high acquisition premium to target shareholders. The
‘Premium*Post*SBI’ terms are also negative for short-term bonus, short-term
compensation, and total compensation components in the full sample, but they are not
statistically significant.
Regression results for stock-options and long-term compensation components in both

samples are less consistent with our expectations, as evidenced by positive, though not
significant, interaction coefficients (for stock options, the β6 = 0.80 (t = 1.06; p > 0.10) in
the full sample and β6 = 0.56 (t = 0.67; p > 0.10) in the restricted sample). It is not
striking, in fact, that long-term compensation group follows the same sign and
significance patterns as the stock options component. As descriptive statistics
demonstrated at the beginning of this chapter, the largest proportion within the long-term
compensation group is represented by stock options – and to a lesser extent, by other
long-term incentive plans. Indeed, the median values for restricted awards and long-term
payouts are always equal to zero over the whole investigation period, while those for
stock options fluctuate around CAN$300,000. Overall, these results seem to suggest that
SBI is not able to reinforce, as predicted, the negative relation between the magnitude of
acquisition premium and the long-term compensation components. Hypothesis 3a is
therefore not corroborated for these two long-term executive compensation factors.
Worth noting, however, is that the F-statistic and the adjusted R² values are very low for
stock options and long-term compensation, indicating that there may be other important
explanatory variables not included in the regression models.
Finally, the only compensation component for which hypothesis 3a is strongly rejected is
‘short-term compensation’ in the restricted sample; the interaction ‘Premium*Post*SBI’
coefficient is positive (β6 = 0.12; t = 1.34) and statistically significant at a p < 0.10 level.
Overall, these regression results generally tend to confirm the negative moderating SBI
effect on the control premium link with some short-term compensation components taken
separately (salary and partially short-term bonus), but not with the long-term
compensation components (stock options and long-term compensation). Table 74
provides a synthesis of the statistical support for hypothesis 3a.
Hypothesis 3a: predicted / obtained signs for Premium*Post*SBI (* p < 0.10)

Full – / –* –/– –/– –/+ –/+ –/–
Restrict. – / –* –/+ – / +* –/+ –/+ –/+
(B) Moderating SBI effect on the direct relation between method of payment and
CEO compensation (hypothesis 3b)
negative relation between the acquisition payment through share
exchanges (rather than in cash) and CEO compensation.
Regression results related to the SBI moderating effect on the direct link between method
of payment and executive compensation are reported in this section. To be consistent
with hypothesis 3b, the ‘Method*Post*SBI’ interaction term has to be significantly

negative. As revealed in tables 72 and 73, the level of significant support for hypothesis
3b is very limited. Interestingly, the patterns of signs and significance levels for the
method of payment factor are opposite to those observed for the magnitude of acquisition
premium factor.
The evidence demonstrates that short-term compensation in the restricted sample is the
only executive compensation component which strongly corroborates hypothesis 3b. In
this case, the ‘Method*Post*SBI’ interaction coefficient (β7 = –0.05; t = –2.15) is
negative and statistically significant at a p < 0.05 level. In other words, structural
independence of the board of directors enhances the negative link between the
acquisition payments through share exchanges and short-term compensation of acquiring
executives.
Furthermore, the interaction terms are also negative for stock options and long-term
compensation in both samples, and for total compensation in the restricted sample. For
these compensation components, however, hypothesis 3b is not strongly confirmed, since
these coefficients are not statistically significant. Here again, it should be noted that for
stock options and long-term compensation the F-statistic and adjusted R² values are very
low. It is likely that the regression models used are not able to explain adequately the
variations in these long-term executive compensation components. Further evidence is
needed in order to account for the moderating effect of SBI on the direct link between
method of payment and stock options and long-term compensation.
Finally, hypothesis 3b is not confirmed concerning the short-term bonus in both samples,
and for short-term compensation and total compensation in the full sample, where
‘Method*Post*SBI’ terms are positive but not significant. Strikingly, the moderating SBI
effect hypothesized in 3b is strongly rejected for salary in both samples. For this
compensation component, the interaction coefficients are significantly positive across the
samples (β7 = 0.13; t = 3.34; p < 0.01 in the full sample and β7 = 0.12; t = 1.92; p < 0.05
in the restricted one). Table 75 provides a synthesis of findings with respect to
hypothesis 3b.
Hypothesis 3b: predicted / obtained signs for Method*Post*SBI (* p < 0.10)

Full – / +* –/+ –/+ –/– –/– –/+
Restrict. – / +* –/+ –/–* –/– –/– –/–
(C) Additional analysis to verify the relationships hypothesized in 3a and 3b
An additional multivariate analysis is also performed in order to test the relationships

hypothesized in 3a and 3b. Since we expect the SBI variable to have a moderating effect
on the direct relation between deal characteristics and CEO compensation, the same
regression equation used to test this latter direct relation is used in for further analysis:
COMP = β0 + β1Premium*Post + β2LnAssets*Post + β3Method*Post + β4LnAssets +
β5Years(1992-2004). In order to be able to account for the moderating SBI effect, however,
both the full and restricted samples are divided into two subgroups across the SBI
partition: 1) acquirers that have boards of directors dependent on management, and 2)
firms with independent boards. The median value of structural board independence is
used when splitting research samples into two subgroups. Similar sample-cuts are fairly
common in compensation literature (Bliss and Rosen, 2001). For instance, Wright et al.
(2002) partitioned their sample in firms that are vigilantly monitored and others that are
weakly monitored. Then, the test of significance of difference in control premium and
method of payment coefficients across the subgroups (Engel et al., 2002) is performed
for the purposes of discussion. Tables 76 through 81 report all empirical findings for
both the full and restricted samples of data.
Focusing on regression with salary as a dependent variable (see table 76), it appears
evident that there is strong support for hypothesis 3a. In both samples of data, the
regression coefficients for the acquisition premium are significantly negative (p < 0.01)
in the independent subgroups, and statistical tests reveal that these coefficients are
significantly different from those in the dependent subgroups – where they are
significantly positive. However, the results of empirical tests are not in line with
hypothesis 3b. The method of payment coefficients are not significant for the
independent board subgroups, even though in the restricted sample of data, the
Method*Post coefficient is negative.
Table 76. Regression results of Ln Salary for the structurally dependent versus the
structurally independent board

variables Dependent Independent Dependent Independent
Intercept 9.154 (37.91)‡ -0.918 (-0.41) 8.961 (31.73)‡ -6.967 (-1.59)*
Premium*Post 0.188 (2.04)† -6.336 (-6.49)‡³ 0.185 (2.08)† -5.978 (-3.71)‡³
LnAssets*Post -0.002 (-0.43) 0.059 (1.20) 0.006 (1.04) 0.151 (1.61)*
Method*Post -0.035 (-0.97) 0.107 (0.24)¹ -0.070 (-1.74)† -0.878 (-0.93)²
LnAssets 0.184 (16.64)‡ 0.623 (5.98)‡ 0.193 (14.07)‡ 0.895 (4.22)‡
Adjusted R² 50.4% 47.6% 58.5% 54.6%
Notes:
Test of significance of difference in coefficients on premium and method measures across the SBI partition
(dependent versus independent board): ¹ p < 0.10 ² p < 0.05 ³ p < 0.01
Regression results for the short-term bonus component (see table 77) are generally
consistent with hypotheses 3a and to a lesser extent with hypothesis 3b, especially in the
full sample. The Premium*Post coefficient is negative and significant at a p < 0.10 level
in the full sample independent subgroup, while it is not significant in the restricted
sample. As far as the method of payment is concerned, there is a significantly positive
association with the short-term bonus in the independent subgroup of the full sample, a
finding that strongly rejects hypothesis 3b. In the restricted sample, the Method*Post
coefficient is negative, though insignificant, in the independent subgroup and
significantly different from that obtained in the dependent subgroup. This latter empirical
result tends to corroborate hypothesis 3b.
Table 77. Regression results of Ln ST Bonus for the structurally dependent versus
the structurally independent board
Intercept -0.757 (-0.24) -10.62 (-2.01)† -4.620 (-1.15) -20.638 (-3.06)‡
Premium*Post -1.674 (-1.42)* -3.214 (-1.38)* -1.730 (-1.37)* -0.081 (-0.03)
LnAssets*Post -0.117 (-2.04)† -0.211 (-1.82)† -0.140 (-1.86)† 0.058 (0.40)
Method*Post 1.142 (2.48)‡ 2.244 (2.13)†¹ 0.594 (1.04) -0.962 (-0.66)²
LnAssets 0.475 (3.36)‡ 0.920 (3.71)‡ 0.728 (3.75)‡ 1.523 (4.66)‡
Adjusted R² 6.8% 11.6% 9.8% 38.7%
Notes:
Test of significance of difference in coefficient on premium and method measures across the SBI partition
Table 78. Regression results of Ln Short Term Compensation for the structurally
Intercept 8,863 (26,03)‡ 6,521 (9,76)‡ 8,549 (18,55)‡ 8,285 (8,52)‡
Premium*Post 0,031 (0,24) 0,116 (0,39) 0,050 (0,34) 0,124 (0,35)
LnAssets*Post -0,003 (-0,44) -0,029 (-2,01)† 0,009 (1,08) 0,002 (0,12)
Method*Post -0,022 (-0,43) 0,132 (0,99) -0,113 (-2,02)† -0,329 (-1,58)*¹
LnAssets 0,226 (14,47)‡ 0,330 (10,53)‡ 0,240 (10,69)‡ 0,236 (5,02)‡
Adjusted R² 44,6% 47,5% 45,6% 40,1%
Model: F-statistic 19,34‡ 9,28‡ 11,64‡ 4,22†
Notes:
With respect to the short-term compensation component (see table 78), the regression
results in the full sample do not provide significant support for the relationships
hypothesized in 3a and 3b. Indeed, both the Premium*Post and Method*Post coefficients
are insignificant in the full sample independent subgroup. This also holds true for the
control premium coefficient in the restricted sample of data. As far as method of payment
is concerned, its significantly negative coefficient in the restricted sample independent
subgroup (β3 = –0.329; t = –1.58; p < 0.10) confirms hypothesis 3b (though this
coefficient is also negative and significant in the dependent subgroup).
Table 79. Regression results of Ln Stock Options for the structurally dependent

Intercept -9.088 (-2.68)‡ -4.311 (-0.83) -14.438 (-2.99)‡ -12.641 (-1.66)*
Premium*Post -0.765 (-0.59) -1.098 (-0.49) -0.751 (-0.51) 0.332 (0.12)
LnAssets*Post -0.028 (-0.44) 0.028 (0.25) -0.091 (-1.02) 0.035 (0.22)
Method*Post 0.646 (1.29)* 0.362 (0.36) 1.153 (1.74)† -0.036 (-0.02)¹
LnAssets 0.880 (5.67)‡ 0.771 (3.18)‡ 1.164 (4.91)‡ 1.072 (2.91)‡
Adjusted R² 7.9% 10.9% 9.2% 14.1%
Model: F-statistic 2.87‡ 2.08* 2.21‡ 1.76*
Notes:
The evidence reported in tables 79 and 80 suggests that the empirical findings
concerning stock options are similar to those observed for long-term compensation. For
both of these compensation components, the control premium and method of payment
coefficients are not statistically significant in the independent subgroups for both
samples. The general patterns of signs and significance levels are not, therefore, in line
with hypotheses 3a and 3b. In other words, the degree of structural independence of the
board of directors does not appear to affect the relationship between the transactional
characteristics and two long-term components of executive compensation. It should be
noted that in the restricted sample and for both compensation components, the method of
payment coefficient is significantly more positive in the dependent subgroup than in the
independent subgroup. This result gives more credence to hypothesis 3b, since it
suggests that in companies where the board of directors is dependent on management
there is a positive association between acquisition payments through share exchanges and
long-term components of executive compensation.
Table 80. Regression results of Ln Long Term Compensation for the structurally

Intercept -13.281 (-4.22)‡ -4.599 (-0.88) -15.696 (-3.31)‡ -12.659 (-1.66)*
Premium*Post -0.765 (-0.64) -1.063 (-0.47) -0.764 (-0.52) 0.329 (0.12)
LnAssets*Post -0.059 (-0.99) 0.032 (0.28) -0.101 (-1.14) 0.036 (0.23)
Method*Post 0.767 (1.65)† 0.035 (0.34) 1.193 (1.83)† -0.044 (-0.03)¹
LnAssets 1.085 (7.51)‡ 0.786 (3.23)‡ 1.229 (5.26)‡ 1.073 (2.91)‡
Adjusted R² 14.6% 11.4% 11.1% 14.1%
Model: F-statistic 4.73‡ 2.13† 2.48‡ 1.76*
Notes:
As evidenced in table 81 with respect to the total compensation component, the

Premium*Post coefficients are negative but not significant in both independent board
subgroups. However, since these coefficients are positive in the dependent board
subgroups, it can be concluded that these findings provide partial support for hypothesis
3a. Results seem to run opposite to predictions concerning the method of payment
variable. The Method*Post coefficients are negative in the dependent subgroups but not
in the independent subgroups. Hypothesis 3b is therefore not corroborated for

executives’ total compensation component.
Table 81. Regression results of Ln Total Compensation for the structurally

Dependent variable : Ln Total Compensation

Intercept 7.559 (19.22)‡ 5.890 (7.69)‡ 7.524 (13.62)‡ 7.966 (6.55)‡
Premium*Post 0.107 (0.72) -0.108 (-0.33) 0.108 (0.64) -0.425 (-0.97)
LnAssets*Post -0.007 (-1.00) -0,026 (-1.58)† 0.006 (0.63) -0.019 (-0.75)
Method*Post -0.011 (-0.19) 0.138 (0.93) -0.124 (-1.63)* 0,017 (0.07)
LnAssets 0.312 (17.34)‡ 0.391 (10.99)‡ 0.314 (11.57)‡ 0.276 (4.69)‡
Adjusted R² 54.6% 52.1% 48.7% 34%
Notes:
5.2.4 Testing the moderating effect of structural board independence on the

relationships between firm performance or size and CEO compensation
In this section, we aim to provide the second part of the empirical responses to the
research question (1.4). The purpose of the two additional research hypotheses associated
with this question (hypotheses 4a and 4b) is to test the moderating effects of SBI on the
relationships between firm performance (size) and monetary components of CEO
compensation. Before testing these relations, we thought it would be interesting to check
the direct effect of SBI within a context where firm performance ratings are also taken
into consideration. For this, the SBI term is added to the regression model that tested the
mediating role of firm performance in the relationships between deal characteristics and
CEO compensation. The final regression equation is designed as follows: COMP = β0 +
β1Premium*Post + β2LnAssets*Post + β3Method*Post + β4LnAssets + β5RET + β6ROE
+ β7SBI + β8Years(1992-2004). The results for both the full and restricted samples of data are
presented in tables 82 and 83. Standard diagnostic procedures (VIF, Durbin-Watson test,
and normality checks) are also performed, but they do not suggest the presence of
multicollinearity, autocorrelation, or non-normality problems.
Table 82. Regression results (including performance ratings)


Intercept 6.93 (8.75)‡ 5.28 (3.81)‡ -1.60 (-0.58) -5.36 (-1.59)* 8.57 (26.34)‡ 8.95 (20.87)‡
Premium*Post -1.72 (-6.05)‡ -2.15 (-5.32)‡ -1.61 (-1.63)† -1.44 (-1.47)* 0.07 (0.63) 0.08 (0.69)
LnAssets*Post 0.05 (3.45)‡ 0.10 (4.16)‡ -0.11 (-2.25)† -0.07 (-1.24) -0.007 (-1.29)* 0.008 (1.02)
Method*Post -0.28 (-2.45)‡ -0.74 (-3.74)‡ 1.24 (3.05)‡ 0.33 (0.69) -0.005 (-0.11) -0.17 (-2.78)‡
LnAssets 0.32 (9.39)‡ 0.43 (6.68)‡ 0.55 (4.61)‡ 0.83 (5.31)‡ 0.25 (17.86)‡ 0.24 (12.07)‡
RET 0.001 (0.92) 0.003 (1.25) 0.02 (3.89)‡ 0.02 (2.64)‡ 0.001 (1.02) 0.00 (0.24)
ROE -0.002 (-0.76) 0.011 (1.22) 0.017 (1.81)† 0.09 (4.57)‡ 0.001 (0.79) 0.004 (1.47)*
SBI -0.19 (-4.12)‡ -0.33 (-4.64)‡ -0.09 (-0.58) -0.33 (-1.90)† -0.06 (-3.26)‡ -011 (-5.01)‡
Adj. R² 27.6% 33.9% 12.2% 24.6% 47.6% 47.7%
F-statistic 10.89‡ 8.28‡ 4.61‡ 5.63‡ 24.53‡ 13.94‡
N 493 271 493 271 493 271
Notes:
The evidence demonstrates that SBI coefficients are negative and significant at a p < 0.01
level for salary, short-term compensation, and total compensation across both samples.
The SBI coefficient is also negative for the short-term bonus component, but it is
significant only in the restricted sample (β7 = –0.33; t = –1.90; p < 0.05) and not in the
full sample (β7 = –0.09; t = –0.58; p > 0.10). Despite slight variations in significance
levels, the general pattern of signs favors an overall negative relationship between these
four dependent variables and the SBI explanatory factor. This means that boards that are
structurally more independent from management negatively affect levels of CEO salary,
short-term bonus, short-term compensation, and total compensation.
Table 83. Regression results (including performance ratings)


Intercept -9.50 (-3.18)‡ -14.54 (-3.53)‡ -12.34 (-4.39)‡ -15.31 (-3.76)‡ 7.46 (20.52)‡ 8.07 (16.13)‡
Premium*Post -1.09 (-1.03) -0.53 (-0.44) -1.09 (-1.09) -0.52 (-0.45) 0.04 (0.34) 0.08 (0.56)
LnAssets*Post -0.01 (-0.19) -0.08 (-1.08) -0.03 (-0.58) -0.08 (-1.19) -0.008 (-1.18) 0.005 (0.59)
Method*Post 0.55 (1.27) 1.16 (2.03)† 0.61 (1.48)* 1.19 (2.11)† -0.01 (-0.25) -0.14 (-1.95)†
LnAssets 0.89 (6.88)‡ 1.16 (6.01)‡ 1.05 (8.64)‡ 1.21 (6.32)‡ 0.33 (21.18)‡ 0.31 (13.30)‡
RET 0.02 (2.91)‡ 0.02 (2.41)‡ 0.02 (3.87)‡ 0.02 (2.49)‡ 0.002 (3.14)‡ 0.002 (1.87)†
ROE -0.03 (-2.75)‡ 0.005 (0.21) -0,03 (-3.05)‡ 0.005 (0.21) -0.001 (-0.78) 0.005 (1.57)*
SBI 0.24 (1.45)* 0.31 (1.52)* 0.17 (1.07) 0.29 (1.45)* -0.07 (-3.26)‡ -0.11 (-4.39)‡
Adj. R² 11.3% 13.3% 17.4% 14.8% 56.7% 50.5%
F-statistic 4.17‡ 3.07‡ 6.23‡ 3.35‡ 33.56‡ 14.81‡
N 473 258 473 258 473 258
Notes:
It should be noted that SBI coefficients are positive and marginally significant (p < 0.10)
for stock options and long-term compensation components in both samples. Although the
F-statistic tests report that regression models significantly explain variations in these
dependent variables, both the F-statistic and adjusted R² values are very low when
compared to other compensation components. These findings generally suggest that
structural board independence is not a powerful predictor of executives’ long-term

compensation levels.
SBI moderating effect on the relations between firm performance/size and CEO
compensation (hypotheses 4a & 4b)
positive relation between firm performance and CEO compensation.
negative relation between firm size and CEO compensation.
Given the complementary nature of hypotheses 4a and 4b, the multivariate regression
results presented in this section refer to both hypotheses at the same time. The regression
equation is designed in such a way as to highlight the relation between firm
performance/size and CEO compensation in the pre-acquisition period and the change in
this relation between the pre- and post-deal periods. The regression equation is designed
as follows: Comp = β0 + β1LnAssets + β2RET + β3ROE + β4LnAssets*Post +
β5RET*Post + β6ROE*Post. The ‘Post’ terms used in this model refer to the three post-
acquisition years (t+1, t+2, and t+3) excluding the year of acquisition completion (t).
In order to test the moderating effects of structural board independence on

performance/size-compensation relations, both the restricted and full samples are divided
across the SBI partition. The median value of the SBI mechanism is used to split each
sample into two subgroups: 1) acquirers that have boards that are structurally
independent from management, and 2) acquirers that have dependent boards of directors.
Similar sample-cuts are used in the studies performed by Bliss and Rosen (2001) and
Wright et al. (2002). The tests of significance of difference in coefficients on
performance and size measures across the SBI partition are also performed (Engel et al.,
2002). Tables 84 through 89 report all regression results related to different monetary
components of executive compensation for both the full and restricted samples of data.
Table 84. Regression results of Ln Salary for the structurally dependent


variables
Dependent Independent Dependent Independent
Intercept 9.033 (39.83)‡ -5.381 (-2.34)† 8.814 (32.71)‡ -13.999 (-3.24)‡
Ln Assets 0.190 (17.80)‡ 0.845 (7.64)‡³ 0.201 (15.30)‡ 1.253 (5.87)‡³
RET -0.0001 (-0.12) 0.012 (2.58)‡² -0.0001 (-0.61) 0.013 (2.01)†²
ROE -0.003 (-1.13) -0.001 (-0.05) -0.004 (-1.25) 0.013 (0.31)
Ln Assets*Post 0.002 (1.05) -0.019 (-0.96)¹ 0.002 (0.88) -0.051 (-1.38)*²
RET*Post -0.0001 (-0.28) -0.028 (-3.07)‡² -0.001 (-0.84) -0.072 (-3.66)‡³
ROE*Post 0.004 (1.57)* 0.009 (0.42) 0.008 (2.25)† 0.139 (1.84)†²
Adjusted R² 49.4% 33% 59.3% 48%
Notes:
One-tailed test of significance of difference in performance and size coefficients across the SBI partition
The regression results are interesting where salary is used as a dependent variable (see
table 84). In the pre-acquisition period, the relation between salary and the stock market
measure of performance is significantly positive in the independent subgroup, while it is
negative in the dependent subgroup in both samples. Moreover, the RET coefficients are
significantly different at a p < 0.05 level across the SBI partition. The salary association
with accounting measure of performance is not significant across the samples but
positive in the independent subgroup of the restricted sample. These results, so far, tend
to corroborate hypothesis 4a. Further, as evidenced by negative RET*Post coefficients in
the independent subgroups, the salary relation with RET diminishes in the post-
acquisition period when compared to the pre-acquisition period. The link between salary
and accounting performance, however, increases in the independent subgroup as the
result of an acquisition.
It should be noted that the regression findings reject hypothesis 4b in the pre-acquisition
years, where there is a significantly positive (p < 0.01) association between firm size and
CEO salary across both samples and subgroups. However, following an M&A
transaction the ‘salary-size’ association diminishes significantly in the independent
subgroup of the restricted sample (β4 = –0.051; t = –1.38; p < 0.10). The test of
significance of difference also suggests that LnAssets*Post coefficient is significantly
lower at a p < 0.05 level in the independent subgroup than in the dependent one. In other
words, in those acquiring companies where the board is more independent from
management, company size plays a smaller role in explaining the variations in the CEO
salary in the post-acquisition period as compared to the pre-acquisition period. Given that
LnAssets*Post coefficients are positive in the dependent subgroups, it can be concluded
that these findings are partially consistent with hypothesis 4b, particularly in the
restricted sample of data.
Table 85. Regression results of Ln ST Bonus for the structurally dependent


