Corporate Payout Policy and CEO Compensation Structure

This paper examines how corporate payout policy is affected by CEO compensation structure using data from more than 1,600 firms during 1992-2006. Specifically, it studies the effects of CEO compensation structure, firm characteristics, and dividend payout policies on dividend type and relative dividend size. It finds CEO salary is positively associated with cash dividends, share repurchases, and relative dividend size whereas CEO salary (compared to bonus) as a percentage of total compensation has negative effects on cash dividends and share repurchases. It also discovers CEO stock awards as a percentage of total compensation are positively associated with share repurchases and CEO option awards are negatively related to cash dividends. In addition, this paper shows larger firms and firms with more free cash flow distribute more cash dividends and share repurchases. On the other hand, firms with higher leverage ratio and more investment opportunities prefer to save earnings for future re-investment projects. International Journal of Accounting and Financial Reporting ISSN 2162-3082 2018, Vol. 8, No. 2 http://ijafr.macrothink.org 180 Finally, it show dividend payout policy (either cash dividends or share repurchases) increases relative dividend size. The results of this study suggest that CEO compensation components affect CEOs’ dividend payout decisions: when CEOs’ stock award increases, they prefer to use share repurchases; when CEOs’ option award increases, they prefer not to use cash dividends.


Introduction
Since Lintner (1956) presents a paper about distribution of incomes of corporations among dividends, retained earnings, and taxes, literature discussing corporate payout policy has been prolific. Despite decades of study, agreement has not been established when it comes to dividend policies. Bhattacharyya (2007) reviews principal dividend policy theories and finds empirical evidence is diverse. A consensus on corporate policy has not been reached, and research on new explanations for dividend policy continues. Of the papers discussing corporate payout policies, some try to find whether dividend payout policy has an effect on a company's value (Miller and Modigliani, 1961;DeAngelo and DeAngelo, 2006;Bhattacharyya, 2007). Others look at the tax effect, or signal/information asymmetry effect, or clientele effect on dividend policy (Litzenberger and Ramaswamy, 1982;Poterba, 2004;Watts, 1973;Baker and Powell, 1999;Nissim and Ziv, 2001;Grullon and Michaely, 2004;Allen et al., 2000). Still others explore the relationship between corporate payouts and other firm characteristics such as the agency hypothesis, management incentives, company size, etc. (La Porta et al., 2000;Borokhovich et al., 2005;Belden et al, 2005). While some papers examine the relationship between stock options and dividend payouts (Fenn and Liang, 2001;Cuny et al., 2009;Bartov et al., 1998;Dittmar, 2000), little research focuses on the relationship between CEO compensations (salary, bonus, stock awards and option awards) and the impacts on dividend payout decisions. In addition, papers examining the relationship between the components of CEO compensation in size and percentage and dividend payout decisions are rare.
This study focuses on the impacts of CEO compensation in size and percentage on dividend payout decisions since the major components of total CEO compensation are salary, bonus, stock awards, and option awards. Each component of CEO compensation represents roughly 25% of total CEO pay (Murphy, 1999). When companies repurchase shares, the stock price tends to go up. On the other hand, when companies use cash dividends, the stock price is likely to go down because of earnings dilution effects. If there is a link between CEO compensation and stock price and a link between dividend policy (either cash dividends or share repurchases) and stock price, we can find a relationship between CEO compensation components and dividend payout decisions. The examination of the relationship between CEO compensation and dividend payout decisions can help researchers, investors, and practitioners better understand a company's dividend payout decisions from the perspective of CEO compensation.
Besides, it focuses on corporate payout policy and CEO compensation structure since CEOs are primary decision makers in deciding which dividend policy to adopt in corporations.
Understanding the relationship between dividend policies and CEO compensation structure helps the board of directors set up a proper compensation package for motivating CEOs. It mitigates agency costs, and motivates CEOs to increase company value, which in turn benefits shareholders. This argument is similar to that of Baker and Powell (1999), who explore the views of corporate managers about the relationship between dividend policy and company value. Furthermore, shareholders use information from dividend payout policy to estimate future company performance. This argument is supported by Nissim and Ziv (2001) who find the information content hypothesis is substantiated. If the information content hypothesis is supported, it would be interesting to see how CEO salary, bonus, stock awards and options awards affect dividend policy.
Besides CEO compensation structure, we consider the effects of firm characteristics on corporate payout policies. Baker and Hall (2004) develop a model to clarify how to measure CEO incentive strength in large and small firms. Fenn and Liang (2001) show that management ownership is associated with higher payouts by firms with potentially the greatest agency problems. Borokhovich et al. (2005) explore that dividends reduce agency costs after controlling for firm size, leverage, ownership, growth options, and change in dividend yield.
To find out how corporate payout policy is affected by CEO compensation structure, we use data during 1992-2006 to examine the relationship between payout policy and CEO salary, bonus, stock awards, option awards, and firm characteristics after controlling for industry dummies. Our research questions are as follows: Do CEO salary and bonus have any effects on cash dividends or share repurchases? Are stock awards and option awards positively associated with share repurchases? What are the impacts of company characteristics (firm size, free cash flow, growth opportunity) on dividend payout policy?
The results show that CEO salary is positively related to cash dividends whereas CEO option awards are negatively related to cash dividends. In addition, we find that larger firms with higher free cash flow and less investment opportunities tend to distribute cash dividends rather than repurchase shares. Finally, we show that dividend payout policy increases relative dividend size.
To the best of our knowledge, we are the first to examine the relationship between corporate payout policy and CEO compensation structure, CEO characteristics, and firm characteristics. Our paper contributes to the literature in that we consider compensation components and how they affect CEOs' decisions about payout policy and the associated amount of dividend payout and we show the percentage of each component is important in affecting CEOs' dividend payout decisions: whether to make a payment, which payment form, and what size of any such disbursement.
The rest of the paper is organized as follows. A brief literature review is presented in Section 2. The development of hypotheses is presented in Section 3. The description of the sample, data and methodology is given in Section 4. Empirical results and analysis are shown in Section 5. The extensions, limitations, future research possibilities, and the conclusion are given in Section 6.

