The role of financial performance of Eurostoxx listed hotel companies in determining CEO compensation

Abstract

This paper is focused on the effect of firms’ financial performance in the compensation of CEOs of Eurostoxx listed hotel firms. We analyze CEO cash-, equity-, and total-compensation using as proxies of financial perfor- mance both accounting-based and market-based measures, where both return and risk are considered. Market- based financial risk measure enables us to delve into the relationship between CEO compensation policies and lagged firms’ systematic and idiosyncratic risk components computed by using a well-known asset-pricing factorial model. Results show a non-significant linear relationship between CEO compensation policies and stock return in the Eurostoxx hotel firms even when we control for market-based risk. However, results support a negative and significant relationship between lagged financial risk and CEO equity compensation that is more intensively related with the firms’ idiosyncratic risk component. Moreover, we show evidence of a non-linear effect of financial return on CEO cash compensation that is idiosyncratic-risk-level dependent.