Intercept 1.815 (0.65) -6.756 (-1.42)* -3.481 (-1.00) -17.882 (-3.15)‡
Ln Assets 0.382 (2.89)‡ 0.749 (3.26)‡¹ 0.720 (4.25)‡ 1.253 (4.46)‡¹
RET 0.003 (0.38) 0.021 (2.06)†¹ -0.008 (-0.94) 0.016 (1.79)†²
ROE 0.098 (3.07)‡ 0.098 (2.53)‡ 0.064 (1.66)† 0.206 (3.62)‡²
Ln Assets*Post 0.008 (0.28) 0.031 (0.75) -0.110 (-3.36)‡ 0.107 (2.19)†³
RET*Post 0.031 (2.76)‡ 0.018 (0.95) 0.036 (2.88)‡ 0.039 (1.51)*
ROE*Post -0.094 (-2.78)‡ -0.111 (-2.56)‡ 0.024 (0.55) -0.186 (-1.87)†¹
Adjusted R² 9.3% 17% 22% 48.7%
Notes:
Empirical results for the short-term bonus as a dependent variable (see table 85) are
partially consistent with hypothesis 4a, but they do not corroborate hypothesis 4b. In the
period preceding the M&A, there is a significant positive link between CEO short-term
bonus and different measures of firm performance in the independent board subgroups.
As reported by t-tests, the RET and ROE coefficients are significantly higher in the
independent subgroups when compared to the dependent subgroups. Following an
acquisition, the short-term bonus association with stock market performance is still
positive in both the full (β5 = 0.018; t = 0.95; p > 0.10) and restricted (β5 = 0.039; t =
1.51; p < 0.10) independent subgroups. However, the negative ROE*Post coefficients in
these latter subgroups suggest that the relation between short-term bonuses and
accounting performance is diminished as a result of an acquisition.
The board of directors’ independence does not seem to affect the links between the CEO
short-term bonus and firm size, as predicted in hypotheses 4b. On the contrary, the
LnAssets and LnAssets*Post coefficients in both samples are greater in the independent
subgroups than in the dependent subgroups. More strikingly, the short-term bonus
association with firm size diminishes significantly following an acquisition in the
dependent board subgroup of the restricted sample (β4 = –0.110; t = –3.36; p < 0.01) and
not in the independent subgroup. These findings generally suggest that even when the
board of directors is more independent from management, the increase in company size
is still an important predictor of variations in CEO short-term bonus.
Only limited support for hypothesis 4a can be found, when looking at the regression
results with short-term compensation component (see table 86), whereas the hypothesis
4b is strongly rejected. In the pre-deal period, contrary to our expectations, there is a
greater positive association with ROE in the dependent subgroups than in the
independent subgroups (where this link is even significantly negative in the restricted
sample). As a result of an acquisition, the changes in the regression slope between ROE
and short-term compensation are insignificant. As far as the relation between executive
short-term compensation and stock market performance is concerned, it is significantly
greater in the post-acquisition period than in the pre-acquisition period in the independent
subgroups of both samples. Moreover, the t-test reveals that RET*Post coefficient is
significantly higher (p < 0.10) in the restricted sample independent subgroup than in the
dependent one.
Table 86. Regression results of Ln Short Term Compensation for the structurally

Intercept 8.713 (27.29)‡ 6.739 (10.38)‡ 8.404 (19.22)‡ 7.473 (7.85)‡
Ln Assets 0.230 (15.29)‡ 0.318 (10.17)‡ 0.246 (11.54)‡ 0.279 (5.92)‡
RET 0.001 (0.73) -0.001 (-0.96) -0.001 (-0.51) -0.001 (-0.37)
ROE 0.005 (1.33)* 0.001 (0.25) 0.006 (1.35)* -0.017 (-1.81)†²
Ln Assets*Post 0.006 (1.83)† 0.002 (0.29) 0.003 (0.74) -0.002 (-0.19)
RET*Post 0.000 (0.35) 0.004 (1.51)* 0.001 (0.80) 0.008 (1.74)†¹
ROE*Post -0.003 (-0.81) -0.004 (-0.66) 0.002 (0.40) 0.010 (0.59)
Adjusted R² 43% 45% 45.6% 32.1%
Notes:
The short-term compensation association with firm size is significantly positive across
both samples and subgroups during the pre-acquisition years. This association is still
maintained following an acquisition in the independent subgroups. Contrary to our
expectations from hypothesis 4b, it seems that a more independent board does not
reinforce the negative relation between CEO short-term compensation and firm size.
The regression results for stock options (see table 87) do not provide significant support
for hypotheses 4a and 4b. Findings even seem to run contrary to predictions concerning
the relationship between stock options and firm performance before an acquisition.
Indeed, the RET coefficients are positive and significant in the dependent subgroups and
not in the independent subgroups, as hypothesized. The only significant positive sign in
the independent subgroup is observed for the RET*Post coefficient in the full sample (β5
= 0.029; t = 1.51; p < 0.10). This means that stock options association with stock market
performance is stronger in the post-deal period than in the pre-deal period.
Table 87. Regression results of Ln Stock Options for the structurally dependent

Intercept -9.364 (-3.01)‡ -9.516 (-1.93)† -14.870 (-3.24)‡ -11.552 (-1.62)*
Ln Assets 0.924 (6.29)‡ 0.959 (4.04)‡ 1.207 (5.35)‡ 1.078 (3.05)‡
RET 0.014 (1.67)† 0.006 (0.59) 0.020 (1.92)† 0.000 (0.04)
ROE -0.099 (-2.79)‡ -0.083 (-2.08)† -0.013 (-0.27) 0.000 (0.00)
Ln Assets*Post -0.002 (-0.07) -0.007 (-0.17) -0.022 (-0.51) 0.023 (0.37)
RET*Post 0.001 (0.09) 0.029 (1.51)* -0.002 (-0.15) 0.001 (0.03)
ROE*Post 0.087 (2.32)† 0.041 (0.92) 0.027 (0.46) -0.048 (-0.39)
Adjusted R² 11.3% 10.6% 13.2% 7.1%
Model: F-statistic 8.34‡ 3.67‡ 5.82‡ 1.90*
Notes:
Furthermore, the relation between stock options component and firm size is significantly
positive before the acquisition in the independent subgroups, a relation that is maintained
following an M&A transaction. The t-tests do not reveal any significant differences in
size coefficients across the structural board independence partition. The same counter-
expected conclusions can be drawn from empirical tests where a long-term compensation
component is used as the dependent variable (see table 88). Therefore, we conclude that
hypotheses 4a and 4b are not significantly confirmed for long-term compensation
component.
Table 88. Regression results of Ln Long Term Compensation for the structurally

Intercept -12.863 (-4.43)‡ -9.825 (-1.99)† -15.859 (-3.49)‡ -11.578 (-1.62)*
Ln Assets 1.092 (7.96)‡ 0.975 (4.10)‡ 1.261 (5.66)‡ 1.079 (3.05)‡
RET 0.018 (2.23)† 0.006 (0.59) 0.020 (1.94)† 0.000 (0.04)
ROE -0.060 (-1.83)† -0.084 (-2.10)† -0.009 (-0.18) 0.000 (0.00)
Ln Assets*Post 0.017 (0.62) -0.007 (-0.16) -0.028 (-0.66) 0.023 (0.37)
RET*Post 0.002 (0.14) 0.029 (1.49)* -0.003 (-0.19) 0.001 (0.03)
ROE*Post 0.047 (1.35)* 0.042 (0.95) 0.023 (0.41) -0.049 (-0.39)
Adjusted R² 17.2% 10.8% 14.5% 7.2%
Model: F-statistic 12.98‡ 3.75‡ 6.36‡ 1.9*
Notes:
Finally, the empirical findings partially corroborate hypothesis 4a, as far as the total
compensation component (see table 89) is concerned, while they reject hypothesis 4b. In
the pre-acquisition period, the total compensation association with RET and ROE is
surprisingly negative in the independent subgroup across both samples. Even more, these
performance coefficients are significantly positive in the dependent board subgroups
(except for ROE in the full sample). The significantly positive RET*Post coefficients in
the independent board subgroups suggest, however, that executives’ total compensation
becomes significantly more contingent on stock market performance in the post-
acquisition period when compared to the period before the M&A transaction.
The t-tests reveal that there are no significant differences in the total compensation
association with firm size across the SBI partition in the pre-merger period. Indeed, all
LnAssets coefficients are uniformly positive and significant across the samples and
subgroups. This positive relation is maintained in the post-transaction period, but the
change in the regression slop between size and total compensation appears to be more
significant in the dependent subgroup of the full sample (β4 = 0.007; t = 2.04; p < 0.05).
We conclude therefore that the hypothesis 4b is not confirmed for total compensation
component.
Table 89. Regression results of Ln Total Compensation for the structurally


Intercept 7.425 (20.15)‡ 5.610 (8.11)‡ 7.352 (14.34)‡ 6.713 (6.28)‡
Ln Assets 0.314 (18.06)‡ 0.396 (11.85)‡ 0.316 (12.57)‡ 0.338 (6.39)‡
RET 0.002 (2.22)† -0.001 (-0.93)¹ 0.002 (1.76)† -0.001 (-0.79)¹
ROE -0.002 (-0.48) -0.009 (-1.53)* 0.007 (1.34)* -0.018 (-1.64)*²
Ln Assets*Post 0.007 (2.04)† 0.001 (0.21) 0.005 (1.05) -0.002 (-0.21)
RET*Post 0.001 (0.65) 0.005 (1.79)† -0.001 (-0.37) 0.007 (1.46)*¹
ROE*Post 0.003 (0.75) 0.005 (0.83) 0.002 (0.33) 0.013 (0.72)
Adjusted R² 52.2% 52.9% 50.7% 37.3%
Notes:
These modest results concerning the moderating effect of SBI on the relationship
between executive compensation and firm performance (or size) are possibly due to the
sample characteristics and measurement biases. The total number of observations is
disproportionably greater in the dependent subgroups than in the independent subgroups.
Indeed, on a nine-point scale on the SBI variable, the majority of acquirers scored five.
As the median SBI value was used to split the sample into two subgroups, the result was
a limited number of observations for the independent board subgroup. This number, as
such, is insufficient in order to make any comparisons with the dependent subgroup or
draw any meaningful conclusions. Tables 90 and 91 provide a synthesis of the empirical
findings with respect to hypotheses 4a and 4b.
Hypothesis 4a: predicted / obtained signs for RET, ROE (* p < 0.10)
Full + / +, + + / +*, + + / +*, – + / +*, –* + / +*, –* + / +, –
Restrict. + / +, +* + / +*, + + / +*, – + / +, – + / +, – + / +, –
Hypothesis 4b: predicted / obtained signs for size (* p < 0.10)

Full –/– – / +* – / +* – / +* – / +* – / +*
Restrict. –/– – / +* – / +* – / +* – / +* – / +*
5.3 LOGISTIC REGRESSION RESULTS
In this section, we report the multivariate analyses related to the four specific attributes
of executive compensation contracts used in this thesis: the adoption of employment
agreements, termination clauses, change of control clauses, and new LTIP. It should be
noted that only the frequency of new adoptions are considered for further analyses, where
the value 1 represents exclusively the specific year of the appearance of this clause/plan
in the seven-year period under study (and the value 0, otherwise). Since the logic of
adoption of these contractual compensation arrangements could obey to a different set of
determinants than the monetary compensation components, the multivariate analyses for
the former variables are treated separately from the latter. Given that the existing
empirical evidence on the adoption of these contractual compensation attributes is
limited, our analysis is more exploratory in nature. Therefore, we only attempt to depict
some explanatory tendencies regarding the adoption of these four compensation
arrangements, without developing any specific research hypotheses.
5.3.1 Testing the direct effect of transactional characteristics on the adoption

frequency of specific attributes of executive compensation contracts
¾ Research Question (2.2): Are deal-specific characteristics (magnitude of the

acquisition premium or method of payment) influencing the frequency of the specific
attributes of executive compensation contracts adoption?
Our aim in this subsection is to provide some empirical evidence with regard to our
research question (2.2). For this, we test a regression equation where the control
premium and method of payment are used as independent variables, and the firm size –
as a control variable. This regression model can be resumed as follows: COMP = β0 +
β1Premium*Post + β2Method*Post + β3LnAssets + e. Logistic regressions are applied to
the four attributes of compensation contracts, since these dependent variables are
measured as a categorical dichotomy (1 versus 0). The logistic regression results are
reported in tables 92 through 95. Standard diagnostic procedures do not suggest the
presence of methodological problems in this regression equation.
Table 92. Logistic regression results testing the direct effect of acquisition
premium/method of payment on employment agreement adoption
Employment agreement adoption
variables B Wald Sig. Exp(B) B Wald Sig. Exp(B)
Constant 1.191 0.659 0.417 3.292 2.365 0.857 0.355 10.639
Premium*Post -1.818 1.287 0.257 0.162 -3.711 0.748 0.387 0.024
Method*Post -0.684 9.133 0.003 0.504 -0.871 3.510 0.061 0.419
LnAssets -0.124 3.074 0.080 0.884 -0.194 2.276 0.131 0.824
Chi-square 15.079† 7.897
Notes:
Chi-Square is produced as result of the Hosmer-Lemeshow goodness-of-fit statistic
The regression findings reported in table 92 do not produce any significant association
between acquisition premium and employment agreement adoption. The results suggest,
however, that the dependent variable is significantly explained by the method of payment
used to finance the M&A transactions. The Method*Post coefficients are significantly
negative in the full (B = –0.684; Exp(B) = 0.504; p < 0.01) and restricted (B = –0.871;
Exp(B) = 0.419; p < 0.10) samples. This means that the likelihood of the adoption of an
employment agreement decreases when the acquisitions are financed through share
exchanges rather than in cash. The dependent variable also appears to be negatively and
significantly associated with company size in the full sample (B = –0.124; Exp(B) =
0.884; p < 0.10) of data. In other words, as company size increases, the probability of the
adoption of a CEO employment agreement diminishes. The Chi-square suggests that this
regression model significantly (p < 0.05) fits the data in the full sample.
Table 93. Logistic regression results testing the direct effect of the acquisition
premium/method of payment on termination clause adoption
Termination clause adoption

Constant 1.434 0.801 0.371 4.194 4.548 6.768 0.096 94.419
Premium*Post -1.866 1.933 0.164 0.155 -8.607 5.323 0.021 0.000
Method*Post -0.185 1.040 0.308 0.831 0.087 0.086 0.770 1.090
LnAssets -0.160 4.258 0.039 0.852 -0.320 5.260 0.022 0.726
Chi-square 12.182 8.448
Notes:
The regression model, where the termination clause adoption is employed as dependent
variable, also produces some interesting results (see table 93). For instance, although
there are no significant links with method of payment, a negative and significant
association is depicted with the magnitude of acquisition premium in the restricted
sample. The negative B coefficient (B= –8.607) and the Exp(B) value lower than one
(Exp(B) = 0.000) suggest that the odds of termination clause adoption increases with the
decrease of the magnitude of the control premium paid to target shareholders.
Conversely, the higher the acquisition premium paid for a given M&A transaction, the
lower the likelihood of the adoption of a termination clause. Furthermore, a significantly
negative relation exists between this dependent variable and company size in both
samples, indicating that the probability of the adoption of a termination clause decreases
with increased firm size.
premium/method of payment on the change of control clause adoption
Change of control clause adoption

Constant -0.498 0.106 0.745 0.608 1.101 0.185 0.667 3.009
Premium*Post -2.540 3.178 0.075 0.079 -2.027 1.608 0.205 0.048
Method*Post -0.133 0.616 0.432 0.875 -0.022 0.007 0.933 0.979
LnAssets -0.063 0.748 0.387 0.939 -0.153 1.416 0.234 0.858
Chi-square 7.808 7.143
Notes:
The empirical findings for golden parachute adoptions reported in table 94 are less
significant than those produced for other specific attributes of executive compensation
contracts. Indeed, the only significant relationship (p < 0.10) is depicted in the full
sample of data, where the change of control clause adoption is negatively associated with
the magnitude of acquisition premium (B = –2.540; Exp(B) = 0.079). This means that, in
those firms where executives pay for their M&A transactions higher control premiums,
the probability that a change of control clause would be adopted is lower.
Finally, according to the logistic regression results shown in table 95, the new LTIP
adoption is not significantly explained by either of the two transactional characteristics. It
is interesting, however, that while the three previous executive compensation protection
provisions are negatively associated with firm size, the new LTIP adoption seems to
follow a contrary logic. Indeed, the ‘LnAssets’ coefficients are significantly positive at a
p < 0.01 level in both the full and restricted samples of data. Therefore, the greater the
company size, the higher the probability of new long-term incentive plans adoptions for
acquiring executives.
premium/method of payment on new LTIP adoption
New LTIP adoption

Variables B Wald Sig. Exp(B) B Wald Sig. Exp(B)
Constant -12.438 27.139 0.000 0.000 -15.187 14.725 0.000 0.000
Premium*Post 0.643 0.606 0.436 1.903 0.911 0.895 0.344 2.488
Method*Post -0.088 0.182 0.670 0.915 0.254 0.501 0.479 1.289
LnAssets 0.432 17.338 0.000 1.541 0.520 8.830 0.003 1.682
Chi-square 11.441 16.567†
Notes:
Chi-Square is produced as result of Hosmer-Lemeshow goodness-of-fit statistic
Additional analysis was also performed using the structural board independence variable
as another explanatory factor in the model. The empirical tests did not produce any
significant relationships between the four specific attributes of executive compensation
contracts and SBI. This finding means that the degree of board independence does not
seem to directly affect the likelihood of the adoption of these clauses or plans.
5.3.1 Testing the effect of firm performance or size on the adoption frequency
of specific attributes of CEO compensation contracts before and after the deal
¾ Research Question (2.3): Is the frequency of specific attributes of executive

compensation contracts adoption influenced by firm performance or size and is the
impact of these independent variables changing between the pre- and post-acquisition
periods?
In this subsection we provide empirical responses to the research question (2.3). We

consider it interesting to verify whether the adoption of the employment agreements,
termination clauses, change of control clauses, and new LTIP is likely to occur as a result
of changing firm performance or size, mainly due to an acquisition. In order to
differentiate between the pre- and post-acquisition behaviour patterns, we use the
following logistic regression model: COMP = β0 + β1LnAssets + β2RET + β3ROE +

β4LnAssets*Post + β5RET*Post + β6ROE*Post. This equation has already been used for
multivariate tests with monetary compensation components. This time, we could not
partition the two samples across either the acquisition premium or method of payment
variables, since there are not sufficient observations in each subgroup. The logistic
regression results for this model are reported in tables 96 through 99.
Table 96. Logistic regression results testing the pre- versus post-acquisition
differences in employment agreement association with firm performance and size
Employment agreement adoption

Constant -1.080 0.430 0.512 0.340 0.670 0.059 0.809 1.953
LnAssets -0.018 0.050 0.822 0.983 -0.116 0.709 0.400 0.891
RET 0.013 11.207 0.001 1.013 0.010 4.981 0.026 1.010
ROE -0.033 5.196 0.023 0.968 -0.017 0.435 0.510 0.983
LnAssets*Post -0.093 23.926 0.000 0.911 -0.110 10.235 0.001 0.896
RET*Post -0.012 2.706 0.100 0.988 -0.014 1.277 0.258 0.986
ROE*Post 0.041 5.261 0.022 1.042 0.022 0.328 0.567 1.022
Notes:
As shown in table 96, during the pre-acquisition period the employment agreement
adoption in both samples is more likely to occur when stock market performance is
higher. However, this dependent variable association with RET diminishes significantly
as result of an acquisition. The contrary empirical results are observed only in the full
sample of data for the accounting performance measure. While there is a significantly
negative association between the employment agreement adoption and ROE in the pre-
acquisition period, this relation seems to be inversed after the acquisition, as the
regression slop changes positively between the pre- and post- periods. The negative and
significant LnAssets*Post coefficient means that the link between the dependent variable
(employment agreement) and the company size is even lower in the post-acquisition
period than in the pre-acquisition period.
differences in termination clause association with firm performance and size
Termination clause adoption