Stock Options and Dividend Policy
Fenn and Liang (2001) examine how corporate payout policy is affected by managerial stock incentives. They use shares held by executive officers as management shares and shares underlying options held by executive officers as management options. In this analysis, we only consider CEO stock and option awards rather than other's stock and option awards because CEOs are primary decision makers with power to affect board decisions including compensation packages. This argument is supported by researchers such as Hallock (1997), Core et al. (1999), and Grinstein and Hribar (2004). Lambert et al. (1989) examine the relationship between the initial adoption of stock options for senior level executives and subsequent changes in corporate dividend policy and found that executive stock options are an incentive for executives to reduce cash dividends. Cuny et al. (2009) study how stock option use affects total payout and examine the influence of stock option use on total payout using a proxy for the EPS dilution effect. They find that if options are not dividend protected, cash dividends will reduce the value of the options. Bartov et al. (1998) compare 130 companies announcing the start of share repurchase programs with firms from the same industries announcing only cash dividends and find that firms use share repurchases as a way to distribute earnings when: 1) equity is undervalued, 2) institutional investors prefer share repurchases, and 3) option grants are given to the management. Dittmar (2000) tests six hypotheses related to firms' share repurchase decisions and find the management incentive hypothesis is supported.

Growth Opportunity and Dividend Policy
Literature about dividend policy and growth opportunity tends to agree that companies with potential positive NPV projects may save funds for future investment and prefers not to pay out dividends. Smith and Watts (1992) explain corporate financing, dividend policy and compensation policy choices and find that firms with more positive NPV projects have lower dividend yields. Bagwell and Shoven (1988) show that repurchases are positively associated with operating income but negatively related to price-to-book ratios. Dittmar (2000) finds that market-to-book ratios are negatively associated with share repurchases, suggesting that firms with growth opportunity prefer not to use share repurchases as a way to distribute earnings. Jagannathan et al. (2000) measure the ways in which stock repurchases and cash dividends are used by companies. They find when firms have permanent operating-related cash flows, firms prefer cash dividends, whereas when firms have temporary nonoperating related cash flows, firms prefer share repurchases. Similarly, Dittmar (2000) shows that firms may repurchase shares as a way to achieve a target leverage ratio and that higher leverage is negatively associated with share repurchases. Similar results are found by Bagwell and Shoven (1988), and Hovakimian et al. (2001), who state that firms may repurchase stock to increase their leverage ratio.

