Executive Remuneration and Performance

A Look at the Operating Cash Flow

Abstract

The executive remuneration studies are theoretically supported by the Agency Theory, in which there is a prediction that the principal delegates to the agent powers to conduct his patrimony, his company. However, the principal does not have full control of the actions taken by the agent. One of the ways to align interests of both is through pay. The researches developed until then analyzed the relation between remuneration and result, or remuneration and performance. The results presented are controversial. The economic result is vulnerable to discretionary accruals, so that the agent can manipulate it to obtain results that provide better remuneration. On the other hand, the financial result is less susceptible to the actions of the executives regarding the use of discretion, besides being object of validation by the auditors. In this sense, the present study verified whether cash variation provides additional compensation to executives, so as to stimulate them to generate operating cash for companies. The main statistical technique used in the study was multiple regression through panel data with robust fixed effects. The results pointed to an average increase of US $ 16,000 in the annual compensation of executives who generated operating cash for the companies. The study concluded that the use of this variable as an indicator for executive compensation is still low, about 15% of companies use it. However, the use of operating cash flow can present better results in the agency relationship, mitigating potential problems and reducing agency cost. The sample is composed of European public companies, with a period of observation between 2007 and 2016.