Constant -0.136 0.006 0.939 0.873 3.302 1.332 0.248 27.161
LnAssets -0.089 1.093 0.296 0.914 -0.256 3.098 0.078 0.774
RET 0.009 4.739 0.029 1.009 0.005 1.314 0.252 1.005
ROE -0.025 2.552 0.110 0.975 -0.019 0.498 0.480 0.981
LnAssets*Post -0.039 5.161 0.023 0.962 -0.061 4.876 0.027 0.940
RET*Post -0.010 2.353 0.125 0.990 -0.012 1.450 0.229 0.988
ROE*Post 0.029 2.582 0.108 1.029 0.002 0.003 0.954 1.002
Chi-square 16.435† 13.819*
Notes:
The patterns of regression signs and significance levels in the pre-acquisition period are
slightly different across the samples regarding the termination clause adoption (see table
97). As with the employment agreement adoption, the termination clause addition is
positively and significantly associated with stock market performance in the full sample
(B = 0.009; Exp(B) = 1.009; p < 0.05) during the years preceding a M&A transaction. In
the restricted sample, however, the likelihood of this dependent variable adoption
decreases as organizational size increases. Finally, an acquisition causes the termination
clause adoption relation with firm size to lessen significantly in the post-deal period
(when compared to the pre-deal period) for both full and restricted samples of data.
Only one significant coefficient is observed in the restricted sample of data concerning
the regression results where the change of control clause addition is used as a dependent
variable (see table 98). The RET*Post coefficient is significantly negative at a p < 0.10
level, suggesting that the golden parachute association with stock market performance is
lower after a M&A transaction than before. Concerning the full sample of data, the
logistic regression results are similar to findings obtained for the employment agreement
adoption variable. So, the change of control clause adoption has a positive association
with RET and negative association with ROE in the pre-acquisition period, while the
change in the regression slop between the pre- and post- periods is negative for RET but
positive for ROE. The significantly negative LnAssets*Post coefficient (B = –0.043;
Exp(B) = 0.958; p < 0.01) means that the relation between the change of control clause
adoption and the firm size is lower in the post-acquisition period than in the pre-
acquisition one.
differences in change of control clause association with firm performance and size
Change of control clause adoption

Constant -1.588 0.891 0.345 0.204 0.222 0.007 0.935 1.249
LnAssets -0.012 0.021 0.884 0.988 -0.108 0.617 0.432 0.898
RET 0.008 4.000 0.045 1.008 0.004 0.657 0.418 1.004
ROE -0.032 4.558 0.033 0.968 -0.031 1.238 0.266 0.969
LnAssets*Post -0.043 7.252 0.007 0.958 -0.036 2.142 0.143 0.964
RET*Post -0.013 4.457 0.035 0.987 -0.014 2.750 0.097 0.986
ROE*Post 0.035 4.482 0.034 1.036 0.019 0.308 0.579 1.019
Notes:
Here, the adoption of new long-term incentive plans (see table 99) again seems to follow
a contrary logic, when compared to the three previous executive compensation protection
provisions. First, while other specific attributes of CEO compensation contracts generally
depict a negative association with company size in the pre-acquisition period, the new
LTIP adoption has a positive link with this explanatory factor in both the full (B = 0.449;
Exp(B) = 1.567; p < 0.01) and restricted (B = 0.457; Exp(B) = 1.579; p < 0.05) samples
of data. This significantly positive relationship is maintained during the post-acquisition

years in the restricted sample (B = 0.235; Exp(B) = 1.265; p < 0.05). Second, the odds of
a new LTIP adoption rise with increasing accounting performance in the pre-acquisition
period, contrary to tendencies observed in other specific attributes of CEO compensation
contracts, while this relationship diminishes as the result of an acquisition. As in the
post-acquisition period firm performance is generally negative, it is likely that the
adoption of new long-term incentives could be designed as a tool for stimulating
executives to increase the profitability of their firms.
differences in the new LTIP association with firm performance and size
New LTIP adoption

Constant -12.522 27.522 0.000 0.000 -18.648 16.554 0.000 0.000
LnAssets 0.449 17,626 0.000 1.567 0.457 4.931 0.026 1.579
RET 0.001 0.029 0.864 1.001 0.012 0.622 0.430 1.012
ROE -0.010 0.145 0.703 0.990 0.332 5.742 0.017 1.394
LnAssets*Post -0.019 0.902 0.342 0.981 0.235 3.936 0.047 1.265
RET*Post -0.003 0.065 0.799 0.997 -0.020 1.165 0.281 0.980
ROE*Post 0.012 0.194 0.660 1.012 -0.297 4.574 0.032 0.743
Chi-square 16.211† 6.008
Notes:
Synthesis of thesis findings
Various statistical analyses were performed and findings related to each research
question and associated hypothesis were reported throughout this chapter. In conclusion,
an overall picture of all research findings with respect to both monetary executive
compensation components and specific attributes of CEO compensation contracts is
presented in table 100.
Table 100. Summary of research findings
Monetary compensation components

Question Hypothesis Expected sign Sample Support level Pay component Explanation
full significant Salary, bonus, ST & LT comp, Managerial
N/A increase options, restricted & total comp wealth
Q-on 1.1 N/A maximi-
(Positive) restricted significant Salary, bonus, ST comp,
increase options, LT comp, total comp zation
H 1a Negative full & significant Salary, bonus

restricted insignificant options, LT comp Institutional,
Q-on 1.2 significant Salary symbolic
full perspectives
H 1b Negative insignificant ST comp, total comp
restricted significant Salary, ST comp, total comp
full complete support Bonus, total comp
partial support ST comp, options, LT comp
H 2a Negative
restricted complete support Bonus, options, LT & total comp
partial support Salary, ST comp Agency
Q-on 1.3 complete support Bonus, total comp theory
full
partial support ST comp, options, LT comp
H 2b Negative
restricted complete support Bonus, options, LT & total comp
partial support Salary, ST comp
full significant Salary
H 3a Negative insignificant Bonus, ST comp, total comp
restricted significant Salary
full insignificant Options, LT comp
H 3b Negative significant ST comp Political
Q-on 1.4 restricted perspective
insignificant Options, LT comp, total comp
H 4a full partial support Bonus, options, ST & LT comp

Positive restricted partial support Salary, bonus, ST comp
H 4b Negative full & restr. insignificant Salary
Specific attributes of compensation contracts
Q-on Effect Determinant Significant sign Sample Pay component
Q-on 2.1 N/A M&A N/A full & restricted All four contractual attributes
Control premium Negative restricted Termination clause adoption
Negative full Change of control clause adoption
Q-on 2.2 Direct Method of payment Negative full & restricted Employment agreement addition
Negative full Employment agreement addition
Size (LnAssets) Negative full & restricted Termination clause adoption
Positive full & restricted New LTIP adoption
Pre-deal RET / ROE Positive / Negative full Employment agreement adoption &
Pre- vs. Post- RET / ROE Negative / Positive Change of control clause addition
Q-on 2.3 Pre-/Pre-Post ROE Positive / Negative restricted New LTIP adoption
Size (LnAssets) Positive / Positive
Pre-deal RET Positive restricted / full Employ. agreem./Termination clause
Results that strongly confirm the research hypotheses
With regard to the monetary components of acquiring firms’ CEO compensation, we

obtain the following findings. The levels of support for the eight hypotheses and their
associations with our research questions are comprehensively reported in this summary
table 100.
Although no research hypothesis is associated with research question (1.1), the evidence
shows that as a result of an acquisition, acquiring managers experience significant
increases in the magnitude of the following compensation components: salary, short-term
bonus, short-term compensation, stock options, long-term compensation, and total
compensation in both samples; restricted stock awards in the full sample.
Concerning the research question (1.2), hypothesis 1a is significantly confirmed for the
salary and short-term bonus components in both research samples, and hypothesis 1b is
significantly supported for the salary component in both samples and for the short-term
compensation and total compensation components in the restricted sample.
Regarding the research question (1.3), hypotheses 2a and 2b are significantly supported
for short-term bonus and total compensation components in both samples and for stock
options and long-term compensation components in the restricted sample.
As for the research question (1.4), hypothesis 3a is significantly confirmed for the salary
component in both samples and hypothesis 3b is significantly supported for the short-
term compensation component in the restricted sample. The hypothesis 4a receives
partial support for the following compensation components: short-term bonus and short-
term compensation in both samples; stock options and long-term compensation in the full
sample; and salary in the restricted sample of data. None of the different executive
compensation components are significantly in line with hypotheses 4b.
With regard to the specific attributes of compensation contracts of acquiring

executives we obtain the following results. Although there are no specific research
hypotheses associated with these compensation arrangements, some of these empirical
findings are significant.
Concerning the research question (2.1), the frequency of the adoption of the four
attributes of executive compensation contracts do not seem to be significantly affected by
the merger or acquisition transaction.
As for the research question (2.2), the following findings are significant. The magnitude
of acquisition premium, the method of payment and the firm size have a negative direct
effect on the likelihood of the adoption of the three executive compensation protection
provisions (employment agreement, termination clause, change of control clause),
whereas firm size has a positive direct effect on the odds of the new LTIP adoptions in
both samples.
Concerning the research question (2.3), the empirical tests provide the following results.
In the full sample, RET (ROE) has a positive (negative) effect on the odds of an
employment agreement and change of control clause additions in the pre-acquisition
period, an effect that is lower (higher) as a result of an acquisition. In the restricted
sample, ROE has a positive effect on the probability of new LTIP adoptions in the pre-
acquisition period, an effect that diminishes after the transaction completion.
CHAPTER 6: ANALYSIS AND DISCUSSION
This analysis and discussion chapter is organized as follows. We begin by answering

each of our research questions related to the monetary executive compensation
components, showing the level of support for each of the eight hypotheses individually.
For this, the results for each hypothesis are discussed in light of previous research and
the different theoretical frameworks we proposed in our conceptual model. We conclude
this chapter by discussing some exploratory results regarding the specific attributes of
executive compensation contracts.
6.1 DISCUSSION OF MONETARY CEO COMPENSATION COMPONENTS
The empirical findings reported in the previous chapter are discussed using the insights
from the agency, political and institutional perspectives. Similarly to Lambert et al.
(1993), we argue that executive compensation is more appropriately characterized by a
combination of these theories than by a single theoretical framework.
6.1.1 Discussion of the pre- versus post-acquisition changes in the monetary

magnitude of executive compensation components
Given the descriptive nature of this question (1.1), no research hypotheses were
developed in order to answer it. However, as evidenced in our literature review, the bulk
of previous studies analyze these preliminary results in light of two commonly tested
hypotheses: shareholder wealth-maximization versus managerial welfare. To be able to
position our research results within the broader body of previous research, we have to
verify whether our descriptive findings provide support for either hypothesis.
Overall, the descriptive statistics and the t-tests indicate that CEOs who engaged in
acquisition activities between 1995 and 2001 received significant increases in the
magnitude of different compensation components. In the full sample of data, as reported
in table 38, all executive compensation components under study – except for other short-
term compensation and long-term payouts – increased significantly in the post-
acquisition period. More specifically, salary levels increased by 24%, the short-term
bonus component by 45%, short-term compensation by 30%, stock options by 39%,
long-term compensation by 62%, and total compensation by 44%.
Since the full sample of data includes companies that made CEOs changes during the
period under study, these increases in the monetary magnitude of compensation
components could be due to a variety of CEO-specific factors (Sloan, 1993).
Compensation data related to companies with the same Chief Executive Officer during
the seven-year period were therefore considered separately from the full sample.
Empirical findings show that in the post-deal period, executives included in the restricted
sample also received higher levels of the same compensation components as those in the
full sample. The only difference between the samples refers to the restricted awards
component, where levels diminished by 61% in the restricted sample.
These empirical results confirm the findings from previous research linking executive
compensation to M&A activities (Schmidt and Fowler, 1990; Khorana and Zenner,
1998). Table 26 shows that out of nine reviewed studies, only Lambert and Larcker
(1987) found that those CEOs who undertook shareholders’ value decreasing M&A deals
received insignificantly lower levels of salary, short-term bonus, and stock options
following an acquisition transaction.
These wealth increases in CEO compensation levels are reasonable to a certain extent,
since the acquisition of another company extends the CEO’s job responsibilities. But, are
these significant increases legitimate? In other words, are executives paid for undertaking
acquisitions that increase shareholders’ returns or simply for having completed such
transactions? According to the t-statistic mean difference in performance ratings between
the post- versus pre-acquisition periods (see table 101), the shareholder wealth-
maximization hypothesis is not supported. In the full sample of data, a significantly (p <
0.01) negative change score (post- minus pre-) in RET (t = –2.85) and ROA (t = –3.77)
indicates a worsened stock market and accounting performance of the acquiring firms in
the post-acquisition period compared to the pre-acquisition period. The change scores are
also negative for ROE in both samples, but the decrease in this accounting measure of
performance following the M&A transaction is not statistically significant (p > 0.10).
Table 101. T-statistic mean difference between the pre- versus post-acquisition
period of firm performance ratings for the full and restricted samples
Performance component Mean S.D. t-test Sig.

Pre (< t) 10.61 48.76
Full -2.85 0.004
Post (≥ t) -2.47 53.93
RET
Pre (< t) 11.97 53.08
Post (≥ t) 3.41 49.75
Pre (< t) 6.46 12.27
Full -1.14 0.252
Post (≥ t) 3.80 32.64
ROE
Pre (< t) 6.84 9.52
Post (≥ t) 6.61 16.70
Pre (< t) 3.21 7.52
Full -3.77 0.000
Post (≥ t) -1.04 16.01
ROA
Pre (< t) 3.85 7.03
Post (≥ t) 1.39 11.94
In light of these results, it becomes clear that acquisition activity does not produce any
financial gains for the shareholders of acquiring firms. In this context, increases in CEO
compensation following an acquisition become economically questionable (Schmidt and
Fowler, 1990). Moreover, the correlation matrix (see table 47) demonstrates that all
monetary compensation components are positively and significantly associated with firm
size (measured either as natural logarithm of total assets, total sales or stock market
capitalization). This finding demonstrates that executives have personal incentives for
company growth, since it translates into higher compensation levels. These results are
consistent with previous research on the topic (Kroll et al. 1997; Khorana and Zenner,
1998), corroborating the managerial welfare hypothesis.
However, our empirical findings do not confirm the conclusions drawn by Avery et al.
(1998) in their study on executive compensation in M&A context. According to these
authors, CEOs have an incentive to pursue acquisitions exclusively to increase their
prestige and standing in the business community (e.g., a greater likelihood for CEOs to
receive external directorships) but not in order to increase their own compensation.
6.1.2 Discussion of the direct effect of the magnitude of acquisition premium

or method of payment on executive compensation
Hypotheses 1a and 1b, developed in order to provide empirical answers to the research
question (1.2), predict a negative relation between the magnitude of acquisition premium
or equity-financed acquisitions and executive compensation. The multivariate results
testing the direct effect of transactional characteristics on CEO compensation provide
partial support for both hypotheses 1a and 1b.
(i) Discussion of significant findings
With respect to the magnitude of acquisition premium, the regression coefficients are
significantly negative for salary and short-term bonus in both samples. Consistent with
hypothesis 1a, these results suggest that those executives who pay a lower control
premium to target shareholders benefit from higher salary and short-term bonus levels.
Regarding the method of payment variable, the regression coefficients depict a negative
and significant association with salary in both samples and with short-term compensation
and total compensation in the restricted sample. As expected in hypothesis 1b, managers
who finance their M&A transactions in cash are likely to receive higher levels of these
compensation components as result of an acquisition.
To our knowledge, no previous research has examined the direct effect of transactional
characteristics on CEO compensation. Therefore, these significant findings related to
hypotheses 1a and 1b could better be discussed in light of the institutional theory and
symbolic implications. According to this theory, organizations respond to pressures in
their environments to conform to accepted ways of doing business so that they will
appear legitimate to their company’s stakeholders (Meyer and Rowan, 1977). Accepted
ways of doing business are defined in the environment by means of a combination of
historical, cultural, social, and other environmental forces linked to a variety of sources,
including the government, professions, and sources internal to organizations. These
institutional responses may be attractive to companies because of the low cost and effort
involved (Zucker, 1987). The legitimization of a particular practice is carried out over
time, adding social consensus concerning its value, drawn from evidence of its efficacy
and whether it has been pre-tested in other organizations.
The explanatory power of institutional and symbolic perspectives has been recognized
extensively by executive compensation literature. According to Magnan (2000), greater
transparency regarding CEO compensation in North-America exerts pressures over the
boards to justify their compensation decisions in a way that would be perceived
legitimate in the eyes of stakeholders. Gélinas (2001), in recent research undertaken in
the Canadian context, shows that the development of executive compensation strategies
is based mainly on compensation practices legitimized by the market.
We argue that paying executives simply for conducting low-premium and cash-financed
M&A transactions could be perceived by the boards as legitimate compensation practice,
since these kinds of deals are expected to positively affect acquiring firm’s performance.
CEOs may also be rewarded for the image and impressions they transmit to the board
about the value of their managerial skills. For instance, since executives who manage to
negotiate a lower control premium are viewed as being more dedicated to the
shareholders’ interests, they could extract additional compensation other than that
rewarding actual improvement in firm’s share value. Similarly, acquisition payments in
cash receive more favorable treatment by acquirers’ stakeholders because these deals are
more rapid and generally less costly, since they allow target management little time to
put forward any antitakeover defenses. Therefore, in a given organizational setting, the
practice of compensating CEOs for completing cash- rather than equity-financed
transactions is more acceptable and less likely to be questioned by the company’s

stakeholders.
Whether or not this institutional explanation is valid either for small size acquirers with
no previous acquisition experience or for larger acquirers with some experience in
markets for corporate control is a question that should be addressed. We would say both,
since all firms are subject to institutional pressures to some extent, but some may be
more vulnerable than others. On the one hand, novice acquirers are eager to have their
compensation practices legitimized, and in order to avoid additional governance costs
they are more likely to mimic those practices that are already in force in their markets of
reference. On the other hand, companies that have already made some acquisitions before
are also likely to respond to institutional pressures, since their M&A experience and
increased organizational size make them more visible to the public and thus more
responsible for their image (DiMaggio and Powell, 1991).
(ii) Discussion of unexpected or insignificant findings
Some insignificant or unpredicted results related to hypotheses 1a and 1b require further

understanding. It should be noted that both stock options and long-term compensation
components are negatively associated with acquisition premium in both samples, but this
link is not statistically significant. Overall, these findings seem to indicate that the
acquisition premium has greater potential to explain as predicted the magnitude of some
short-term compensation components taken separately (salary and short-term bonus),
rather than of long-term compensation components (stock options and long-term
compensation group). Moreover, the low adjusted R² (around 12%) and F-statistic
(around 4) values for regression models where stock options and long-term compensation
components are used as dependent variables suggest that a sizeable portion of the
variance associated with these executive compensation components is left unexplained.
These insignificant results could be explained as follows. Since the acquisition premium
is one among other proxies of M&A transactions, it is likely that premium alone cannot
fully account for the variations in some CEO compensation components as result of an
acquisition. The target management attitude towards the deal and the type of antitakeover
defense implemented in order to prevent their firm from being acquired could also have
an impact on the acquiring managers’ compensation. Furthermore, previous literature has
demonstrated that the magnitude of acquisition premium significantly affects the
acquiring company’s profitability more in the short run (one year) than in the long run
(Sirower, 1994). Similarly, if this transactional characteristic has significant short-term
implications in the acquiring firm, it becomes understandable why the magnitude of
control premium has more power to explain the levels of CEO short-term compensation
components than the long-term ones.
Contrary to our expectations, the regression coefficients for the method of payment
factor are positive and statistically significant in those models where the short-term
bonus, stock options, and long-term compensation components are used as dependent
variables. Therefore, the conclusion drawn for method of payment direct effect seems to
be slightly different from that drawn for acquisition premium. While the latter variable is
a modest predictor of variations in CEO long-term compensation components, the former
seems to be unable to explain, as predicted, the levels of variable compensation
components. Indeed, for both short-term (i.e. short-term bonus) and long-term (i.e. stock
options) variable compensation components, the method of payment coefficients are
strikingly positive, while for the fixed compensation component (i.e. salary), this
coefficient is, as expected, negative. As for the stock options and long-term
compensation, the adjusted R² and F-statistic values for the short-term bonus regression
models are also very low. The same reasons (as in the control premium case) can
therefore be used to explain why method of payment alone cannot adequately explain the
variations in these compensation components in the post-acquisition period.
Another surprising finding concerns the positive though insignificant link between
control premium and short-term compensation group. There are two possible
explanations for this unexpected result. 1) We need to remember that the short-term
compensation component was computed as a sum of salary, short-term bonus, and other
short-term compensation. And, since it was demonstrated before that higher acquisition
premium was a significant predictor for lower levels of salary and short-term bonus, the
insignificant short-term compensation relation with acquisition premium is likely to be

caused by ‘other short-term compensation’ component. 2) Since both transactional
characteristics were used together in all the regression equations, additional tests were
performed to verify whether final results could be affected by relationships between the
two independent variables. When the method of payment was removed from the short-
term compensation regression model, the control premium coefficient became negative.
This finding suggests that an insignificant relation between the acquisition premium and
short-term compensation in the initial regression model is likely to be explained by the
presence of ‘method of payment’ factor.
More interestingly, when comparing results for the two independent variables reported in
tables 48 and 49, we observed that, salary aside, when control premium coefficients are
negative, the method of payment coefficients are positive, and vice-versa. The correlation
matrix presented in table 47 reveals that the two deal characteristics are negatively
correlated (r = –0.083). It seems that acquiring executives are not able to make
acquisitions that would be profitable to their shareholders in both payment method and
control premium terms at the same time. In other words, when CEOs manage to
negotiate a lower acquisition premium (that has a positive impact on firm returns), they
are less likely to do so with the method of payment, tending to finance their deals more
through share exchanges (that have a negative impact on acquirer’s profitability).
This finding is consistent with tax considerations of the means of payment hypothesis
advanced in corporate finance literature. According to Weston et al. (1998), the tax codes
generally award a tax-deferred status to a pure equity-financed deal, while requiring
capital gains taxes to be paid immediately in an all-cash purchase. Since these gains are
fully taxable to target shareholders, the authors suggest that higher control premia will be
offered by bidders to compensate for immediate taxes paid by targets in cash deals.
André et al. (2000) go in the same direction, suggesting that the acquisition premium
paid to target shareholders and the abnormal returns to bidding shareholders are higher
when the transaction is cash-financed, rather than stock-financed.
Finally, in order to understand the unpredicted positive association of payment method