Dividend Policy Decisions
Literature about dividend policy tends to agree the preference of companies for share repurchases over cash dividends is the trend for the foreseeable future. Brav et al. (2005) survey financial executives to decide the factors that drive dividend and share repurchase decisions. The results show that managers favour repurchases because they view them as being more flexible than dividends. Allen and Michaely (2003) state that cash dividends have been the principal form of payout historically and share repurchases were unimportant until the mid-1980s, suggesting that stock incentives are becoming more and more important for corporations since the 1980s. Chhaochharia and Grinstein (2006) examine the effect of board oversight on executive compensation and show that board oversight is a significant determinant of the size and structure of executive compensation. Bebchuk and Fried (2003) argue that powerful CEOs are likely to manipulate their compensation schemes in ways that minimize transparency and will cause little concern to shareholders. Bergstresser and Philippon (2006) provide evidence that CEOs exercise unusually large numbers of options, and CEOs and other insiders sell large quantities of shares during years of high use of discretionary accruals to manipulate reported earnings. Cole and Mehran (2007) examine the determinants of CEO compensation and find that executive pay is related to CEO age, education and gender.

Development of Hypotheses
Our first hypothesis is that CEO salary and CEO bonus are not associated with cash dividends, share repurchases, or relative dividend size. Typically, CEO salary and bonus are not directly linked to stock price, which is associated with either cash dividends or share repurchases. When a company repurchases shares, the stock price of that company is likely to increase, which in turn will increase the value of a CEO's stock or options, but not necessarily their salary or bonus. Therefore, CEO salary and CEO bonus may be irrelevant to dividend payout policy and relative dividend size (Jensen and Murphy, 1990).
The second hypothesis is that CEOs with stock or option awards would prefer to repurchase shares rather than distribute cash dividends to shareholders. Therefore, CEO stock/option awards should be positively associated with share repurchases and relative dividend size. Our reasoning is that share repurchases would increase share price, which in turn will increase the value of stock or option awards. An increase in stock/options will increase share repurchases, which in turn will increase relative dividend size. This argument complements the findings by Fenn and Liang (2001), Bartov et al. (1998), andDittmar (2000). For firm characteristics, our hypotheses are that larger firms, firms with higher free cash flow, and firms with less growth opportunities would distribute more cash dividends to shareholders, which will increase the relative dividend size of the company. This is so because larger companies would keep earnings for positive NPV projects when there are investment opportunities. This line of reasoning is consistent with studies by Jensen and Meckling (1976), Fenn and Liang (2001), Smith and Watts (1992), and Bagwell and Shoven (1988).

Sample, Data Description and Methodology
The data sources are from Standard & Poor's Compustat and ExecuComp databases, which include all active and inactive firms of the entire databases during 1992-2006. Incorporating all of the firms in the analysis allows us to examine the characteristics of the firms that distribute cash dividends only, share repurchases only, both cash dividends and share repurchases, and nothing at all, respectively. It also helps understand the corporate payout decisions of the firms that adopt different payout policies. We use salary, bonus, stock awards, and option awards as CEO compensation. In addition, we use market capitalization, debt-to-equity ratio, book-to-market ratio, and free cash flow as firm characteristics. To analyze the industry effects on corporate payout policies, we use Kenneth French's 17 industry portfolios, as given on his website, and as described in Table A1 of the Appendix.

Sample Selection
To construct the sample, we select assets, long-term debt, preferred stock, operating income before depreciation, common dividends, close price, common shares outstanding, deferred taxes and investment tax credit, preferred stock redemption value, convertible debt, buy of common and preferred stock, capital expenditures, liabilities, fiscal year closing price, and stockholder's equity from Compustat's Industrial Annual variables. Then, we select salary, bonus, stock awards, and option awards, from the Executive compensation variables. We then merge these two sets of data. Because of the limitation of the data, we find that information on stock awards and options awards is available only for 2006, not for data between 1992 and 2005. We then build two separate regression analyses based on the information of 1992-2006 and on the information of 2006, respectively. The first regression analysis uses information that does not include stock awards and option awards between 1992 and 2006. The second regression analysis uses information that includes stock awards and option awards in 2006. Table 1 and Figure 1 report the number of issues on dividends or repurchases during 1992-2006. Since 1998, the number of issues on repurchases exceeded that on dividends, suggesting that companies started to view share repurchases as a more important way of distributing earnings in the last 10 years.  1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Number of Issues Yea r Dividend Repurchase   Figure 2 present the size of issues on dividends or repurchases during 1992-2006. The size of issues on repurchases has become larger than that on dividends, and the difference in the size of issues between repurchases and dividends increased after 1996. This shows that companies prefer to use share repurchases as a way of distributing earnings since 1996 (Brav et al., 2005;Allen and Michaely, 2003).  1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Size of Issues ($ million) Yea r Dividend Repurchase   Table 3 and Figure 3 show the number of issues for dividends and repurchases by industry during 1992-2006.  Table 4 and Figure 4 display the dollar size of issues for dividends and repurchases by industry during 1992-2006. The Drugs, Soap, Perfumes, and Tobacco industry has the largest value of issues, followed by the Food industry and the Oil and Petroleum Products industry. The Mining and Minerals industry has the smallest dollar issuance.  Table 5 provides definitions of the variables used in the regression analysis. Variables are classified into five categories: dividend payout policies, dividend types, CEO compensation structure, CEO characteristics, and firm characteristics. Our sample comprises data from 1992 to 2006. Variables are classified into five categories: 1) dividend payout policies, 2) dividend types, 3) CEO compensation structure, 4) CEO characteristics, and 5) firm characteristics. Dividend payout policies, dividend types, and firm characteristics data was obtained from Compustat during 1992-2006. CEO compensation structure and CEO characteristics data was obtained from ExecuComp during 1992-2006.

Dividend Payout Policies
Dummy Dividend Dummy dividend equals one when companies distribute cash dividend and zero otherwise Dummy Repurchase Dummy repurchase equals one when companies repurchase shares and zero otherwise Dividend Types

Cash Dividends
This is the cash dividends on common stock, which is data item 21 in Compustat Share Repurchases This is the open market repurchases of common stock, which is data item 115 in Compustat Dividend Size The sum of cash dividend and stock repurchase

Relative Dividend Size
This is dividend size divided by market capitalization

CEO Compensation Structure
Salary This is CEO's salary

Salary_pct
Salary percentage is calculated as salary divided by total compensation, where total compensation is the sum of salary, bonus, stock awards, and option awards Bonus_pct Bonus percentage is calculated as bonus divided by total compensation, where total compensation is the sum of salary, bonus, stock awards, and option awards

Stock Awards
The value of stock awards given to CEO

Option Awards
The value of option awards given to CEO

Stock _award_pct
Stock awards percentage is calculated as stock awards divided by total compensation, where total compensation is the sum of salary, bonus, stock awards, and option awards Option_award_pct Option awards percentage is calculated as option awards divided by total compensation, where total compensation is the sum of salary, bonus, stock awards, and option awards CEO Characteristics

Age
This is CEO's age as of 2006.

Dummy Gender
Dummy gender equals one when gender type is male and zero otherwise

Mark et Capitalization
This is the calendar year price (data item 24 in Compustat) times common shares outstanding (data item 25 in Compustat)

Debt-to-Equity Ratio
This is long-term debt (data item 9 in Compustat) divided by equity (data item 25 times data item 199 in Compustat)

Book -to-Mark et Ratio
This is total assets divided by the measure of market, where measure of market is total assets minus book equity plus market equity