with CEO short-term bonus, further considerations can be taken into account. The
implicit assumption for hypothesis 1b is that, knowing that an acquisition payment
through share exchanges generally translates into lower performance of the acquiring
firm, it is legitimate to expect that only the announcement of this kind of payment would
negatively affect the magnitude of CEO short-term bonus. This assumption holds
particularly in those firms where boards of directors place relatively more weight on
financial performance metrics in executive short-term bonus contracts. According to
Feltham and Xie (1994), financial measures alone may not provide the most efficient
means for motivating managers to behave in the shareholders’ interest. The use of some
non-financial criteria (e.g., productivity, product quality, customer and employee
satisfaction, etc.) in executives’ performance evaluation has therefore been on the
increase in the corporate world. Some authors suggest that decisions related to the design
of CEO compensation contracts should be based on the type of organizational strategy
adopted: prospector versus defender (Govindarajan and Gupta, 1985). In the same vein,
Ittner et al. (1997) observe that the use of non-financial measures in executive bonus
contracts increases with the extent to which the firm follows an innovation oriented
strategy.
In the context of markets for corporate control, the acquisition strategy may be regarded
as one that is closer to the prospector end of the strategy continuum. Some acquiring
companies’ executives may be rewarded for completing such complex deals as merger or
acquisition transactions (non-performance criteria), disregarding whether the method
chosen to finance those deals will result in decreased firm profitability (performance
measures). In other organisations, executives are awarded a bonus both for completing
the M&A deal and for performance unrelated to the deal. In a sample of 327 large M&As
between 1993 and 1999, Grinstein and Hribar (2003) conclude that 39% of CEOs are
paid for their acquisitiveness and that compensation comes mainly in the form of a cash
bonus. Moreover, these authors find a negative relationship between deal performance
and bonus payments.
In this thesis, the short-term bonus component refers to a number of short-term

incentives given to acquiring executives. Since the exact amount is generally not clearly
indicated in proxy statement, we could not separate the deal-specific bonus from other
short-term bonus payments not related to the deal. Moreover, as Grinstein and Hribar
(2003) argue, compensation committees generally hide the reasons for granting their
CEOs M&A-related bonuses. Therefore, the relationship between method of payment
and short-term bonus could capture the impact of an inflated M&A-specific bonus rather
than the impact of actual firm performance.
One possible explanation for this finding relies on institutional theory assumptions.
Compensating executives for the achievement of some complex (albeit non-financial)
objectives such as a M&A completion may be considered by boards of directors as being
a highly legitimate compensation practice. And, board members themselves could be
interested in the conduct of such transactions because their own compensation could be
positively affected as part of the results of increased corporate size, or due to the
symbolic implications related to directors’ prestigious position to sit in boards of large-
size corporations (this also increases their standing in business community).
Another possible explanation, similar to that drawn by Grinstein and Hribar (2003), may
be based on political perspective insights. In this sense, the primary driver of M&A-
related bonuses resides in managerial power, where executives who exert greater
influence over the board members are more likely to receive higher levels of deal-
specific bonuses.
6.1.3 Discussion of the mediating effect of firm performance on the

relationship between the magnitude of acquisition premium or method of
payment and executive compensation
CEO compensation of acquiring firms?
Hypotheses 2a and 2b, intended to answer the research question (1.3), expect a higher
acquisition premium or equity-financed acquisitions to negatively affect CEO
compensation through firm performance ratings. The multivariate regression results
previously reported provide partial support for both hypotheses 2a and 2b.
The preliminary assumption of hypotheses 2a and 2b is that a lower control premium and
acquisitions financed in cash are positively associated with firm performance. With one
exception, the empirical results presented in table 52 confirm this assumption. For
instance, the evidence suggests that a high control premium paid has a negative impact
on performance, but that this effect is significant only for the accounting measures (ROE
and ROA) of profitability and not for the stock market one (RET). Equity-financed
acquisitions have a more significant negative effect on the ROE measure of accounting
performance than on the ROA measure of accounting performance, while their impact on
stock market returns appears to be positive but not significant.
Although these results suggest that the two deal characteristics are more powerful
determinants of variations in acquirers’ accounting profitability than in the stock-market
one, they are generally consistent with findings in the financial literature. Indeed,
Sirower (1994) and Hayward and Hambrick (1997) find a consistently significant
negative association between premium size and post-deal returns. Previous studies also
provide significant support for the means of payment hypothesis, where stock-financed
transactions translate into negative abnormal returns for acquiring shareholders
(Loughran and Vijh, 1997; Mitchell and Stafford, 1999). Though our research results do
not completely corroborate the means of payment hypothesis, they are consistent with
previous research done in the Canadian context. For instance, in a study of 182 Canadian
transactions between 1964 and 1982, Eckbo et al. (1990) report positive abnormal returns
to bidders for equity deals and insignificant returns in the case of cash-financed
acquisitions.
The most significant support for hypotheses 2a and 2b among all compensation
components is given by short-term bonus and total compensation, and, to a lesser extent,
by stock options and long-term compensation. This finding is not surprising, since short-
term bonuses and long-term compensation are variable compensation components
expected to be closely linked to firm performance. There is also a positive association
between ROE and salary and short-term compensation, but it is marginally significant
only in the restricted sample. It is further interesting to note that for some executive
compensation components, companies tend to place relatively more emphasis on
accounting than on the stock market metrics of firm performance. As evidenced in tables
53 and 54, the ROE coefficients are more significant for salary and short-term
compensation, while RET is more significantly associated with stock options and long-
term compensation components.
This finding, in which higher levels of short-term compensation granted to CEOs are due
to better performance ratings measured as an accounting ratio, and higher levels of long-
term compensation are explained by an increased stock market measure of profitability,
is consistent with prior research. Lambert and Larcker (1988), in an in-depth analysis of
the use of accounting and market measures of performance in executive compensation
contacts, come to the same conclusion. They find that organizations place less
importance on RET relative to ROE in cash-compensation contracts, when RET is of
more importance in the long-term compensation components of managerial wealth. They
also interpret these results as being consistent with the hypothesis that accounting
numbers provide a less useful measure of CEOs’ performance, when the consequences of
executives’ current-period actions tend to occur in the future and are not reflected in
current-period accounting numbers.
The results of the Engel et al.’s (2002) study of annual corporate governance decisions at
firms making an initial public offering of common stock between 1996 and 1999 are
similar. They find that the ‘pay-accounting performance’ relation for non-Internet
executives appears to be driven by cash compensation, while the ‘pay-stock returns’
relation for Internet CEOs seems to result from grants of stock-based instruments.
Finally, in a study of the relationship between executive compensation and bank mergers
between 1986 and 1995, Bliss and Rosen (2001) find that CEO cash compensation
explicitly depends on accounting-based return on assets (ROA).
Another result worth mentioning refers to an additional analysis performed to test

hypothesis 2b. In this analysis, both research samples were divided into two subgroups
across the method of payment partition, resulting in a subgroup of cash-payers versus
equity-payers. It is interesting to note that in the pre-acquisition period the positive RET
coefficients are consistently more significant in the stock-payment subgroup than in the
cash-payment subgroup, for long-term compensation components as well as short-term
compensation components. This finding is not surprising, since the method of payment
chosen to finance the deal can render a full account of a board of directors’ preferences to
tie executive compensation to either RET or ROE. Indeed, just because CEOs undertake
stock-financed acquisitions, it is more likely that all their compensation components will
be linked to the stock market than to the accounting metrics of firm performance.
It should also be noted that the restricted sample of data has a greater potential to produce
expected results than the full sample of data, as evidenced by more significantly positive
RET and ROE coefficients in the former sample. We drew from prior literature to
consider a control variable capturing CEO changes. Indeed, data from the restricted
sample are more consistent and therefore easily interpretable, because changes in
compensation levels are not attributable to changes in top management. Hiring a new
CEO around the time of a merger transaction may be indicative of a need for certain
skills and expertise useful in managing a large size corporation. In this vein, a particular
initial compensation package (e.g., higher proportion of salary and lower proportion of
incentive compensation) may be provided to a new executive in order to recognize his
key competencies. Moreover, the initial compensation contract may also reflect the
specific labor market conditions at the time of hiring (Engel et al., 2002).
Overall, these findings suggest that when executives pay high acquisition premiums or
finance their deals through equity exchanges, the levels of their short-term bonuses, stock
options, long-term compensation and total compensation decrease due to diminished firm
performance in the post-acquisition period. These empirical results can be further
understood if grounded within the agency theory framework, where shareholders act as
principals and executives as agents. This theory postulates that there is a monitoring
problem between a principal and an agent because of their diverging interests and risk
preferences, as well as shareholders’ inability to directly observe executives’ actions
(Jensen and Meckling, 1976). The principal’s main concern is, therefore, to find an
optimal mix of solutions to insure that an agent’s actions are consistent with outcome
maximization.
Within the agency framework, the monitoring problem may be resolved through the
implementation of an incentive compensation plan (e.g., short-term bonus or stock
options). Pay-for-performance is more likely to be observed in situations where the
principals do not have a priori sense for what actions an agent should be pursuing. This
argument suggests that incentive compensation may be more likely in cases where the
overall environment is more uncertain. Since markets for corporate control bring high
levels of uncertainty, tying executive compensation more closely to performance metrics
during the period surrounding M&A transactions, may be seen by the boards as an
effective control mechanism to ensure that CEOs interests converge toward shareholders’
value creation.
Several unexpected but interesting findings obtained in relation to hypotheses 2a and 2b

require further discussion. If consistent with these hypotheses, performance coefficients
should be positive and significant, while acquisition premium or method of payment
coefficients should not be significantly different from zero. Empirical tests report,
however, that the deal characteristics’ coefficients are still significant for salary and
short-term bonus, while the method of payment is also significant for short-term
compensation, stock options, long-term compensation and total compensation in the
restricted sample. Even though the mediating effect of firm performance is strong, the
significant coefficients for the premium and payment method suggest that the direct
effect of these transactional characteristics is still present. In other words, executive
compensation association with acquisition premium or method of payment is mediated
not exclusively by firm performance but also by other factors not taken into
consideration in the regression model. As already mentioned, these other explanatory
factors could be related to other M&A-related characteristics, such as a friendly or hostile
takeover, or the kind of antitakeover measures implemented by target management to
impede the deal.
Among all compensation components, the less significant support for hypotheses 2a and
2b is recorded by salary. Its association with firm performance is generally insignificant,
excepting for ROE which positive coefficient is significant at p < 0.10 level in the
restricted sample of data. In fact, this finding is not striking because salary is a fixed
compensation component and its payment is generally not contingent on firm
performance as the variable compensation components, such as bonuses and stock
options.
When splitting the research samples across the control premium and method of payment
partition, we observe that the relation between some short-term compensation
components and ROE is significantly lower in the post-acquisition period than in the pre-
acquisition period. This is the case for short-term bonus component in both high-
premium and combination and stock subgroups of the full sample. As previously
explained, bonus payments are generally intended to be closely linked to the accounting
metrics of firm performance, a contention that is confirmed for the period preceding the
deal completion. How can it be explained that a ‘bonus-accounting performance’ link
diminishes after an acquisition?
The first possible explanation could be related to the payment of M&A-related bonuses
that reward executives’ acquisitiveness and are not related to firm performance
(Grinstein and Hribar, 2003). The second may involve limitations associated with the
accounting performance metrics retained in this thesis. Similarly to Wright et al. (2002),
the strength of using the return on equity measure of accounting performance is that it is
easier to believe that changes in executive compensation levels reflect long-term changes
in profitability. The limitation of this measure, however, is that modifications in the ROE
of acquiring firms may be attributable not only to acquisitions but also to other factors
beyond the influence of acquisitions.
Another possible explanation of the diminished short-term bonus association with ROE
in the post-deal period may be rooted in the method of payment chosen. For instance, in
those companies that paid for their acquisitions through share exchanges (and not cash),
board members may find that linking short-term bonus payments to stock market
performance (as opposed to accounting performance) simply because of stock financed
acquisitions will more closely align executives’ interests with those of their shareholders.
In light of the agency theory, the message the boards want to transmit to their CEOs is
clear: if you undertake a value-decreasing acquisition paying in equity and want to be
rewarded for your job, it is more the stock market performance you will have to worry
about both before and after the deal. This is true for short-term bonus component for
equity-payers, where RET and RET*Post coefficients are significantly positive and
different compared to cash-payers.
We have also observed that in all regression equations where stock options are used as
the dependent variable, the adjusted R² and F-statistic values are generally very low. This
reduced explanatory power of the determination models for stock options is consistent
with prior evidence showing that companies do not appear to grant stock options solely
on the basis of economic factors (Craighead et al., 2004). For example, Engel et al.
(2002) find that firm performance does not explain stock-based compensation in venture
capital-influenced initial public offering firms. Following eighteen interviews conducted
with senior executives, St-Onge et al. (2001) concluded that stock options are used as: an
incentive tool intended to align executives’ interests with those of shareholders; a
recruitment and retention tool of strategic personnel driven by labor market conditions; a
legitimate reward tool where options are granted irrespective of their effectiveness and
simply because other firms also offer them; and a payout symbol which facilitates the
payment of high levels of executive compensation.
Finally, one additional argument can be used to explain the modest support for
hypothesis 2b obtained in the additional analysis, where cash-payers were compared to
stock-payers. This relates to the measure of the method of payment retained in this thesis:
a 3-point ordinal scale, taking the value 1 for cash, value 2 for combination of cash and
stock, and value 3 for stock-financed deals. When partitioning the sample, we included
companies that used a combination method in the stock-payers subgroup. As descriptive
statistics report, as much as 46% of acquirers in the full sample and 50% in the restricted
sample used a combination method in order to finance their acquisitions. These data and
the partition choice explain why the total number of observations included in the equity-
payers subgroup is 3.5 times higher than that in the cash-payers subgroup. Moreover,
since there is no a clear division between the two opposite kinds of method of payment
(cash versus stock), the results may be not significant and are sometimes difficult to
interpret. One possible solution, which could be addressed in future research in order to
overcome this problem, would be to gather larger samples of data for both opposite kinds
of method of payment, excluding companies that used a combined payment of cash and
stock.
6.1.4 Discussion of the moderating effect of structural board independence

on the relationship between the acquisition premium or method of payment
(firm performance or size) and executive compensation
(A) Discussion of results related to hypotheses 3a and 3b
Hypotheses 3a and 3b are intended to provide the first part of empirical answers to the
research question (1.4) of this thesis. These hypotheses expect structural board
independence to enhance the negative relation between the magnitude of acquisition
premium or equity-financed acquisitions and CEO compensation. Results from statistical
tests already presented provide a limited support for hypotheses 3a and 3b.
It should be noted that both the main and additional statistical analyses yield similar
empirical results with respect to hypotheses 3a and 3b. As reported in tables 72 and 73,
the only compensation component for which the interaction ‘Premium*Post*SBI’ term is
significantly negative is executive salary. In other words, in those companies with solid
governance structures a more independent from management board pays a lower salary
to executives who pay a higher acquisition premium. Analysis also reveals that short-
term compensation is the only component which significantly corroborates hypothesis 3b
in the restricted sample, where the ‘Method*Post*SBI’ coefficient is significantly
negative. This means that for companies with the same CEO during the seven years
under study, the negative relation between the payment through share exchanges and
executives’ short-term compensation is further reinforced due to a higher structural
independence of the board. It can be observed that there are also significantly negative
“main” SBI effects for salary, short-term bonus, short-term compensation and total
compensation, but these effects are not directly conceptually relevant to testing the SBI
moderator hypothesis (Baron and Kenny, 1986).
Due to a lack of previous research testing the moderating SBI effect on relationships
between control premium or method of payment and CEO compensation, we are unable
to compare these findings to the literature in this area. It is our belief, however, that these
significant results with respect to hypotheses 3a and 3b can be more comprehensively
explained if the agency theory is completed by political perspective insights. The basic
agency theory postulate is that both internal and external governance mechanisms should
be established in firms in order to realign executives’ interests with those of shareholders
(Fama and Jensen, 1983). A critical internal mechanism for limiting managerial
inefficiencies and ensuring that executives engage in value-maximizing activities is the
corporate board of directors. In order to fulfill its responsibility, the board possesses the
power to hire and fire top management, and to ratify important managerial
compensation-related decisions. Seen through agency theory lenses, these predicted
results seem to suggest that boards of directors adequately fulfill their duties. Indeed,
when managers undertake those kinds of acquisitions that are less profitable to acquiring
shareholders (paying higher control premia and financing transactions through share
exchanges), boards of directors are further enhancing the negative relation between
control premium and salary, on the one hand, and method of payment and short-term
compensation, on the other hand.
At this point, is should be mentioned that the ‘Premium*Post*SBI’ coefficients are

consistently lower in the full sample of data than in the restricted sample. How can it be
explained that the sample that includes all acquiring companies provides greater support
for hypothesis 3a than the sample of acquirers that had same CEO during the seven years
under study? Political perspective insights seem to be able to shed more explanatory light
on these observations. According to this perspective, the executive pay-setting process is
an outcome of a complex interplay between CEO-power and board-power, where each
part is characterized by self-maximizing behavior. The balance of power can be
favorable to either one, depending on their characteristics and attributes. Most of the
times, however, directors have a myriad of financial and non-financial incentives to
favour, or at least to get along with, longstanding executives (Bebchuk and Fried, 2004).
CEOs at the heads of their companies for several years are likely to gain more expert and
informal power both inside and outside the firm, power that may be used to benefit
individual directors directly or indirectly. Indeed, a general observation in the corporate
governance literature is that, regardless of its sources, CEO power increases over time
(Shen, 2003). In contrast, newly hired executives are unlikely to be able to exert much
influence over the board, since they have not yet proven their competence and they were
not involved in appointing any director to the board. Also, the familiarity and collegiality
that come with serving together on a board will not yet have developed.
It is true that structural independence of the board members from corporate management
is crucial in enabling them to perform their fiduciary responsibility. We argue, however,
that a board of directors has more power to adequately exert its monitoring responsibility
when an executive has less power, simply because of his relative newness at the
managerial top. Directors do not feel the same sense of obligation and loyalty that they
would feel to a CEO who had supported their nomination, or who had developed a
broader network of acquaintances. This position is consistent with our findings related to
hypothesis 3a, where the negative moderating SBI effect on the premium-compensation
relation is less present in companies with the same CEO throughout the seven years
under investigation.
If this explanation is valid for hypothesis 3a, it is less pertinent to explain that the only
negative moderating SBI effect with respect to hypothesis 3b is observed in the restricted
sample of data. This observation can better be understood using the same explanation as
that used to explain the direct effect of transactional characteristics on executive
compensation. An overview of tables 72 and 73 allows for the following observation:
when the Premium*Post*SBI coefficient is positive, the Method*Post*SBI is negative
and vice-versa for the same executive compensation component and for both samples. As
previously argued, since both transactional terms are used jointly in the regression
models, the pattern of signs for the acquisition premium appears to be determined by the
presence of the ‘method of payment’ explanatory factor. Similarly, if the board of
directors has any negative moderating influence, it is able to exercise it with respect to
the association of executive compensation with only one of the two transactional
characteristics at a time. In other words, when the board manages to enhance the negative
relation between managerial short-term compensation and equity-financed acquisitions, it
is less likely to also reinforce the negative short-term compensation relation with the
control premium.
Aside from salary and short-term compensation components, the evidence provides no
significant support for hypotheses 3a and 3b. One explanation may be that testing the
moderating effect of board independence on the ‘CEO compensation-deal characteristics’
relation is not the most adequate methodological approach to this question. The board of
directors was present when executives undertook acquisition transactions, and their
members approved the deal’s method of payment and the magnitude of control premium
to be paid to the target shareholders. The significantly negative SBI coefficients for all
executive compensation components, except for stock options and long-term
compensation, reported in tables 72 and 73, suggest that there is a significant main effect
of SBI for these compensation components. Therefore, exploring the main effects may be
a more relevant conceptual approach to testing the structural board independence role
within the context of change in corporate control.
Another explanation of the limited moderating SBI effect may be grounded within the
political perspective principles. According to Weiss (1991), aspects of takeover-related
situations make it reasonable to expect directors to perform more effectively ensuring
managerial value maximizing behavior. The political perspective, however, does not
assume that boards focus solely on shareholders’ interests when negotiating executive
compensation arrangements (Bebchuk and Fried, 2004). In this sense, directors’ own
incentives and preferences matter in their corporate decision-making processes. Myriad
factors impede board members from adequately playing their monitoring role. Among
them: managers’ influence over directors’ appointments, managers’ ability to reward
friendly directors, the social and psychological forces leading directors to favour
executives (such as loyalty, collegiality and team spirit), the limited costs to board
members of favouring managers, and directors’ lack of adequate time and information.
These factors invest managers with substantial power to influence the decisions made by
the board, whose effectiveness is thereby undermined.
In line with these political perspective arguments, it is worth paying more attention to the
composite measure of the structural board independence variable. As previously argued,
nine corporate board structural attributes are believed to reflect board independence from
management: the ratio of unrelated directors, board leadership, board size, tenure as
CEO, ownership concentration, and the value and percentage of both directors’ and
CEOs’ shares holdings. The explanatory power of the composite SBI measure used in
this thesis is not validated by prior research. Indeed, the vast majority of previous studies
in the corporate governance field tested the individual effect of these variables on CEO
compensation. For instance, Core et al. (1999), investigated the individual impacts on
executive compensation of such variables as duality title, board size, inside directors,
gray outside directors, interlocked outside directors, busy outside directors, CEO
percentage stock ownership, etc.
To our knowledge, the only empirical investigation in the area to have developed a
composite measure of structural board independence is that of Westphal (1998).
Compared to the SBI measure retained in this thesis, Westphal only used four (not nine)
and mainly different variables to compute his SBI measure. These variables include the
ratio of outside directors (versus the ratio of unrelated directors used in the thesis),
CEO/COB split (the same as in the thesis), CEO-board friendship ties and demographic
distance (measures not used in this thesis). It should be noted, however, that using this
metric of SBI factor, Westphal (1998) finds that higher board independence does not
insure higher effectiveness. Applying political perspective insights, the researcher argues
that changes in board structure that increase its independence from management are
associated with higher levels of CEO ingratiation and persuasion behavior toward board
members, offsetting the effect of an increased SBI on executive compensation policy.
In light of the findings of this research, two possible conclusions may be drawn to
explain our modest empirical results with respect to hypotheses 3a and 3b. First, since
prior findings of the effects of composite SBI measure on CEO compensation are limited
and inconclusive, Westphal’s (1998) arguments may be used to understand why SBI is
not able to exert a negative moderating effect on the executive compensation association
with the acquisition premium or method of payment. Second, it may also be possible that
some of the nine variables included in our SBI measure are less powerful indicators of
board independence than others.
Another concern related to our composite measure of SBI refers to a potential error in
measurement, as it is difficult to distinguish well-aligned from poorly-aligned board
members. Concerning board composition – although a higher ratio of unrelated directors
translates into greater independence, it may be that unrelated members of the board are
more aligned with top management than with shareholders (Mace, 1986). In those
acquiring firms where the CEO is also chairman of the board, we did not capture the
board members’ potential independence associated with their nomination to the board
prior to that of the CEO. It is important to note that the separate CEO-chairperson
variable is not subject to the same measurement error problem. A ten-member cutoff
used to determine an optimal board size may also be less pertinent, due to the differences
in size and business complexities among acquiring companies.
Finally, while the composite measure of structural board independence developed in this
thesis captures the board members’ intent to monitor executives’ activities, this measure
does not estimate the capacity of these members to actually monitor (Sundaramurthy et
al., 1997). Other influences affecting board independence (e.g., other contractual
connections, board members’ educational background, knowledge of the industry, and
experience on other corporate boards) may be vital in determining directors’ ability to
monitor effectively corporate managements (Seward and Walsh, 1996).
(B) Discussion of results related to hypotheses 4a and 4b
The second part of the empirical answers to the research question (1.4) is provided by
hypotheses 4a and 4b. In light of these hypotheses, the structural board independence
variable is expected to reinforce the positive relation between CEO compensation and
firm performance and the negative executive compensation association with firm size.
Multivariate regression results already presented partially corroborate hypothesis 4a, but
reject hypothesis 4b.
Overall, the evidence shows that there is significant support for hypothesis 4a in both
samples for the short-term bonus and, to a lesser extent, salary components. Indeed, for
these compensation components, the performance coefficients are generally positive in
the independent board subgroups. The size (LnAssets) coefficients are always
significantly positive in both the full and restricted samples of data, regardless of the
degree of board independence – a finding that is not consistent with the predictions we
hypothesized in 4b. However, this would have been only a partial discussion of our
findings with respect to hypotheses 4a and 4b, had we not made a double-way
distinction. This refers to the distinction between the stock market (RET) and accounting
(ROE) measures of performance on the one hand, and between the pre- and post-
acquisition periods on the other hand.
For example, a more independent from management board links executive short-term
bonus payments more closely to both RET and ROE in the pre-acquisition period
compared to the companies with dependent boards. As result of an acquisition, the
bonus-RET relation is still positive, while the short-term bonus association with ROE
diminishes in the independent board subgroup compared to the period preceding the deal.
Then, in the independent subgroup, the positive association of salary with RET is strong
in the pre-acquisition period, but diminishes as a result of an acquisition; inversely, the
salary relation with ROE is weak before the deal but increases after the transaction’s
completion.
Then, taking into consideration the distinction between the pre- and post-deal periods, it
seems now that the salary component provides some support for hypothesis 4b. As
shown in table 84, even though salary levels before an acquisition relate positively and
significantly to firm size in the independent board subgroup, the ‘salary-assets’ relation is
significantly lower in the post-acquisition period when compared to the dependent
subgroups.
These significant results could be discussed in light of both prior research in this area and
agency and political perspectives insights. Several studies on acquiring executives’
compensation concentrated on the analysis of CEO compensation sensitivity to either
firm performance or size, with different managerial and firm-specific characteristics. It
should be noted that in the existing literature, managerial discretion has been primarily
approached from the perspective of the ownership structure of the firm. The most
common approach has been the differentiation among manager-controlled, owner-
controlled, and owner-manager-controlled enterprises (Kroll et al., 1990; Kroll et al.,
1997). Kroll et al. (1990) find that where owner control is less than 5%, firm size is the
major determinant of CEO compensation, while managers of owner-controlled firms are
paid for both making the firm larger (e.g., size) and for ensuring its profitability. In a
later study, Kroll et al. (1997) added to their classification of company ownership a third
structure type – that is, owner-manager-controlled firms. Their findings indicate that
increases in corporate size due to M&A deals are positively and significantly associated
with CEO compensation of manager-controlled and owner-manager-controlled
companies, while excess returns from acquisitions are significant determinants of
executive compensation in owner-controlled firms.
More recently, Bliss and Rosen (2001) took a different approach to the agency problem,
focusing on the form of the CEO compensation contract and the frequency of merger
activity as the determinants of acquisition decisions and managerial compensation. They
find that banks where CEOs receive more stock-based compensation are less likely to
acquire other banks than those where executives receive more cash compensation.
Boards of directors want to fashion compensation plans that offer incentives for efficient
mergers but do not push CEOs towards bad mergers. For executives who tend to merge
frequently, the board shifts the reward from size to profitability, specifically ROA. For
managers who tend to make few acquisitions, the board rewards them more for becoming
larger through acquisition (e.g., size). Bliss and Rosen (2001) suggest in conclusion that
these results could be a sign that boards target an optimal level of acquisitions, and
structure compensation accordingly.
In fact, only Wright et al. (2002) use a similar methodological approach to ours,
inquiring whether monitoring activities can moderate the CEO compensation link with
firm performance versus firm size. The moderating variable (e.g., monitoring) used in
their study is different from that retained in this thesis, since it includes the following
factors: number of analysts following a firm, percentage of investments by institutions,
and proportion of independent board members. The authors conclude that, in firms where
external monitoring is active, CEO compensation is influenced by returns of acquisitions,
while in companies where external monitoring is weak, increases in firm size due to
M&A deals explain changes in executive compensation.
Our significant findings with respect to salary and short-term bonus match well with
earlier findings. Indeed, we have provided some evidence that the degree of structural
board independence may moderate whether appropriate managerial compensation

schemes are fashioned. These results can be discussed further, within both the agency
theory and political perspective frameworks. As we argued before, the board of directors
is the major mechanism ensuring the alignment of managerial interests’ with those of the
shareholders. Where the board is highly dependent upon management, CEOs are invested
with more power to exercise their discretion to benefit themselves. Executives may adopt
acquisition strategies in order to enhance their own compensation, since there tends to be
a positive association between firm size and CEO compensation. With structural board
independence, directors possess more power to properly exert their supervision
responsibilities and, thus, to encourage executives to use their own discretion to enhance
the interests of shareholders (Fama, 1980; Wesphal and Zajac, 1994). Under these
circumstances, managerial compensation would be linked more to firm performance
ratings that are related to acquisitions than to firm size.
Several unexpected findings with respect to the SBI moderating effect on the association
of executive compensation with firm performance and size require further exploration.
One general observation is that there is a stronger link in the independent board subgroup
between different components of CEO compensation and RET than between executive
compensation and ROE (and not with both performance measures, as expected). These
results are not in line with the Joskow et al.’s (1993) study, where it was found that
managerial rewards are far more closely related to accounting returns than to shareholder
returns. These authors explain that accounting measures of performance provide a more
convenient benchmark for compensation committees, since boards conclude that share
prices are affected by too many factors outside CEOs’ control to serve as a motivational
target. They did not, however, take the degree of board independence into consideration.
An alternative interpretation, consistent with our own findings, is therefore also possible.
Although accounting returns may be seen as more fully under management control, they
are also open to various manipulations and, therefore, do not adequately reflect company
performance (Hambrick and Finkelstein, 1995). Consequently, it is likely that a more
independent from management board would consider the accounting data less reliable
than market-based data when linking CEO compensation to firm performance.
Our findings are also consistent with prior research that postulates that accounting
performance is of more importance in executive cash compensation contracts, while
market-based returns are more likely to influence managerial long-term compensation
(Lambert and Larcker, 1988; Engel et al., 2002). Although salary is more contingent on
RET before an acquisition in the restricted sample independent subgroup, the ‘salary-
ROE’ relation increases in the post-acquisition period when compared to the pre-
acquisition years. Executive stock options and long-term compensation components are
overall more significantly linked to market-based returns than to accounting
performance, regardless of the degree of board independence.
The only surprising observation is perhaps that the short-term bonus association with
accounting performance decreases significantly in the post-acquisition period. This can
probably be explained by the practice of awarding gratuitous bonuses to executives for
having completed an acquisition transaction. Bebchuk and Fried (2004) report that
during the 90s, in about 40% of large M&A deals, the CEOs of acquiring firms received
multimillion-dollar acquisition-related bonuses paid mainly in cash. For example,
William Wise, the CEO and chairman of El Paso Corporation, received more than US$
29 million for his company’s acquisition of Sonat Inc. in 1999, in addition to his regular
salary and other benefits. Given the significant cash amounts involved in these payments,
which are not correlated with firm performance and generally spread over the year
following the acquisition, it may not be surprising that the short-term bonus association
with ROE becomes weaker in the post-acquisition period.
Overall, support levels for hypotheses 4a and 4b are very limited. The evidence shows
that for all compensation groups (short-term compensation, long-term compensation, and
total compensation) the performance coefficients are generally not statistically different
across the SBI partition. Moreover, for all compensation components, excepting salary,
the firm size coefficients are significantly positive regardless of the degree of structural
independence of the board. In the Wright et al.’s (2002) study, the size coefficients are
also positive for companies with vigilant monitoring, but these coefficients are not
statistically significant. These modest results with respect to the moderating SBI role
within the executive compensation relation with firm performance or size can be due to
sample characteristics or other measurement biases.
As we have already argued, the composite measure of board independence we computed

for the purposes of this thesis may be too complex, including as it does nine different
structural mechanisms. Since this composite SBI measure may not capture the degree of
directors’ independence well enough, it would be interesting to consider separate models,
estimating the moderating impact of each SBI mechanism individually. Moreover, the
number of observations may not be sufficient to make any meaningful comparisons
between the independent and dependent board subgroups. In fact, the latter subgroups are
almost three times larger than the former ones. Descriptive statistics show that in a nine
point scale on SBI variable, a large majority of acquirers scored five. The methodological
choice of using the median SBI value to partition the sample generated a small
independent board subgroup size respective to the dependent subgroup’s size.
Some more qualitative demographic measures of board independence would also be

useful to be integrated in final measure of SBI as Westphal (1998) does in his work. In
our opinion, case studies of board functioning, large-scale questionnaire surveys, and
interviewing of directors would be valuable in providing insights on corporate board
characteristics that may influence directors’ performance. This kind of qualitative
approach to corporate governance questions would be worthwhile since the empirical
findings of this thesis indicate that structural independence of board members do not
have important impacts on aligning executives and shareholders interests.
6.2 DISCUSSION OF SPECIFIC ATTRIBUTES OF COMPENSATION CONTRACTS
¾ Research Question (2.2): Are deal-specific characteristics (magnitude of the

attributes of executive compensation contracts adoption?
¾ Research Question (2.3): Is the frequency of specific attributes of executive

compensation contracts adoption influenced by firm performance or size and is the
periods?
In this section, the empirical results of the exploratory analysis related to the adoption of
employment agreements, terminations clauses, change of control clauses and new LTIP
are discussed. Although no specific hypotheses were developed with respect to these
specific attributes of executive compensation contracts, the sets of findings with respect
to the research questions (2.2) and (2.3) present interesting implications and open the
way to future research.
It is interesting to note in our findings that the adoption of a new LTIP obeys to a
different set of determinants than the adoption of employment agreements, termination
clauses and change of control clauses. In fact, the correlation matrix (see table 47) is also
supportive of this observation. The significantly positive bivariate correlations among the
last three contractual provisions suggest that they are complementary, while the generally
negative correlations between each of these provisions and the new LTIP adoption
illustrate that these two groups of compensation arrangements can best be described as
substitutes.
With respect to the research question (2.2), neither of the two transactional terms appears
to exert a sizeable influence on the adoption of a new LTIP, while firm size is an
important positive determinant in the adoption of these plans. By contrast, firm size is a
negative predictor of the adoption odds of the other three executive compensation
protection provisions, while the two deal-related characteristics negatively affect the
adoption of these contractual provisions. The method of payment then negatively and
significantly affects the probability of an employment agreement adoption in both
samples, while the magnitude of control premium exerts a negative influence on the
adoptions of a termination clause in the restricted sample, and change of control clause,
in the full sample.
The research question (2.3) tests the change in the association of specific attributes of
compensation contracts with performance and firm size between the two M&A-related
periods. The evidence shows that the likelihood of a new LTIP adoption increases with
corporate size, both in the pre- and post-acquisition periods, and with better ROE ratings
before the deal and, to a lesser extent, after the deal. Whereas the odds of an employment
agreement, termination clause, and change in control clause adoptions: a) decreases with
organizational size in both periods; b) increases with better RET before the deal, a
relation that is lower after the deal; c) decreases with ROE in the pre-acquisition period, a
relation that is higher in the post-acquisition period.
The empirical evidence linking the adoption of specific attributes of executive

compensation contracts with merger and acquisition activity is very limited. Out of four
contractual compensation arrangements, the golden parachute’s impact on the stock
prices of target firms has received the lion’s share of attention in prior research (Knoeber,
1986; Hall and Anderson, 1997; Subramaniam, 2000). Indeed, the positive wealth effects
to target shareholders from golden parachute adoptions are documented empirically in a
number of studies of non-financial firms (Jensen, 1988). These results do not seem to
apply to the banking industry, where the adoption of golden parachutes engenders
negative wealth effects and is positively related to the likelihood of bank failures (Evans
et al., 1997). These types of empirical investigations (also see appendix 4) are silent on
the determinants of golden parachute adoptions in acquiring firms. Some parallels can,
however, be drawn between our findings and the existing literature that approached our
research questions from an alternative perspective.
Agrawal and Knoeber (1998), for example, investigate the impact of a takeover threat on
the adoption likelihood of two executive contractual provisions: employment agreements
and golden parachutes. Contrary to our findings, these authors observe that these two
contractual provisions are substitutes, since there is a negative correlation between them.
They also expect firm size to have a negative effect on the employment contract and
golden parachute use, but this hypothesis is corroborated only for the latter component.
Our results are in line with this hypothesis, but the negative size coefficient is significant
only for the employment agreement component (and termination clause), and not for the
change of control clause, as in the study of Agrawal and Knoeber (1998).
We draw on their (Agrawal and Knoeber, 1998) research to explain our findings. In our
analysis of acquirers’ proxy statements, we conclude that the existence of one contractual
compensation provision does not automatically imply the existence of the other two.
Indeed, not all CEOs with an explicit employment agreement also had termination clause
and/or golden parachute provisions and vice-versa. However, the cases when CEOs
benefited from all three contractual provisions are very common in our sample. For
example, in the proxy statement of Corus Entertainment Inc. from November 1, 2002 the
following information is specified under the “Employment Agreement” heading:
“Corus entered into a new three year employment agreement effective September
1, 2002, with John Cassaday [company’s President and CEO]. [Under the terms
of the agreement Mr. Cassaday will receive an annual salary of CAN$ 700,000 in
fiscal 2003, CAN$ 775,000 in 2004 and CAN$ 800,000 in 2005]. The agreement
provides for certain revenue payments in the event of termination of Mr.
Cassaday’s services for reasons other than cause or for change of control equal
to two times his salary and targeted bonus at 90% of his annual salary”.
What motivates managers of acquiring firms to agree simultaneously to all three

contractual provisions under which some of their compensation is explicitly differed?
Having undertaken an M&A transaction does not protect the acquirer from the threat of
being acquired itself. Our data show that as many as six sample acquirers became sample
targets shortly after completing the acquisition of another company (see appendix 8,
table A14). For instance, Canadian Satellite Communications, which made an M&A
deal in 1999, was acquired by Shaw Communications one year later. Two clauses that
can reassure managers who invest in firm-specific human capital (Shleifer and Summers,
1988) that their compensation is not at risk from a takeover are explicit employment
contracts – that permit court enforcement – and golden parachutes (Agrawal and
Knoeber, 1998). Executives may also feel threatened by the risk of dismissal due to other
events not under their control and not linked to M&A activities, such as disability. From
the political perspective, those CEOs who are invested with the power to influence
directors’ decisions and who manage to negotiate an employment agreement and a
change of control clause will be more likely to also add a termination clause to their
compensation contracts.
However, since the threat of takeover is lower for large firms than for small firms, the
takeover-specific compensation assurance provisions may be less valuable in the eyes of
CEOs and ultimately less common in larger companies. With increasing firm size,
managers are less concerned by the consequences of takeover risks, and they may also
find it less useful to be protected from other risks, which in turn lower their motivation to
negotiate a termination clause adoption alone.
The most surprising finding refers to the differential impact of stock-market and
accounting performance across the pre- and post-acquisition periods on the likelihood of
the three compensation assurance provisions. This could be a sign that powerful
managers may see a decrease in ROE as more threatening to their jobs than a decrease in
RET. In fact, the fluctuation in stock prices is not always under managerial control, and
therefore does not always imply better or worse management. The accounting data are
more open to the manipulations that may, to some extent, hide a worsened performance
of the firm (Hambrick and Finkelstein, 1995). If despite this characteristic the accounting
data are still cause for concern in the pre-acquisition period, CEOs may feel that the risk
of their dismissal is greater. Therefore, when the ROE decreases and the RET does not,
contractual provisions are more valuable for managers and hence more likely. Further
evidence is also needed to verify whether this explanation is reliable.
To our knowledge, no previous study has examined the impact of M&A characteristics
on the likelihood of the adoption of compensation assurance provisions. Our findings
related to the negative association between the acquisition premium or method of
payment and the three contractual provisions could, however, be interpreted in light of
the agency, institutional, and political perspectives. Since both higher control premia paid
and equity-financed acquisitions have negative wealth effects, directors’ decisions not to
provide CEOs with compensation protection clauses when they undertake such kinds of
M&A deals can be explained as follows. From the agency theory standpoint, this
decision is viewed as one that aims to align managers’ interests with those of corporate
shareholders. From within the political framework, when the balance of power becomes
favorable to the board members, they are more likely to carry out their monitoring
responsibilities properly. From the institutional perspective, this decision on the part of
the board members might be seen as more justifiable and legitimate in the eyes of the
corporate shareholders.
Finally, previous research on the new LTIP adoption suggest that these new
compensation schemes are likely to be adopted by firms that are not satisfied that their
existing compensation structure provides their managers with the appropriate incentives
to maximize shareholder wealth (Brozobsky and Sopariwala, 1995). In a recent study,
Arora and Alam (2005) go further, observing that the adoption of the new LTIP has to be
viewed as an incentive to align CEO interests not only with those of the corporate
shareholders but also with those of the primary stakeholders of the firms (customers,
employees, suppliers).
More interesting for the purposes of our research, are the investigations by Westphal and
Zajac (1994) and Zajac and Westphal (1995) analyzing the political and institutional
determinants of LTIP adoption and use. These authors find that a large majority of firms
adopt but do not actually use LTIP, suggesting a potential separation of substance and
symbolism in executive compensation contracts. Whereas early adopters may have
sought a substantial alignment between CEO and shareholder interests, later adopters
may have pursued legitimacy by symbolically controlling agency costs.
Our results regarding the determinants of new LTIP adoption only partially corroborate
Westphal and Zajac’s (1994) findings. Similarly to these authors, we find that firm size
has a positive effect on the likelihood of the adoption of these plans. In fact, when a
company is larger, both the company’s visibility and the complexity of the CEO’s job
increases. Therefore, the need to adopt those compensation practices already legitimated
by the market or designed to control agency costs may be greater than when the firm is
smaller. In contrast to the evidence provided in this thesis, Westphal and Zajac (1994)
conclude that prior performance (RET and ROA) is significantly and negatively related
to a firm’s tendency to adopt an LTIP. The positive association of LTIP adoption with
ROE before the acquisition and the decreases in this association after the completion of
the transaction (that are part of our research findings) may be explained as follows. For
high-performing bidders in the pre-acquisition period, the adoption of an LTIP may
simply be used as a way of providing executives with additional compensation. In the
post-acquisition period, however, low-performing companies may adopt an LTIP to
stimulate executives to improve firm profitability by increasing the performance-
contingent part of their compensation.
CHAPTER 7: CONCLUSION
This final chapter of this thesis is reserved for some concluding remarks and tying
together all that we have shown so far, from the literature review through to the empirical
results and discussion. In this chapter we proceed as follows. We first resume the
empirical findings and highlight the contributions of this thesis by setting out what we
believe has extended the body of research on our chosen topic. We then continue by
discussing the methodological and theoretical limitations of our research, and finally, we
conclude with our views on future research possibilities, making suggestions as to how
our line of reasoning might be extended.
7.1 RESULTS’ SYNTHESIS AND CONTRIBUTIONS
7.1.1 Synthesis of the results
This research project examines the impacts of mergers and acquisitions on executive
compensation of acquiring firms. M&As are currently at the centre of heated debate and
myriad leading topics related to these restructuring strategies figure prominently among
central public and corporate policy issues. The bulk of empirical studies on post-
acquisition performance explicitly show that, despite their popularity, many M&As do
not produce the expected financial benefits for the acquiring company. In light of these
lamentable M&A results, the real motives behind corporate managers’ willingness to
undertake these complex operations call for close scrutiny. Theoreticians and
practitioners continue to pay careful attention to the considerable rewards garnered by
West European and North American executives. Underlining the poor association
between managerial compensation and organizational performance, some authors
increasingly question whether CEOs are really worth what they are paid. Within this
context, questions concerning the best determinants of executive compensation abound.
It should be noted that the various relationships that could be drawn between M&A
activities and CEO compensation have received scant attention in the existing literature.
In fact, only nine studies are identified in our literature review that have explicitly
tackled issues related to executive compensation of acquiring firms. There is, therefore,
only limited empirical evidence on these relationships. This thesis contributes to the field
of investigation by linking these two highly controversial subjects under one research
program. The emphasis is on analyzing the effects of M&A characteristics (magnitude of
acquisition premium and method of payment) on executive compensation of acquiring
firms. We consider the relation between M&A transactions and CEO compensation in
two ways. First, we assess how M&As relate to the monetary magnitude of CEO
compensation components and second, we ascertain if M&A activity relates to specific
attributes of CEO compensation contracts.
With regard to the magnitude of acquiring firms’ CEO compensation, we develop