Free Cash Flow
This is the operating income (data item 13 in Compustat) minus capital expenditure (data item 128 in Compustat), the outcome of which is divided by total assets (data item 6 in Compustat) ISSN 2162-3082 2018 http://ijafr.macrothink.org 190 Summary statistics of dividend payout policies, dividend types, CEO compensation structure, CEO characteristics, and firm characteristics during 1992-2006 are shown in Table 6. Panel A in Table 6 shows the statistics of the entire sample. Panels B, C, D, and E in Table 6 Table 7. Panel A in Table 7 displays the statistics of the entire sample. Panels B, C, D, and E in Table 7  and option awards because the information on stock awards and option awards is available for 2006 in ExecuComp's dataset. We use the sum of salary, bonus, stock awards, and option awards as a proxy for total compensation for 2006. We then calculate salary percentage, bonus percentage, stock awards percentage, and option awards percentage as salary, bonus, stock awards, and option awards divided by total compensation, respectively. We use salary percentage, bonus percentage, stock awards percentage, and option awards percentage to measure the effects of the change in CEO compensation on dividend type and relative dividend size.

Firm Characteristics.
For firm characteristics, we use market capitalization to measure the size of the company. We use long-term debt divided by equity to measure a company's leverage ratio. To measure investment opportunity, we use the book-to-market ratio. We also consider free cash flow in the firm characteristics.

Market capitalization.
We use calendar year price (data item 24 in Compustat) times common shares outstanding (data item 25 in Compustat) to calculate market capitalization, which is the measure of a company's size (Baker and Hall, 2004).
Debt-to-equity ratio. The measure of debt is long-term debt, which is data item 9 in Compustat. We use common shares outstanding (data item 25 in Compustat) times fiscal year closing price (data item 199 in Compustat) to calculate equity. The debt-to-equity ratio is the measure of leverage (Dittmar, 2000).
Book-to-market ratio. We use book-to-market ratio to measure a company's investment opportunities, which is consistent with past literature (Grullon and Michaely, 2004;Fenn and Liang, 2001;Smith and Watts, 1992). The measure of book value is total assets, which is data item 6 in Compustat. The measure of market value is total assets minus book equity plus market equity, where book equity is calculated as total assets (data item 6) minus total liabilities (data item 181) minus preferred stock (data item 10) plus deferred taxes (data item 35) plus convertible debt (data item 79). The measure of market equity is common shares outstanding (data item 25) times price (data item 199).

Free cash flow.
In much of the corporate finance literature free cash flow is used as a proxy for firms that have excess cash after funding all positive net present value projects (Jensen, 1986;Fenn and Liang, 2001). Free cash flow is calculated as operating income (data item 13 in Compustat) minus capital expenditure (data item 128 in Compustat) divided by total assets (data item 6 in Compustat).
Dividend Payout Policy. The measures of dividend payout are cash dividends and share repurchases. Cash dividends are the cash dividends on common stock (data item 21 in Compustat). For repurchases, we use open market repurchases of common stock (data item 115 in Compustat).

Dummy dividend as independent variable.
We use DUMMY_DIV to examine the effect of cash dividends on dividend size, and relative dividend size. When DUMMY_DIV equals one, this means CEOs choose to distribute cash dividends. ISSN 2162-3082 2018 http://ijafr.macrothink.org 197 Dummy repurchase as independent variable. We use DUMMY_REP to examine the effect of share repurchases on dividend size and relative dividend size. When DUMMY_REP equals one, this means CEOs choose to repurchase shares. Industry Dummies. Dempsey et al. (1993) found that industry has an impact on the dividend decision. To control for industry effects, we use Kenneth French's classification of 17 industries, which is the data from U.S. Research Returns. The industry classifications are described in Appendix A1. As suggested by Fenn and Liang (2001), we exclude utilities, banks, insurance, financial, and telephone companies in the analysis because these firms belong to regulated industries where dividend payouts are not a good representation of normal industries.