four research questions and eight hypotheses and obtain the following findings. Due to
its descriptive nature, there are no research hypotheses associated with question (1.1) –
During the three years preceding and following the change in control transaction, are
there any significant changes in the monetary magnitude of different compensation
components of acquiring companies’ executives? We provide evidence that, as result of
an acquisition, acquiring managers experience significant increases in the magnitude of
their salary, short-term bonus, short-term compensation, stock options, long-term
compensation and total compensation in both samples, and in their levels of restricted
awards in the full sample. Since, on average, M&As do not produce any financial gains
to the shareholders of acquiring firms, we may infer that executives have personal
incentives for undertaking M&A deals, as they translate into higher compensation levels.
These findings are consistent with previous research on the topic, corroborating the
managerial welfare hypothesis.
Two research hypotheses are developed with respect to question (1.2) – What are the
impacts of the magnitude of acquisition premium or method of payment on executive
compensation following M&A transactions? In line with hypotheses 1a and 1b, a high
acquisition premium is associated with lower salary and short-term bonus for both
samples, whereas equity-financed acquisitions – with lower salary for both samples and
short-term compensation and total compensation for the restricted sample. These findings
with regard to the direct effect of the transactional characteristics are discussed in light of
the institutional theory and its symbolic implications. From an institutional standpoint,
paying CEOs for just conducting low-premium or cash-financed M&A deals seems to be
perceived by the boards as being a legitimate compensation practice since these kinds of
deals are expected to positively affect acquiring firm’s performance. Moreover, by
transmitting impressions to the board about the inherent value of the managerial skills
they possess, CEOs are able to extract additional compensation other than that rewarding
actual improvement in the firm’s share value.
Two research hypotheses are developed with respect to question (1.3) – What are the
effects of firm performance on the relationships between the magnitude of acquisition
premium or method of payment and the CEO compensation of acquiring firms?
Consistent with both hypotheses 2a and 2b, firm performance has a mediating effect on
and executives’ short-term bonus and total compensation in both samples, and stock
options and long-term compensation in the restricted sample. In other words, M&A
transactions with attributes such as a low (high) acquisition premium and a cash (equity)
consideration which translate into good (poor) performance lead to higher (lower)
executive compensation. These empirical findings related to the mediating effect of firm
performance can be understood if grounded within the agency theory framework. Since
markets for corporate control bring high levels of uncertainty, tying executive
compensation more closely to firm performance is seen as an effective control
mechanism to ensure that CEOs interests converge toward shareholders’ value creation.
It is therefore legitimate that diminished performance, due to high control premia or
acquisitions through share exchanges, translates into a reduction in CEO compensation.
Four research hypotheses are related to question (1.4) – What are the effects of
structural board independence on the relationships between the magnitude of
acquisition premium or method of payment (firm performance or size) and the
executive compensation of acquiring companies? Structural board independence exerts
a twofold moderating effect. First, consistent with hypotheses 3a and 3b, SBI reinforces
the negative relation between the magnitude of control premium and salary component in
both samples and between equity-financed deals and short-term compensation in the
restricted sample. Second, SBI reinforces the positive association between stock market
returns and short-term bonus and short-term compensation in both samples and between
stock market returns and stock options and long-term compensation in the full sample,
confirming hypothesis 4a. However, hypothesis 4b is rejected, since the SBI is not found
to be able to enhance the negative relation between firm size and the various executive
compensation components. These significant findings concerning the moderating effect
of the SBI are interpreted using the political perspective insights. With structural board
independence, directors seem to possess more power to exert properly their supervision
responsibility, encouraging the CEOs to use their discretion to enhance shareholders’
interests. Under these circumstances, powerful boards are able to link managerial
compensation more closely to firm returns from acquisitions.
With regard to the specific attributes of executive compensation contracts, we develop

three research questions and obtain the following findings. Concerning the question (2.1)
– During the three years preceding and following the change in control transaction,
are there any significant changes in the structure of executive compensation contracts
of acquiring firms? – the frequency of employment agreement, termination clause,
change of control clause and new LTIP adoptions does not seem to be determined by
M&A transactions. Even though the means of the adoption frequencies are generally
greater in the post-acquisition period when compared to the pre-acquisition period in
both samples of data, these increases are not statistically significant. These results
suggest that acquiring companies that have adopted these contractual compensation
clauses or plans continue to use them.
Regarding the question (2.2) – Are deal-specific characteristics (magnitude of

attributes of executive compensation contracts adoption? – findings show that the
magnitude of control premium and the method of payment (equity) have a negative direct
effect on the likelihood of adding three CEO contractual provisions (employment
agreement, termination clause, change of control clause) whereas these M&A-related
characteristics do not significantly affect the odds of new LTIP adoptions. These
significant results are explained in light of the agency, political, and institutional
perspectives. Since the payment of higher control premia and equity-financed

acquisitions have negative wealth effects for stockholders, the directors’ decision not to
provide CEOs with compensation protection clauses when they undertake such deals is
an effective tool to align CEOs’ and shareholders’ interests (agency theory). Such a
board decision is more likely when the board is powerful and independent from
management (political perspective). Finally, the decision not to provide such contractual
compensation arrangements will be easier to justify and to legitimatize in the eyes of
shareholders (institutional perspective).
Concerning the question (2.3) – Is the frequency of specific attributes of executive

compensation contracts adoption influenced by firm performance or size, and is the
periods? – we obtain the following findings. Firm size is negatively associated with the
probability of the three contractual provisions additions, but positively with the odds of
the new LTIP additions in both samples. In the full sample, stock market returns
(accounting-based return on equity) have a positive (negative) effect on the odds of
adopting an employment agreement or a change of control clause in the pre-acquisition
period, an effect that is lower (higher) as result of an acquisition. In the pre-acquisition
period, a high return on equity increases the probability of adopting a new LTIP for
restricted sample firms, an effect that decreases after the transaction. These findings seem
to suggest that the adoption of a new LTIP obeys to a different set of determinants than
the adoption of employment agreement, termination clause and change of control clause.
While the compensation protection provisions are less valuable for managers of large
firms (as the threat of takeover is lower), the adoption of new LTIP is probably more
important for these firms as their public visibility increases. The adoption of
compensation protection provisions is higher when powerful managers see the decrease
in accounting-based return on equity as more threatening for their position than poor
stock market returns. Finally, the adoption of a new LTIP in the pre-acquisition period is
used as a means of providing executives with additional compensation, while in the post-
acquisition period – as a tool to stimulate managers to improve the accounting-based
performance of their firm.
7.1.2 Contributions
We believe that this thesis brings several contributions to the current literature on
executive compensation of acquiring firms. As far as we know, this research is among
the first and most exhaustive studies carried out in the Canadian context of markets for
corporate control. In light of both this thesis findings and the particularities of the
Canadian institutional context, the investigation of the corporate governance structures
embedded in this country becomes of great interest for future research.
The empirical evidence related to the increases in the magnitude of different managerial
compensation components in the post-acquisition period has allowed us to confirm the
existence of an important link between executive compensation practices and operations
of change in corporate control. The overall positive association between firm size and the
monetary magnitude of executive compensation demonstrates that Canadian executives,
like their American and British counterparts, have personal incentives for company
growth, even though these strategies do not produce the expected financial gains to
acquiring shareholders. These results clearly call for better governance structures within
acquiring companies, where more accountable compensation committees would be able
to design CEO compensation practices that would be more in line with shareholder’s
wealth maximization.
To our knowledge, existing literature has paid scant attention to such transaction-related
explanatory factors of executive compensation following M&A deals as the control
premium and method of payment. However, the regression results in this thesis
corroborate the existence of a direct effect exerted by these M&A-related characteristics
on some CEO compensation components in the post-acquisition period. These findings
raise interesting questions, and provide useful practical implications. For instance, if the
transactions of change in corporate control clearly have a wealth-increasing effect for
acquiring executives, why not make them undertake those kinds of M&A deals that
would also be profitable for their shareholders? Paying executives simply for having
conducted low-premium and cash-financed acquisitions may be an efficient
compensation practice, since it would align the actors’ interests and would be motivating
for executives. It is worth noting that the negative correlation between the two
transactional characteristics found in this thesis demonstrates all the complexity of the
compensation-setting procedure for board members that need to make the best CEO
compensation-related choices.
The empirical findings of this thesis also provide support for the mediating effect of firm
performance on the relationships between control premium, or method of payment, and
CEO compensation. The magnitude of some executive compensation components is
indeed found to be negatively affected by high-premium or stock-financed acquisitions,
due to the negative impact of these kinds of acquisitions on firm performance ratings.
Our data also suggest, however, that the executive compensation association with these
two transactional characteristics is not mediated exclusively by firm performance but
also by other M&A-related proxies. With these results, and when designing their control
mechanisms, acquiring shareholders and directors may also need to consider such factors
as the target attitude towards the deal (friendly or hostile), or the type of antitakeover
measures implemented by target management to impede the transaction completion.
In the existing literature, managerial discretion has primarily been approached from the
perspective of the ownership structure of the firm, differentiating among manager-
controlled, owner-controlled, and owner-manager-controlled companies. In this thesis,
we have taken an alternate approach, examining the agency problem by focusing on the
degree of structural board independence. Although we have provided some empirical
evidence that an SBI may moderate whether or not appropriate compensation schemes
are fashioned, the moderating SBI effect remains limited. In other words, these results
clearly show that CEOs have the ability to influence their own compensation levels, and
this can explain their enrichment. Corporate governance structures are still weak in many
acquiring companies, and executive compensation packages are still not designed well
enough to maximize economic efficiency and profitability. These findings should
therefore encourage acquiring shareholders to revise the corporate governance practices
in their companies and to reconsider the demands they place on their boards with respect
to executive compensation.
Another important contribution of this thesis resides in its separate analysis of different
monetary compensation components (i.e. salary, short-term bonus, stock options, short-
term compensation, long-term compensation, and total compensation) and specific
attributes of executive compensation contracts (i.e. adoption of employment agreement,
termination clause, golden parachute clause, and new LTIP). The heterogeneity of
regression results across these managerial compensation factors suggests that they have
different determinants. The practical implications of these findings are twofold. First,
directors should increasingly consider the executive compensation packages under their
different components. Second, compensation committees should also approach the
adoptions of CEO compensation protection provisions and new LTIP as potentially
efficient mechanisms for stimulating good managerial behavior within the context of
changes in corporate control.
The main theoretical contribution resides in the suggestion that CEO compensation is
more adequately explained by a combination of the agency, political, and institutional
perspectives, rather than being described entirely by a single theoretical framework. The
four Burrell and Morgan’s (1979) paradigms are influential in determining the
epistemological orientation chosen in this thesis. The Functionalist and Radical
Structuralist paradigms have in common an emphasis on the objective nature of social
constructs; the former is committed to social order and consensus while the latter is
concerned with radical change and modes of domination. The Interpretive and Radical
Humanist paradigms include psychological constructs in a subjectivist reality; the former
views the social world as an emergent social process created by the individuals
concerned, while the latter emphasizes the importance of overthrowing the limitations of
existing social arrangements. Our integrative theoretical framework is therefore
positioned within the functionalist and interpretative paradigms, primarily concerned as it
is with understanding rational human actions through hypotheses testing and with the
explanation of subjective human behaviour using symbolic insights. The results of this
thesis confirm the importance of considering jointly the explanatory power of several
theoretical approaches in a model designed to investigate the impacts of M&As on
executive compensation of acquiring companies.
7.2 STUDY LIMITATIONS
Although this thesis has produced interesting results, methodological and theoretical
limitations do exist, and should be specified. One methodological limitation is related to
the modest sample size of 80 transactions. There are no fixed specifications in the
literature as to what constitutes “a large enough” sample. Traditional wisdom is that
when N drops below 50, the validity of the results becomes increasingly questionable
(George and Mallery, 2005). Although our sample size complies with this generally
acceptable rule, our findings could not be generalized to the whole population of
Canadian acquiring CEOs.
The stock options valuation method used in this thesis is open to criticism. Even though
this method has been used extensively in previous research, it only calculates the
approximate value of executive stock option grants. We were unable to determine the
“pure” acquisition-specific effect of CEO compensation levels and structure, as we did
not use a control group of non-acquirers. In fact, it is very difficult to find firms
corresponding more or less to the treatment companies in terms of size, industry, and
location, with no history of acquisitions undertaken during the seven year-period related
to the matched sample firm. Out of nine studies presented in our literature review, only
three used a control group (Schmidt and Fowler, 1990; Avery et al., 1998; Khorana and
Zenner, 1998).
On the theoretical level, our integrative theoretical framework could be positioned within
the functionalist and interpretative paradigms (Burrell and Morgan, 1979). Criticism
could be levelled, arguing that both the radical humanist and the radical structuralist
paradigms were left out, receiving no consideration in this thesis. Recognising their
scientific validity for the analysis of social processes it should be noted, however, that
the radical or revolutionary changes they promote in organisations through political and
economic crises go beyond the primary focus of this research.
Although we applied three well-known theoretical perspectives to explain our findings,

there are other popular theories, such as human capital and stewardship that we did not
use. Under the human capital theory, CEO compensation is a function of personal career
investments: education level, experience in general management, and job tenure (Becker,
1964). Though it might have been interesting to pursue the empirical implications of this
theory, scholars have argued that these human capital proxies possess only a modest
ability to account for much of the variance in CEO compensation (Finkelstein and
Hambrick, 1988; Leonard, 1990)
Critics of the agency model and adepts of the stewardship theory postulate that some
non-economic, psychological mechanisms are needed to understand situations where
CEOs are not motivated by individual goals, but are stewards instead, whose objectives
are aligned with those of their principals, causing them to behave pro-organizationally
(Davis et al., 1997). The following reasons lie behind our decision not to use the
stewardship theory in this thesis. Due to its relative newness, its theoretical contributions
have not yet been adequately established, particularly in the corporate word where the
reinforcement of governance structures is called for. And because we opted for
quantitative research methods, we were prevented from exploring the psychological
assumptions on which this theory is based.
7.3 FUTURE RESEARCH
Given the exploratory nature of this thesis and the limitations of the existing empirical
evidence in this field of inquiry, the roads now open to future research are multiple. Only
a few of these future investigation avenues are explored hereinafter. Scholars could
pursue work already begun on the effects of mergers and acquisitions on the executive
compensation of acquiring managers, but in other cultural settings with different
institutional contexts. Previous empirical research has overwhelmingly used U.S. data
sources. Data on other countries represents a rich and unexploited source of increased
understanding of the nature of executive compensation, in the M&A context particularly.
Similarly to what we have attempted to do in this thesis, researchers could explore in
greater detail the statistical relationships in other settings, with their different governance
structures and tax regimes, and the extent to which similarities could extend to those
examined so far in the United States.
Future studies could also address the limitations observed in this thesis in order to further
the exploratory analysis of executive compensation sensitivity to the M&A-related
characteristics initiated in this research. More specifically, they could focus on those
CEO compensation components for which the hypothesized relationships did not receive
any significant support. More investigations of Canadian samples are needed to better
understand how the magnitude of acquisition premium or method of payment translates
into lower levels of CEO compensation in the post-acquisition period. Additional
evidence with a greater sample-size is necessary to establish whether the results of this
thesis can be generalized to all Canadian firms involved in M&A activity between 1995
and 2001. To capture the “pure” acquisition-related effect of executive compensation, it
would also be appropriate to include, for comparison purposes, a group of equivalent
firms that did not make any acquisitions during the study period.
Future research might simply address our research questions in a broader empirical
context. That is, the emphasis might more generally be on whether returns from
acquisitions or increases in firm size impact executive compensation, as moderated by
the intensity of structural board independence. It would be useful to make a similar
analysis to that done in this thesis, but with larger samples of acquiring firms qualified as
having structurally more independent from management boards of directors. Our
empirical findings also suggest that several acquiring firms made CEO changes in the
pre- or post-acquisition periods. These data related to executive turnovers surrounding
the takeovers may be due specifically to the particular M&A transaction, but the whole
question is worthy of further exploration and understanding.
It would be equally appropriate to make the same analysis as that used in this thesis, but
using the compensation data for the five highest compensated managers as a group, not
only the CEO. These analyses could shed more light on the impacts of M&As on the
compensation strategies designed for the top management teams of acquiring firms.
Within the larger context of changes in corporate control, the impacts of other types of
corporate restructurings such as divestitures, spin-offs, and split-ups on executive
compensation in the companies involved in these strategies are also interesting and could
very well serve as the subject of further investigation.
There are additional empirical and theoretical issues that warrant further consideration.
The statistical tests performed in this thesis provide evidence that some factors excluded
from our analysis may also strongly influence the observed relationships. For instance,
transactional characteristics other than the acquisition premium and method of payment
(e.g., target management attitude toward the deal and the type of the antitakeover
measure adopted) can be added to the model as explanatory variables of executive
compensation of acquiring firms. Differences in organizational complexity, customary
practices, and even industry-related factors may also affect acquiring managers’
compensation and should therefore be considered. It may also be interesting to determine
whether there are differential patterns in the structure of long-term incentive plans among
the acquiring firms and surrounding the M&A transactions. We believe that these kinds
of further explorations need to be multidisciplinary, with insights from the agency theory
complemented by insights from many other well-known theories.
Finally, future corporate governance research needs to be able to identify in greater detail
the corporate board characteristics that not only promote an effective functioning of the
board but are also recognized by the market. Such identification entails a richer
description of the corporate board processes and mechanisms that link a board’s
membership to its performance. Who are the unrelated directors, how are these members
selected, and what motivates them to join corporate boards? Such issues need to be
addressed, particularly through qualitative research methods (e.g., case studies through
in-depth interviews with higher ranks actors). Many scholars call for more qualitative
research in the field of compensation, as these qualitative techniques allow a rich and
complex understanding of each individual’s interpretation to be developed.
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APPENDICES
Appendix 1: Merger waves
Authors commonly identify five periods of intense merger activity (see figure A1) called
merger waves, that have taken place in the United States (Gaughan, 1999; L’Her and
Magnan, 2000; Hitt et al., 2001), each of them being demarcated by a distinctive
predominating logic. The first merger wave (1897-1904) recorded many horizontal
transactions and consolidations of several industries, while mainly horizontal
combinations but also many vertical deals characterized the second wave (1916-1929).
Figure A1. US merger waves
[1897 - 1904] [1916 - 1929] [1965 - 1969] [1984 - 1989] [1992 - 2000]
First wave Second wave Third wave Fourth wave Fifth wave
horizontal deals, horizontal & diversification, specialization, strategic,
consolidation of vertical conglomerate leveraged expansion to
industries transactions era transactions new markets
The third merger wave (1965-1969) was the conglomerate era which refers to the
acquisition of companies in different industries. In contrast, this diversification trend was
reversed during the fourth merger wave (1984-1989), bringing American corporations to
greater specialization (Shleifer and Vishny, 1991). According to Gaughan (1999), this
wave was unique in that it featured the appearance of the corporate raider, who often
used the junk bond market to finance highly leveraged deals. Mergers from the fifth
wave, which started in 1992 and, we presume, came to their end in 2000 due to the
overall decrease in merger and acquisition activities registered afterwards (Mergerstat
Review, 2003), were in general all strategic ones, involving companies seeking to expand
into new markets or to take advantage of perceived synergies.
Appendix 2: Canadian top ten deals 2003*
Table A1. Canadian top ten deals (1 January 1997 - 16 June 2003)
Table A2. Canadian top ten transactions announced in 2003

Value (* Estimate) Date
Rank ($Cdn millions) Target Acquirer Vendor (**) Announced
1 $15,000 John Hancock Financial Manulife Financial September 28,
Services Inc. Corp. 2003
2 $6,252 Pechiney SA Alcan Inc. July 7, 2003
3 $4,855* Moore Wallace Inc. R. R. Donnelley & November 9,
Sons Co. 2003
4 $1,658 Wallace Computer Services Moore Corp. Ltd. January 16,
Inc. 2003
5 $1,600 Pasminco Ltd. OntZinc Corporation November 28,
2003
6 $1,478 DVD and CD Division of AOL Cinram International AOL Time Warner July 18, 2003
Time Warner Inc. Inc. Inc.
7 $1,403 Selfridges PLC Wittington May 12, 2003
Investments Ltd.
8 $1,400 DuPont Canada Inc. E.I. du Pont de March 19, 2003
Nemours & Co.
9 $1,360 Aquila Networks Canada Fortis Inc. Aquila Inc. September 15,
(Alberta) Ltd. 2003
Aquila Networks Canada
(British Columbia) Ltd.
10 $1,120 Circle K Corp. Alimentation Couche- ConocoPhillips October 6,
Tard Inc. Co. 2003
Source: Crosbie & Company Inc. (4/2004)
NOTES:
** Vendor is a company selling part of its business, division, or wholly or partially owned subsidiary to another company.
Appendix 3: Executive compensation updates
Each year Business Week magazine publishes the list of the 50 highest paid executives.
For the year 2002 Business Week’s annual executive compensation survey reported that
the top 15 CEO earners netted an average of $35.8 million, this amount is down from the
$135 million average in 2001. The compensation consultants say 2002 CEOs’
compensation decline is due to the elimination of bonuses from executive compensation
packages and to managerial minimal gains from option exercises because of stock
options’ value decrease. Although the average CEO pay fell last year, because the
compensation packages of many of the most richly rewarded managers declined, in 2002
a large percentage of executives were given a 6% raise to $8.52 million (Lavelle, 2003).
Furthermore, some analysts report that the average CEO pay since 1990 has grown much
faster than the average worker’s pay (see figure A2).
Figure A2. CEO Pay, Stock Prices, Corporate Profits,

Worker Pay, and Inflation, 1990-2002
It is clear that executive pay varies considerably by country. In 1996, for instance,
Canadian CEOs on average made 50% of what American CEOs did, 96% of the average
Japanese CEOs’ earnings, and 89% of what British CEOs were paid (Dessler et al.,
1999). Nevertheless, a simple analysis of data from the last ten years demonstrates that
Canadian CEOs improved significantly their global annual compensation as compared to
other countries and especially to the United States. A comparison study of 22 countries
conducted by the consulting company Towers Perrin in 1995 on worldwide global
compensation issues demonstrated that American executives occupied the best ranking
position in terms of total annual compensation received, while Canadians occupied the
sixteenth position (Durivage, 1995). In 1997, another survey conducted by the same
company revealed that CEO’s compensation in a Canadian industrial company came
eighth out of 23 countries studied, while a Canadian production worker came seventh
(Towers Perrin, 1998). Three years later, the similar study reported the compensation of
Canadian managers and production workers improved their ranking positions among the
25 countries surveyed, both occupying the fourth place in their respective employee
category (Towers Perrin, 2001).
Appendix 4: Relationships between target’s executive compensation and