Methodology
Logit Regression. We intend to find the relationship between CEO compensation structure and dividend payout policy for U.S. firms during 1992 and 2006. To test our hypotheses, we use a logit regression to represent the firms' dividend payout decisions: whether firms distribute cash dividends or use share repurchases. Company characteristics that affect firms' dividend payout decisions are also considered. The method used to examine the relationship between the size of CEO compensation and dividend payout decisions is as follows: Dividend Type = α + β 1 X Salary + β 2 X Bonus + β 3 X Stock_awards + β 4 X Option_awards + β 5 X Mkt_cap + β 6 X Debt_equity + β 7 X Book_market + β 8 X F_cashflow + ε i (1) where Dividend Type is the dependent variable that equals one when cash dividends or share repurchases are represented and zero when no cash dividends or share repurchases are distributed. X Salary , X Bonus , X Stock_awards , and X Option_awards are CEO compensation coming from salary, bonus, stock awards, and option awards, and ε i are error terms associated with unobservable factors that may affect firms' dividend payout policy decisions.
The method used to examine the relationship between the percentage of CEO compensation and dividend payout decisions is as follows: Dividend Type = α + β 1 X Salary_pct + β 2 X Bonus_pct + β 3 X Stock_awards_pct + β 4 X Option_awards_pct + β 5 X Mkt_cap + β 6 X Debt_equity + β 7 X Book_market + β 8 X F_cashflow + ε i where Dividend Type is the dependent variable that equals one when cash dividends or share repurchases are represented and zero when no cash dividends or share repurchases are distributed. X Salary_pct , X Bonus_pct, X Stock_awards_pct , and X Option_awards_pct are salary, bonus, stock awards, and option awards as percentages of total CEO compensation, respectively, and ε i are error terms associated with unobservable factors that may affect firms' dividend payout policy decisions.

OLS Regression.
To find the effects of the size and percentage of CEO compensation International Journal of Accounting and Financial Reporting ISSN 2162-3082 2018 http://ijafr.macrothink.org 198 components and their impacts on firms' relative dividend size, this paper employs OLS regression. The method used to examine the relationship between the sizes of CEO compensation and relative dividend size is as follows: Relative Dividend Size = α + β 1 X Salary + β 2 X Bonus + β 3 X Stock_awards + β 4 X Option_awards + β 5 X Mkt_cap + β 6 X Debt_equity + β 7 X Book_market + β 8 X F_cashflow + β 9 X Dummy_div + β 10 X Dummy_rep where Relative Dividend Size is the dependent variable that measures the net effects of dividend size after considering company size. X Salary , X Bonus , X Stock_awards , and X Option_awards are CEO compensation coming from salary, bonus, stock awards, and option awards. X Mkt_cap , X Debt_equity , X Book_market , and X F_cashflow are company characteristic variables that represent the size, leverage, investment opportunity and free cash flow of the firm. The independent variables X Dummy_div and X Dummy_rep examine the effects of the decisions to pay cash dividends or share repurchases on relative dividend size. Finally, ε i are error terms associated with unobservable factors that may affect firms' dividend payout policy decisions.
The method used to examine the relationship between the percentages of CEO compensation and relative dividend size is as follows: Relative Dividend Size = α + β 1 X Salary_pct + β 2 X Bonus_pct + β 3 X Stock_awards_pct + β 4 X Option_awards_pct + β 5 X Mkt_cap + β 6 X Debt_equity + β 7 X Book_market + β 8 X F_cashflow + β 9 X Dummy_div + β 10 X Dummy_rep + ε i where Relative Dividend Size is the dependent variable that measures the net effects of dividend size after considering company size. X Salary_pct , X Bonus_pct , X Stock_awards_pct , and X Option_awards are the percentages of total CEO compensation coming from salary, bonus, stock awards, and option awards. X Mkt_cap , X Debt_equity , X Book_market , and X F_cashflow are company characteristic variables that represent the size, leverage, investment opportunity and free cash flow of the firms. The independent variables X Dummy_div and X Dummy_rep examine the effects of cash dividends and share repurchases on relative dividend size. Finally, ε i are error terms associated with unobservable factors that may affect firms' dividend payout policy decisions.