M&A transactions
Considering that the link between target’s executive compensation and M&A operations
is twofold, two lines of research could be identified. The first one investigates the impact
of the threat of takeover on managerial compensation of target companies. While the
second one is concerned with analyzing the incidences of different components of
target’s CEOs’ compensation on takeover characteristics, such as transaction type
(merger or acquisition), attitude to a tender offer (friendly or hostile), method of payment
(cash or stock), tender offer success or failure, and magnitude of the control premium
paid by the acquiring company.
A.4.1 Impacts of the threat of takeover on target's executive rewards (M&A⇒ $)
To our knowledge, there are only two empirical studies which examine explicitly the
changes in target’s managerial compensation before a takeover (see table A3), and this in
two different national contexts: The United States (Agrawal and Knoeber, 1998) and
Canada (Houle, 2003).
Table A3. Synthesis of studies examining the changes in target

management compensation before the takeover
Authors Sample Target management Impact of the

nationality
compensation structure takeover threat
Agrawal & United States Salary Positive
Knoeber (1998) Bonus Positive
Bonus Positive
Houle (2003) Canada Golden parachute Positive
Stock options Negative
Stock ownership Negative
Arguing that the takeover attempt has two opposing effects (competition and risk effects)
on executive compensation of target firms, Agrawal and Knoeber (1998) investigate their
net effect for a sample of 450 large U.S. companies. The authors hypothesize that, on the
one hand, since a greater threat of takeover means a more competitive managerial labor
market, the competition effect will imply a lower executive compensation. On the other
hand, by making executives’ implicitly deferred compensation and firm-specific human
capital less secure, the risk effect of takeover will likely increase CEOs’ rewards. Indeed,
Agrawal and Knoeber’s (1998) findings confirm that the competition effect on target’s
CEO salary and bonuses is negative and the risk effect is positive. They further show
that, since the risk effect dominates, the net effect is positive, implying that managers of
American target firms experience an increase in their salary and bonus in the periods
preceding the takeover.
For a sample of 58 Canadian firms acquired between 1990 and 2000, the results from
Houle’s (2003) study provide evidence that, during the periods preceding the operations
of change in control, the value of bonuses and the number of golden parachutes granted
to target executives increased significantly. Her findings also show a significant decrease
in the proportion of both stock options and stock owned by target managers before M&A
transaction.
A.4.2 Impacts of target's executive rewards on M&A characteristics ($⇒ M&A)
(i) Effects of target's CEO compensation on target management attitude
Several empirical studies have investigated the link between target managers’
compensation and their attitude towards takeover bid (see table A4). Overall, these
studies reveal that different perspectives have been used to approach the CEOs’
compensation variable of acquired firms and then to further analyze their relationship
with the likelihood of target management acceptance or resistance to a takeover bid.
Some researchers (Walkling and Long, 1984; Agrawal and Walkling, 1994) examine
whether target executives are overpaid or underpaid before the bid, relative to a model of
normal compensation. Here, the studied components of executive abnormal
compensation are the salary, bonus, and stock options. Others (Morck et al., 1988b;
Shivdasani, 1993; Buchholtz and Ribbens, 1994) look at the structure of executive
compensation of target companies during the period preceding the change in control.
This approach is principally based on the proportion of stock owned by CEOs of
acquired companies and the presence or absence of golden parachutes. While other
researchers (D’Aveni and Kesner, 1993; Cotter and Zenner, 1994, etc.) concentrate on
the analysis of changes in the target’s managerial wealth (in other words, the gains or
losses in compensation for managers of target firms) resulting from the tender offer and
how these changes affect their attitude towards takeover.
Table A4. Synthesis of studies examining the impact of target

management compensation on its attitude towards takeover
Target executive
Authors Study approach Attitude Relation
compensation structure
changes in managerial Stock options and stock Hostile Negative
Walkling & Long wealth ownership
(1984) abnormal compensation Salary, bonus and stock Hostile Positive
options
Morck et al. (1988b) compensation structure Stock ownership Hostile Negative
D’Aveni & Kesner changes in managerial Stock options and stock Hostile Negative
(1993) wealth ownership
Shivdasani (1993) compensation structure Stock ownership Hostile Negative
Song & Walkling compensation structure Stock ownership Hostile Negative
(1993)
Agrawal & Walkling abnormal compensation Salary and bonus Hostile Positive
(1994)
Buchholtz & compensation structure Stock ownership Hostile Negative
Ribbens (1994) Golden parachute Hostile Positive
changes in managerial Total compensation Hostile Negative
Cotter & Zenner wealth
(1994) compensation structure Stock ownership Hostile Negative
Golden parachute Hostile Positive
compensation structure Stock ownership Hostile Negative
Houle (2003) Golden parachute Hostile Negative
According to a study conducted by Walkling and Long (1984), the existence or absence
of bid resistance is directly related to the managerial wealth changes of target companies.
Tests on a sample of 105 acquired companies demonstrate that managers who did not
contest the tender offer experience, before the change in control, a significantly greater
increase in their compensation as compared to CEOs who contested the offer and see
their compensation increase to be significantly smaller. Moreover, their results indicate
that only wealth gains generated by shares and stock options held by target managers
influence negatively and significantly their resistance to takeovers. These findings are
supported by D’Aveni and Kesner (1993) who, comparing target firms that resisted to
those that acquiesced, find that resistance to takeovers is negatively related to the effect
they would have on the personal wealth of the top management teams involved.
Finally, based on the model of normal compensation, Walkling and Long (1984) show
that executives who adopted a friendly attitude towards takeover have negative levels of
abnormal compensation (are underpaid), while those who were hostile have positive
levels of abnormal compensation (are overpaid). Overall, their findings provide support
for the managerial welfare hypothesis. Agrawal and Walkling (1994) also examine the
unexplained compensation of CEOs of target firms categorized by managerial response
to a takeover bid. Their results reveal that managers of both friendly and hostile targets
experience positive levels of abnormal compensation (of 0.112 and 0.087 respectively),
but there is no significant difference between the abnormal compensation of CEOs of
contested and uncontested targets.
In order to document the relationship between managerial ownership and managers’

decision to resist a tender offer, Morck et al. (1988b) compare the characteristics of
hostile and friendly takeovers and find that targets with low equity ownership are more
likely to resist a takeover attempt. The authors conclude that, on average, contested
takeovers are more likely to be disciplinary and uncontested ones are more likely to be
synergetic. These results are further confirmed by Song and Walkling (1993), who, using
a sample of 153 acquired firms, find that hostile targets have significantly lower
managerial ownership (6.4%) than friendly targets (13.3%). Shivdasani (1993) in a
similar investigation reports that the high percentage of shares held by CEOs is
negatively and significantly related to the likelihood that target management will resist
the takeover.
It is worth mentioning that none of the previously cited studies include golden parachutes
in their research designs, while more recent empirical papers do. For instance, Buchholtz
and Ribbens (1994) examine separately the role that the two following managerial
incentives play in takeover resistance: stock ownership and golden parachutes. Their
results demonstrate that the greater the level of executive stock ownership, the lower the
likelihood that target firms will resist takeover attempts, while neither the existence nor
the magnitude of a CEO’s golden parachute payment affects takeover resistance.
According to Cotter and Zenner (1994), changes in managerial wealth resulting from a
tender offer are negatively related to the likelihood of managerial resistance to this offer.
By disaggregating the measures of managerial wealth, the authors show that the main
component responsible for this negative relationship is the managerial stock ownership,
while neither the presence of a golden parachute, nor the present value of the golden
parachute payment is significantly associated with target management team resistance.
More recently, in an empirical study of Canadian acquired firms, Houle (2003) shows
that target management resistance is negatively and significantly influenced by the
proportion of stock owned by target management, thus corroborating Cotter and Zenner
(1994) and Buchholtz and Ribbens’ (1994) findings. As far as the golden parachute
component is concerned, Houle’s (2003) results contrast with those of the two previously
cited studies, indicating that the higher the value of target executives’ golden parachute
payment, the higher the likelihood that managers will adopt a friendly attitude towards
the transaction of change in control of their companies.
(ii) Effects of target executive compensation on acquisition premium
Other studies focus on analyzing the impact of target executive compensation on the
magnitude of acquisition premium the acquiring company pays to the shareholders of
acquired firms (see table A5). For a sample of 31 targets, Machlin et al. (1993) show that
the value of golden parachute payments made to target executives positively and
significantly influences the amount of control premium paid to target shareholders.
Hayward and Hambrick (1997) find that stockholdings of target companies’ managers
and directors are positively associated with control premia. This finding suggests that
when target managers have large holdings in their companies, they have a financial
incentive to hold out for a very high price, causing acquisition premia to be large.
Table A5. Synthesis of studies analyzing the impact of target CEOs’ compensation
on acquisition premia paid to their shareholders
Authors Sample Target management Impact on the

nationality compensation structure control premium
Machlin et al. (1993) United States Golden parachute value Positive
Hayward and United States Stock ownership Positive
Hambrick (1997)
Stock options Negative
Houle (2003) Canada Stock ownership Negative
Golden parachute presence Positive
In her study, Houle (2003) also examines this relationship including other components of
executive compensation, such as stock options and stock ownership. She finds that the
higher the proportion of stock options and shares owned by executives of target firms,
the lower the probability that managers of acquiring firms will acquiesce to pay higher
control premia. In addition, Houle (2003) shows that the presence of golden parachutes
influences positively and significantly the magnitude of acquisition premia paid to target
shareholders.
Appendix 5: Antitakeover measures
Some target firms may agree to an acquisition, while others may reject a tender offer
choosing to remain independent. The evidence suggests that friendly deals are generally
completed quickly, but hostile takeovers become dramatic, with management teams
pushing for some defensive measures to protect themselves (Belcourt and McBey, 2000).
Even though antitakeover amendments’ adoption requires shareholders’ approval
(Subramaniam, 2001) the impact of these measures on shareholder wealth remains a
highly controversial topic, with some studies purporting clear adverse shareholder wealth
effects and others failing to detect these adverse impacts; the issue is left somewhat
unresolved. The takeover defenses are so numerous and varied that for the clarifying
purposes, it is convenient to briefly define these measures (see table A6). Gaughan
(1999) divides the array of antitakeover defenses into two categories: preventative and
active measures. Preventative measures are those measures that a potential target puts in
place in advance of a possible hostile bid, while active defenses are employed after a
hostile bid has been attempted.
Table A6. Antitakeover measures
Measures’ nature Types of antitakeover measures

Preventative measures Poison pills; corporate charter amendments; golden parachutes.
Active measures Greenmail; standstill agreements; white knight; white square;
capital structure changes; litigation; Pac-Man defense.
Some of the preventative measures such as poison pills are directed at reducing the
target’s value-enhancing characteristics in order to diminish the financial incentive a
bidder might have to acquire the target. The two general types of poison pills are flip-
over plans, in which target shareholders are issued rights to purchase common stock in
the bidder’s firm at a significant discount, and flip-in plans, which allow target
shareholders a bargain purchase of the target’s shares at some trigger point (Weston et
al., 1998). The target firm may enact various corporate charter amendments that will
make it more difficult for a hostile acquirer to bring about a change in managerial control
of the target (e.g. supermajority voting provisions, staggered boards, fair price
provisions, and dual capitalization). Golden parachutes, the attractive severance

agreements offered to top management, may also be used as an antitakeover defense,
even though Gaughan (1999) argues that they are less powerful when used alone, but
more effective when combined with other two previous types of defensive techniques.
If the preventative antitakeover defenses are not effective in preventing an unwanted bid,
the target may still implement the active measures (Gaughan, 1999). These defenses
include: greenmail - shared repurchases of the bidder’s stock at a premium; standstill
agreements - where the bidder agrees not to buy additional shares in exchange for a fee;
white knight - a friendly bidder sought out by the target of a hostile bidder; white squire
- a friendly firm or investor where the target places its shares or assets to avoid an
unwanted takeover; capital structure changes - as recapitalizations, where the firm
assumes more debt while paying its shareholders a larger dividend; litigation - where the
target sues the bidder, and the latter responds with a countersuit; and Pac-Man defense -
which occurs when the target makes a counteroffer for the bidder (Weston et al., 1998;
Gaughan, 1999).
Impacts of mergers and acquisitions on executive compensation of acquiring firms
Appendix 6: Motives for divestitures
Table A7. Motives for divestitures
Motives’ groups Motives’ types and their description
Change in focus • abandoning the core business; • changing strategies or restructuring
Financial gains • adding value by selling into a better fit; • harvesting past successes
Financial needs • large additional investment required; • financing prior acquisitions;

• taking a position in another firm
Correcting prior • discarding unwanted businesses from prior acquisitions; • dismantling

errors conglomerates; • reversing mistakes; • learning
Defense measure • warding off takeovers
Other motives • meeting government requirements; • selling businesses to managers

Appendix 7: Some determinants of acquisition premium
A.7.1 Impacts of executive compensation on acquisition premium
(i) Effects of bidding executive compensation on control premium
Although they do not specifically investigate this question, Slusky and Caves (1991) find
that agency situation of the acquiring firm also affects the merger premium. Their results
suggest that managers who hold larger proportions of their firms’ shares offer smaller
premia (significant at 5% in a one-tail test).
Table A8. Synthesis of the study analyzing the effects of bidders’ executive
compensation structure on the magnitude of acquisition premium
Authors CEO pay structure Pre-acquisition Means of Acquisition

before M&A performance payment premium
Slusky and High ownership of N/A N/A Lower
Caves (1991) firm’s shares
Datta et al. Low equity-based Good Cash Higher
(2001) compensation Poor Non-cash Higher
High equity-based Good Cash Lower
compensation Poor Non-cash Lower
Datta et al. (2001) investigate the relationship between the acquisition premium and the
extent to which acquiring managers’ interests, measured by their compensation structure,
are aligned with those of the shareholders. For a sample of 1,719 completed acquisitions
during 1993-1998, they hypothesize that self-interested managers with low equity-based
compensation (EBC) are more likely to overpay for targets. The acquisition premium is
calculated as the difference between the highest price paid per share and the target share
price four weeks prior to the announcement date.
The authors find that the premium paid by managers in high EBC firms (35.88%) is
significantly lower than that paid by their counterparts in low EBC companies (44.66%).
This 8.78% difference in premium paid translates into large savings ($54.6 million) for
high EBC firms considering an average target market capitalization of $621 million.
These findings are also robust to different cross sections of the sample. Datta et al.
(2001) partition the sample by the pre-acquisition stock price performance of bidding
firms and by the method of payment, and reexamine the acquisition premia offered by
high and low EBC bidders. For a sub-sample of good and poor performers (cash-
financed and non-cash-financed takeovers) the average premium paid by low EBC
bidders is significantly greater than the average premium offered by high EBC firms (see
table A8). Overall, the results are consistent with the results obtained by Shleifer and
Vishny (1988), who argue that firms awarding low EBC provide fewer incentives for
managers to make value-maximizing decisions, and these managers pay higher premia
for their low-growth targets.
(ii) Effects of target executive compensation on control premium
For a synthesis of studies analyzing the effects of target executive compensation on

control premium see appendix 4, section A.4.2 (ii).
A.7.2 Effects of other variables on acquisition premium
• Synergy perspective
The magnitude of acquisition premia is often attributed to a combination of bidder’s

estimate of acquisition gains, which may come from a variety of sources, including
anticipated synergistic benefits derived from combining the bidder and the target, or the
target being underpriced or poorly managed. According to the synergy perspective,
complementarities between the bidder and target enable the combined value of the firms
to exceed their value as two independent entities. Therefore, premia should reflect the
value to the acquiror of the expected synergies (see table A9).
However, the empirical evidence for synergies is weak, since studies by Walkling and
Edminster (1985), Haunschild (1994), and Hayward and Hambrick (1997) have not
found any association between business similarity of acquirors and targets and
acquisition premia paid. Slusky and Caves (1991) report no evidence of real synergies,
but they also study the premium’s association with financial synergies that arise when
acquisitions yield a more efficient capital structure. Thus, although they observe that
financial synergy (as reflected by acquiror’s surplus debt capacity relative to the target) is
significantly related to premia, overall variance (13.5%) explained by this factor is small.
As for Hayward and Hambrick (1997), the association of premium with financial
synergies (as measured by debt/equity ratio of the target less the same ratio of the
acquiror in the year prior to the acquisition) is also positive but insignificant.
Table A9. Synthesis of studies analyzing the impact of synergies

on the magnitude of acquisition premium paid to target shareholders
Variables Walkling & Slusky & Haunschild Hayward &

Edminster (1985) Caves (1991) (1994) Hambrick (1997)
Real synergies Positive Negative Positive Positive
Financial synergies N/A Positive N/A Positive
• Target underperformance hypothesis
Tests on poor target performance in affecting acquisition premia have been inconclusive
(see table A10). Varaiya (1987) reports some mixed results for the role of anticipated
benefits from target’s underpricing and undermanagement in explaining acquisition
premia. Although he finds evidence that target firm’s poor performance within its
industry causes higher premia, he concludes that there is only “a weak support for the
predicted effects of ex-ante gains”, and “the undermanagement variables are uniformly
insignificant”.
Table A10. Synthesis of studies analyzing the impact of

target underperformance on acquisition premium
Varaiya Machlin et Haunschild Hayward & Schwert

Variable
(1987) al. (1993) (1994) Hambrick (1997) (2000)
Target
underperformance
Positive Positive Negative Positive Positive

Slusky and Caves (1991) do not directly examine the underperformance hypothesis, but
they find that acquisition premia are not as large when target’s stockholdings are
relatively concentrated, presumably a condition in which managers are already closely
monitored and less able to sustain poor management. Other studies (Haunschild, 1994;
Hayward and Hambrick, 1997; Schwert, 2000) find no evidence to support target
underperformance as a determinant of acquisition premia. The only research that reports
a positive and significant relationship is that conducted by Machlin et al. (1993).
• Hubris hypothesis
Richard Roll (1986) proposes that a human element, called hubris (the pride of the
acquiring managers), may play an important role in explaining takeovers. The hubris
hypothesis suggests that CEOs seek to acquire firms for their own personal motives. Roll
(1986) uses this hypothesis to explain why managers might pay a premium for a firm that
the market has already valued correctly. He argues that management pride allows them to
believe that their valuation is superior to that of an objectively determined market
valuation. Implicit in this theory is an underlying conviction that the market is efficient
and can provide the best indicator of the value of a firm.
Table A11. Synthesis of the study analyzing the impact of the three
measures of hubris on the magnitude of acquisition premium
Hubris’ measures Recent acquiror Media praise CEO relative

performance for CEO pay
Hayward & Positive Positive Positive
Hambrick (1997)
Statistically significant
A more recent research by Hayward and Hambrick (1997) seems to support the hubris
hypothesis as being the most powerful explanation of acquisition premia. Using a sample
of 106 large acquisitions, the authors find CEO hubris to be positively associated with
the size of acquisition premia paid to target shareholders. Their measure of hubris
includes the acquiring company’s recent performance and CEO self-importance as
reflected by recent media-praise for the CEO and compensation relative to the second
highest paid executive (see table A11). The study also considers such independent
variables as CEO inexperience, measured by years in that position, along with board
vigilance, measured by the number of inside directors versus outside directors.
• Winner’s curse hypothesis/competition
The winner’s curse of takeovers’ hypothesis states that bidders who overestimate the
value of a target will most likely win a contest (Weston et al., 1998, Gaughan, 1999).
This is due to the fact that they will be more inclined to overpay and outbid rivals who
more accurately value the target. In a study that examines the relationship between the
bid premium and combined market values of the bidder and target, Varaiya (1987) finds
that the premium paid by bidders is too high relative to the value of the target to the
acquirer. Thus, in the case of 800 acquisitions made from 1974 to 1983, the author shows
that on average the winning bid in takeover contests significantly overstates the capital
market’s estimate of any takeover gains by as much as 67%. He measures overpayment
as the difference between the winning bid premium and the highest bid possible before
the market responds negatively to the bid. This investigation provides support for the
existence of a winner’s curse, which, in turn, also supports the hubris hypothesis.
Table A12. Synthesis of studies analyzing the impact

of competition on the magnitude of acquisition premium
Jahera et Varaiya Slusky & Haunschild Comment & Hayward & Schwert
Variable
al. (1985) (1987) Caves (1991) (1994) Schwert (1995) Hambrick (1997) (2000)
Competition Positive Positive Positive Positive Positive Positive Positive
Statistically significant
Bidder’s bargaining position in determining the acquisition premium may be affected by

the presence of other bidders and all previously done studies uniformly confirm this
statement (see table A12). Indeed, the early investigations by Jahera et al. (1985) and
Varaiya (1987) find significant support for the role of competitive forces in the auction
process in setting acquisition premia. Similarly, all latter research shows that the
presence of competing bidders is positively and significantly associated with acquisition
premia (Slusky and Caves, 1991; Haunschild, 1994; Comment and Schwert, 1995;
Hayward and Hambrick, 1997; Schwert, 2000). These studies report that control premia
are from 11.4% to 25% higher in the presence of multiple bidders. The competition is
measured by a dummy variable which is equal to one, if some other entity submitted a
rival bid for the target, and zero otherwise (Varaiya, 1987; Slusky and Caves, 1991).
• Antitakeover defenses
The strength of the target’s bargaining position is also linked to antitakeover defenses,
which can materially affect the cost of an acquisition and so may influence both control
premia and acquisition returns (Malatesta and Walkling, 1988). Among all existing
defense mechanisms (see appendix 5) only the existence of poison pills (Comment and
Schwert, 1995; Hayward and Hambrick, 1997; Schwert, 2000), staggered boards, and
supermajority voting provisions (Varaiya, 1987) have been studied so far.
Table A13. Synthesis of studies analyzing the impact

of antitakeover defenses on the magnitude of acquisition premium
Varaiya Comment & Hayward & Schwert

Variables
(1997) Schwert (1995) Hambrick (1997) (2000)
Poison pills N/A Positive Insignificant Insignificant
Anti-
Supermajority
takeover Positive N/A N/A N/A
voting provisions
defenses
Staggered boards Positive N/A N/A N/A
The results of Varaiya (1987), who finds significant support for the positive influence of
these measures in determining control premia in 77 deals between 1975 and 1980, are
also confirmed by Comment & Schwert (1995). Neither Hayward and Hambrick (1997)
nor Schwert (2000) find a significant association between antitakeover mechanisms and
control premia (see table A13). To measure the presence of antitakeover amendments a
dummy variable is used which is equal to one, if the company has a defense mechanism,
and zero otherwise (Varaiya, 1987; Hayward and Hambrick, 1997).
Appendix 8: List of M&A transactions included in the sample
Table A14. Full sample (80 acquiring companies)

Date Date
No. Deal number Bidder Name Target Name announced completed
1. 477229040 TransCanada Pipelines Ltd Alberta Natural Gas Co Ltd 1995-06-28 1996-03-29
2. 483193040 Crestar Energy Inc Ranchmen's Resources Ltd 1995-07-26 1995-10-06
3. 487579040 Royal Oak Mines Inc El Condor Resources 1995-08-18 1996-01-12
4. 487581040 Royal Oak Mines Inc Geddes Resources Ltd 1995-08-18 1995-10-17
5. 491478040 Donohue Inc (a) QUNO Corp(Tribune Co) 1995-12-22 1996-03-01
6. 492012040 Ranger Oil Ltd (b) Czar Resources 1995-09-13 1995-11-30
7. 522806040 Alberta Energy Co Ltd Conwest Exploration Co Ltd 1995-12-11 1996-01-31
8. 523642040 Rigel Energy Corp (c) Inverness Petroleum Ltd 1995-12-13 1996-01-31
9. 545183040 Canadian Natural Resources Ltd Sceptre Resources Ltd 1996-06-10 1996-08-20
10. 550290040 Crestar Energy Inc Petrostar Petroleums Inc 1996-04-23 1996-06-28
11. 551011040 Precision Drilling Corp EnServ Corp 1996-04-26 1996-06-10
12. 556453040 Hollinger Inc(Ravelston) Southam Inc 1996-05-24 1996-11-29
13. 598426040 Elk Point Resources Inc Fossil Oil & Gas Inc 1996-10-22 1996-12-17
14. 642193040 Abitibi-Price Inc Stone-Consolidated Corp 1997-02-13 1997-06-02
15. 653861040 Elk Point Resources Inc Truax Resources Corp 1997-03-31 1997-06-09
16. 659761040 Cambridge Shopping Centres Ltd Markborough Properties Inc 1997-04-28 1997-06-11
17. 672385040 Bank of Nova Scotia National Trustco Inc 1997-06-24 1997-08-15
18. 675723040 Crestar Energy Inc Grad & Walker Energy Corp 1997-07-02 1997-07-29
19. 683132040 Gulf Canada Resources Ltd Stampeder Exploration Ltd 1997-07-28 1997-09-10
20. 689036040 Great-West Lifeco (Power Finl) London Insurance Group Inc 1997-08-18 1997-11-21
21. 692118040 Ranger Oil Ltd (b) Elan Energy Inc 1997-09-02 1997-09-30
22. 693552040 Baytex Energy Ltd Dorset Exploration Ltd 1997-09-08 1997-10-08
23. 703095040 Reserve Royalty Corp (d) Jordan Petroleum Ltd 1997-10-14 1997-12-19
24. 703320040 Hummingbird Communications Ltd Andyne Computing Limited 1997-10-15 1998-01-06
25. 712257040 Boliden Ltd Westmin Resources Ltd(Brascan) 1997-11-23 1997-12-31
26. 722776040 TLC - The Laser Center BeaconEye Inc 1998-01-09 1998-04-27
27. 725682040 Sleeman Breweries Ltd Upper Canada Brewing Co 1998-01-13 1998-04-06
28. 727985040 TransCanada Pipelines Ltd NOVA Corp of Alberta Ltd 1998-01-26 1998-07-02
29. 745589040 Magna International Inc TRIAM Automotive Inc 1998-03-30 1998-06-30
30. 751774040 Architel Systems Corp (e) Accugraph Corp 1998-04-13 1998-06-29
31. 752518040 Call-Net Enterprises Inc Fonorola Inc 1998-04-15 1998-06-29
32. 754784040 Shaw Communications Inc WIC Western Intl Commun Ltd 1998-04-17 1998-06-05
33. 755526040 SLM Software Inc Milkyway Networks Corp 1998-04-28 1998-10-01
34. 775730040 Alliance Communications Corp Atlantis Communications Inc 1998-07-20 1998-09-22
35. 776354040 Loblaw Cos(George Weston Ltd) Provigo Inc 1998-10-30 1998-11-30
36. 778170040 Talisman Energy Inc Arakis Energy Corp 1998-08-17 1998-10-08
37. 792513040 Alberta Energy Co Ltd Amber Energy Inc 1998-09-16 1998-11-04
38. 803015040 BC Telecom(Anglo-CA Telephone) Telus Corp 1998-10-16 1999-01-31
39. 810134040 Canadian Satellite Commun Inc (f) Star Choice Communications Inc 1998-11-11 1999-09-01
40. 817996040 Quebecor Inc Sun Media Corp 1998-12-09 1999-01-05
41. 837207040 Tembec Inc Crestbrook Forest Industries 1999-01-11 1999-04-02
42. 845891040 Glamis Gold Ltd Rayrock Yellowknife Resources 1999-01-25 1999-03-01
43. 853634040 Barrick Gold Corp Sutton Resources Ltd 1999-02-18 1999-04-10
44. 856657040 Alimentation Couche-Tard Inc Silcorp Ltd 1999-03-01 1999-06-04
45. 856920040 Canadian Medical Laboratories Med-Chem Health Care Ltd 1999-04-15 1999-08-06
46. 858263040 Hummingbird Communications Ltd PC DOCS Group International 1999-03-05 1999-09-29
47. 860932040 Alberta Energy Co Ltd Pacalta Resources Ltd 1999-03-15 1999-06-01
48. 861473040 Riocan Real Estate Invest Trus RealFund Trust 1999-03-15 1999-05-31
49. 862158040 Royal Bank of Canada Connor Clark Ltd 1999-03-25 1999-05-28
50. 877536040 Precision Drilling Corp Computalog Ltd 1999-05-03 1999-08-12
51. 878652040 Cara Ops(Cara Hldgs/373027) Kelsey's International Inc 1999-02-15 1999-07-05
52. 887872040 Talisman Energy Inc Rigel Energy Corp (c) 1999-08-23 1999-09-30
53. 891894040 Astral Communications Inc Radiomutuel Inc 1999-06-09 1999-07-07
54. 892932040 Talisman Energy Inc Highridge Exploration Ltd 1999-06-11 1999-07-14
55. 894457040 National Bank of Canada First Marathon Inc 1999-06-17 1999-08-13
56. 897782040 Franco-Nevada Mining Corp Ltd Euro-Nevada Mining Corp Ltd 1999-06-24 1999-09-09
57. 934324040 Air Canada Inc Canadian Airlines Corp 1999-10-19 2000-07-07
58. 946355040 Shaw Communications Inc Canadian Satellite Commun Inc (f) 1999-10-15 2000-04-03
59. 946757040 AT&T Canada Inc TigerTel Inc 1999-11-29 2000-01-07
60. 976406040 Abitibi-Consolidated Inc Donohue Inc (a) 2000-02-11 2000-06-22
61. 977308040 Bell Canada Enterprises Inc Teleglobe Inc 2000-02-15 2000-11-01
62. 980435040 MDS Inc Phoenix Intl Life Sciences Inc 2000-02-24 2000-05-22
63. 980869040 BCE Inc CTV Inc 2000-02-26 2000-06-02
64. 982333040 Mountain Province Mining Glenmore Highlands Inc 2000-03-01 2000-06-30
65. 993455040 BCT.Telus Communications Inc QuebecTel Group Inc 2000-03-31 2000-06-15
66. 999097040 Nortel Networks Corp Architel Systems Corp (e) 2000-04-19 2000-07-03
67. 1003733040 Heroux Inc Devtek Corp 2000-05-05 2000-06-23
68. 1004084040 Precision Drilling Corp Plains Energy Services Ltd 2000-05-08 2000-07-10
69. 1016244040 Canadian Natural Resources Ltd Ranger Oil Ltd (b) 2000-06-15 2000-07-31
70. 1017299040 Exco Technologies Inc TecSyn International 2000-06-16 2000-09-05
71. 1017883040 PrimeWest Energy Trust Reserve Royalty Corp (d) 2000-06-20 2000-07-31
72. 1018308040 Breakwater Resources Ltd Jascan Resources Inc 2000-06-21 2000-11-09
73. 1021764040 Barrick Gold Corp Pangea Goldfields Inc 2000-06-30 2000-08-04
74. 1026472040 Summit Resources Ltd Torex Resources Inc 2000-07-18 2000-09-08
75. 1026972040 Noranda Inc Falconbridge Ltd 2000-07-19 2000-07-19
76. 1038704040 Telus Corp Clearnet Communications Inc 2000-08-21 2001-01-12
77. 1039689040 H&R Real Estate Investment Royop Properties Corporation 2000-06-01 2000-08-31
78. 1042100040 Corus Entertainment Inc Nelvana Ltd 2000-09-18 2000-11-17
79. 1056743040 Ultra Petroleum Corp Pendaries Petroleum Ltd 2000-10-16 2001-01-17
80. 1065699040 Exco Technologies Inc Techmire Ltd 2000-11-15 2001-01-11
(a) (b) (c) (d) (e) (f) Sample bidders that became sample targets
Table A15. Restricted sample (acquiring companies that had same CEO
during the whole study period)
Date Date
1. 483193040 Crestar Energy Inc Ranchmen's Resources Ltd 1995-07-26 1995-10-06
2. 487579040 Royal Oak Mines Inc El Condor Resources 1995-08-18 1996-01-12
3. 487581040 Royal Oak Mines Inc Geddes Resources Ltd 1995-08-18 1995-10-17
4. 522806040 Alberta Energy Co Ltd Conwest Exploration Co Ltd 1995-12-11 1996-01-31
5. 523642040 Rigel Energy Corp Inverness Petroleum Ltd 1995-12-13 1996-01-31
6. 545183040 Canadian Natural Resources Ltd Sceptre Resources Ltd 1996-06-10 1996-08-20
7. 550290040 Crestar Energy Inc Petrostar Petroleums Inc 1996-04-23 1996-06-28
8. 551011040 Precision Drilling Corp EnServ Corp 1996-04-26 1996-06-10
9. 556453040 Hollinger Inc(Ravelston) Southam Inc 1996-05-24 1996-11-29
10. 598426040 Elk Point Resources Inc Fossil Oil & Gas Inc 1996-10-22 1996-12-17
11. 653861040 Elk Point Resources Inc Truax Resources Corp 1997-03-31 1997-06-09
12. 659761040 Cambridge Shopping Centres Ltd Markborough Properties Inc 1997-04-28 1997-06-11
13. 672385040 Bank of Nova Scotia National Trustco Inc 1997-06-24 1997-08-15
14. 675723040 Crestar Energy Inc Grad & Walker Energy Corp 1997-07-02 1997-07-29
15. 692118040 Ranger Oil Ltd Elan Energy Inc 1997-09-02 1997-09-30
16. 693552040 Baytex Energy Ltd Dorset Exploration Ltd 1997-09-08 1997-10-08
17. 703320040 Hummingbird Communications Ltd Andyne Computing Limited 1997-10-15 1998-01-06
18. 722776040 TLC - The Laser Center BeaconEye Inc 1998-01-09 1998-04-27
19. 725682040 Sleeman Breweries Ltd Upper Canada Brewing Co 1998-01-13 1998-04-06
20. 755526040 SLM Software Inc Milkyway Networks Corp 1998-04-28 1998-10-01
21. 778170040 Talisman Energy Inc Arakis Energy Corp 1998-08-17 1998-10-08
22. 792513040 Alberta Energy Co Ltd Amber Energy Inc 1998-09-16 1998-11-04
23. 837207040 Tembec Inc Crestbrook Forest Industries 1999-01-11 1999-04-02
24. 856657040 Alimentation Couche-Tard Inc Silcorp Ltd 1999-03-01 1999-06-04
25. 856920040 Canadian Medical Laboratories Med-Chem Health Care Ltd 1999-04-15 1999-08-06
26. 858263040 Hummingbird Communications Ltd PC DOCS Group International 1999-03-05 1999-09-29
27. 860932040 Alberta Energy Co Ltd Pacalta Resources Ltd 1999-03-15 1999-06-01
28. 861473040 Riocan Real Estate Invest Trus RealFund Trust 1999-03-15 1999-05-31
29. 877536040 Precision Drilling Corp Computalog Ltd 1999-05-03 1999-08-12
30. 878652040 Cara Ops(Cara Hldgs/373027) Kelsey's International Inc 1999-02-15 1999-07-05
31. 887872040 Talisman Energy Inc Rigel Energy Corp 1999-08-23 1999-09-30
32. 891894040 Astral Communications Inc Radiomutuel Inc 1999-06-09 1999-07-07
33. 892932040 Talisman Energy Inc Highridge Exploration Ltd 1999-06-11 1999-07-14
34. 980435040 MDS Inc Phoenix Intl Life Sciences Inc 2000-02-24 2000-05-22
35. 982333040 Mountain Province Mining Glenmore Highlands Inc 2000-03-01 2000-06-30
36. 1003733040 Heroux Inc Devtek Corp 2000-05-05 2000-06-23
37. 1004084040 Precision Drilling Corp Plains Energy Services Ltd 2000-05-08 2000-07-10
38. 1016244040 Canadian Natural Resources Ltd Ranger Oil Ltd 2000-06-15 2000-07-31
39. 1017299040 Exco Technologies Inc TecSyn International 2000-06-16 2000-09-05
40. 1039689040 H&R Real Estate Investment Royop Properties Corporation 2000-06-01 2000-08-31
41. 1042100040 Corus Entertainment Inc Nelvana Ltd 2000-09-18 2000-11-17
42. 1056743040 Ultra Petroleum Corp Pendaries Petroleum Ltd 2000-10-16 2001-01-17
43. 1065699040 Exco Technologies Inc Techmire Ltd 2000-11-15 2001-01-11
Table A16. Multiple acquirers included in the sample

Date Date
Companies that made 2 acquisitions:
1. 477229040 Alberta Natural Gas Co Ltd 1995-06-28 1996-03-29
TransCanada Pipelines Ltd
727985040 NOVA Corp of Alberta Ltd 1998-01-26 1998-07-02
2. 487579040 El Condor Resources 1995-08-18 1996-01-12
Royal Oak Mines Inc
487581040 Geddes Resources Ltd 1995-08-18 1995-10-17
3. 492012040 Czar Resources 1995-09-13 1995-11-30
Ranger Oil Ltd
692118040 Elan Energy Inc 1997-09-02 1997-09-30
4. 545183040 Sceptre Resources Ltd 1996-06-10 1996-08-20
Canadian Natural Resources Ltd
1016244040 Ranger Oil Ltd 2000-06-15 2000-07-31
5. 598426040 Fossil Oil & Gas Inc 1996-10-22 1996-12-17
Elk Point Resources Inc
653861040 Truax Resources Corp 1997-03-31 1997-06-09
6. 642193040 Stone-Consolidated Corp 1997-02-13 1997-06-02
Abitibi-(Price)Consolidated Inc
976406040 Donohue Inc 2000-02-11 2000-06-22
7. 703320040 Andyne Computing Limited 1997-10-15 1998-01-06
Hummingbird Communications Ltd
858263040 PC DOCS Group International 1999-03-05 1999-09-29
8. 754784040 WIC Western Intl Commun Ltd 1998-04-17 1998-06-05
Shaw Communications Inc
946355040 Canadian Satellite Commun Inc 1999-10-15 2000-04-03
9. 853634040 Sutton Resources Ltd 1999-02-18 1999-04-10
Barrick Gold Corp
1021764040 Pangea Goldfields Inc 2000-06-30 2000-08-04
10. 977308040 Teleglobe Inc 2000-02-15 2000-11-01
Bell Canada Enterprises (BCE) Inc
980869040 CTV Inc 2000-02-26 2000-06-02
11. 1017299040 TecSyn International 2000-06-16 2000-09-05
Exco Technologies Inc
1065699040 Techmire Ltd 2000-11-15 2001-01-11
Companies that made 3 acquisitions:
12. 483193040 Ranchmen's Resources Ltd 1995-07-26 1995-10-06
550290040 Crestar Energy Inc Petrostar Petroleums Inc 1996-04-23 1996-06-28
675723040 Grad & Walker Energy Corp 1997-07-02 1997-07-29
13. 522806040 Conwest Exploration Co Ltd 1995-12-11 1996-01-31
792513040 Alberta Energy Co Ltd Amber Energy Inc 1998-09-16 1998-11-04
860932040 Pacalta Resources Ltd 1999-03-15 1999-06-01
14. 551011040 EnServ Corp 1996-04-26 1996-06-10
877536040 Precision Drilling Corp Computalog Ltd 1999-05-03 1999-08-12
1004084040 Plains Energy Services Ltd 2000-05-08 2000-07-10
15. 778170040 Arakis Energy Corp 1998-08-17 1998-10-08
887872040 Talisman Energy Inc Rigel Energy Corp 1999-08-23 1999-09-30
892932040 Highridge Exploration Ltd 1999-06-11 1999-07-14
16. 803015040 Telus Corp 1998-10-16 1999-01-31
993455040 BC Telecom(BCT.Telus Com Inc) QuebecTel Group Inc 2000-03-31 2000-06-15
1038704040 Clearnet Communications Inc 2000-08-21 2001-01-12
Appendix 9: Possible calculations of post- versus pre-acquisition period

changes in executive compensation levels
Figure A3. Changes in the magnitude of executive compensation components
ÌCOMPt+3,t-3 = (COMPt+3 – COMPt-3)/COMPt-3
ÌCOMPt,t-3 = (COMPt - COMPt-3)/COMPt-3
ÌCOMPt,t-1 = (COMPt - COMPt-1)/COMPt-1
Before Before Before M&A After After After

t−3 t−2 t−1 t t+1 t+2 t+3
Size, perf., Size, perf., Size, perf., + premium, Size, perf., Size, perf., Size, perf.,
SBI, comp. SBI, comp. SBI, comp. + method SBI, comp. SBI, comp. SBI, comp.
ÌCOMPt+1,t = (COMPt+1 – COMPt)/COMPt
Ì COMPt+1,t-3 = (COMPt+1 – COMPt-3)/COMPt-3
Pre = t - 3; t - 2; t - 1 Post = t; t + 1; t + 2; t + 3
Pre = t - 3; t - 2; t - 1; t Post = t + 1; t + 2; t + 3
ÌCOMPpost, pre = (COMPpost – COMPpre)/COMPpre

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Impacts of M&As on executive compensation of acquiring firms © Virginia Bodolica, 2005

École des Hautes Études Commerciales

Impacts of Mergers and Acquisitions

Thèse présentée à la Faculté des études supérieures

© Virginia Bodolica, 2005

École des Hautes Études Commerciales

Cette thèse intitulée :

Impacts of Mergers and Acquisitions

a été évalué par un jury composé des personnes suivantes :

Président-rapporteur : Louis Hébert

Co-directeurs de recherche : Sylvie St-Onge et Michel Magnan

Membre du jury : Paul André

Examinateur externe : Patrice Roussel

Représentant du doyen de la FES : Linda Rouleau

We assume that Chief Executive Officer (CEO) compensation is more adequately

With regard to monetary magnitude of executive compensation components, our key

restricted sample. From an agency theory standpoint, tying executive compensation to

With regard to specific contractual compensation arrangements, findings show that

Key words: Executive Compensation, Mergers and Acquisitions, Acquisition Premium,

Cette thèse analyse les incidences des transactions de fusions et d’acquisitions

D’abord, la rémunération totale des dirigeants des sociétés absorbantes augmente de

Par ailleurs, l’indépendance structurelle des conseils d’administration des sociétés

Mots clés : rémunération des dirigeants, fusions et acquisitions, prime d’acquisition,

CHAPTER 2: DEFINITIONS AND THEORETICAL PERSPECTIVES 21

2.1.2 Executive compensation 27

CHAPTER 3: MODEL DEVELOPMENT 76

3.2.2 Research hypotheses 125

CHAPTER 4: METHODOLOGY 132

CHAPTER 5: RESULTS 164

(A) Monetary CEO compensation components 164

contracts before and after the deal

CHAPTER 7: CONCLUSION 280

Table 1. Mergers and acquisitions’ types 22

Table 75. Levels of statistical support for hypothesis 3b 218

Figure 1. Canadian M&A market activity (1997 - June 2003) 2

ACTREM Actual Remuneration

Appendix 1: Merger waves 315

Appendix 5: Antitakeover measures 325

1.1 GENERAL RESEARCH CONTEXT

1.1.1 Merger and acquisition transactions

(A) M&A frequency and extent

Figure 1. Canadian M&A market activity (1997 - June 2003)

(B) M&A motives and performance

perspective adopted, various integration problems could be put forward as causes of

1.1.2 Executive compensation

United Kingdom (U.K.) established a requirement of public disclosure of the annual

1.2 STUDY DESCRIPTION

1.2.1 Thesis as part of a global research program

Figure 2. Global research program: relationships between

BEFORE transaction TAKEOVER AFTER transaction

Bidder’s executive d* Acquirer’s executive

Source: adapted from Magnan et al. (2001)

1. Impacts of M&As on executive compensation of acquiring firms (arrows A and

2. Impacts of M&As on executive compensation of target firms (arrow B). This

3. Impacts of executive compensation of both acquiring and target firms on M&A

4. Impacts of executive compensation on organizational performance in the post-

5. Executive compensation in companies involved in operations of change in control

1.2.2 General research design and objectives

Our analysis of the monetary magnitude of CEO compensation components is guided

We also attempt to make an exploratory analysis of the specific attributes of executive

(2.2) Are deal-specific characteristics (magnitude of acquisition premium or method of

(2.3) Is the frequency of specific attributes of executive compensation contracts adoption

Furthermore, we develop an integrative conceptual framework in this thesis, based on

1.2.3 Research contributions

Stock purchase plans

Stock option plans

Restricted stock awards

Phantom stock plans

Stock appreciation rights

Long-term performance bonuses