Regression Models for Dividend Type and Relative Dividend Size Using 1992-2006 Data
To examine the effects of CEO compensation structure, CEO characteristics, firm characteristics, and dividend policy on dividend type and relative dividend size over a longer period of time, this paper estimates four separate regression models for dividend type and relative dividend size, respectively, using 1992-2006 data. Because of the limitation of the data, it does not include stock and option award variables in the analysis. Table 8 shows the ISSN 2162-3082 2018 http://ijafr.macrothink.org 199 relationship between dividend type, CEO compensation, and firm characteristics. The relationship between DUMMY_DIV and salary, market capitalization, book-to-market ratio, and free cash flow is positive, whereas the relationship between DUMMY_DIV and bonus, salary percentage, and debt-to-equity is negative (Regressions 1 and 2). Table 8. Logit Estimates of Dividend Type

International Journal of Accounting and Financial Reporting
The sample has 16,466 observations that come from the merger of Compustat and ExecuComp datasets during 1992-2006. Dividend types include DUMMY_DIV and DUMMY_REP. The former equals one when companies distribute cash dividends, and zero when companies do not do so. The latter variable equals one when companies repurchase shares, and zero when companies do not do so. SALARY_PCT is calculated as salary divided by market capitalization. Similarly, BONUS_PCT is calculated as bonus divided by market capitalization. MKT_CAP is the market capitalization of the company. DEBT_EQUITY is long-term debt divided by equity. BOOK_MARKET is book-to-market ratio. F_CASHFLOW is free cash flow. ***, **, *, denote significance levels of 1%, 5%, and 10%, respectively. p-values are presented in parentheses. The relationship between DUMMY_REP and salary, bonus, market capitalization, book-to-market ratio, and free cash flow is positive, whereas the relationship between DUMMY_REP and salary percentage and debt-to-equity ratio is negative (Regressions 3 and 4).
The estimate of relative dividend size is presented in Table 9. The relationship between relative dividend size and salary, market capitalization, book-to-market ratio, free cash flow, DUMMY_DIV, and DUMMY_REP is positive, whereas the relationship between relative dividend size and bonus is negative (Regressions 5,6,7,and 8). Combining the results of Table 8 and Table 9, the findings are interesting from the perspectives of CEO compensation structure, CEO characteristics, firm characteristics, and dividend payout policies.
First, when CEOs are given higher salary, they prefer both cash dividends and share repurchases, and increases in CEO salary are correlated with increases in relative dividend size. However, when salary percentage increases, CEOs are less likely to distribute cash dividends or carry out share repurchases. In addition, CEO bonus is negatively associated with cash dividends but is positively associated with share repurchases. This finding is contrary to our hypothesis that CEO salary and bonus have no impact on dividend payout policy. One possible explanation is that when a CEO has a higher salary or bonus, he/she may have a comparable compensation package coming from stock or option awards. As suggested by Murphy (1999), salary corresponds approximately to 20-30% of total CEO pay, bonus represents another 20% of total CEO pay, and options and other CEO pay represent approximately 50% of total CEO pay, during the 1992-1996 period. When CEOs' salary or bonus percentage increases, their stock or option percentage will decrease. Therefore, CEO salary percentage has a negative impact on cash dividends. ISSN 2162-3082 2018 http://ijafr.macrothink.org 201 Table 9. OLS Estimates of Relative Dividend Size

International Journal of Accounting and Financial Reporting
The sample has 16,466 observations that come from the merger of Compustat and ExecuComp datasets during 1992-2006. Dividend size is the sum of cash dividends and share repurchases. Relative dividend size is the sum of cash dividends and share repurchases divided by market capitalization. SALARY_PCT is calculated as salary divided by market capitalization. Similarly, BONUS_PCT is calculated as bonus divided by market capitalization. MKT_CAP is market capitalization of the company. DEBT_EQUITY is long-term debt divided by equity. BOOK_MARKET is book-to-market ratio. F_CASHFLOW is free cash flow. DUMMY_DIV equals one when companies distribute cash dividends, and zero when companies do not do so. DUMMY_REP equals one when companies repurchase shares, and zero when companies do not do so. ***, **, *, denote significance levels of 1%, 5%, and 10%, respectively. p-values are presented in parentheses.  (8) Second, firms of larger size and higher free cash flow tend to distribute dividends through both cash dividends and share repurchases, which in turn increase relative dividend size. This ISSN 2162-3082 2018 http://ijafr.macrothink.org 202 finding is consistent with the fact that larger firms may mitigate agency problems by distributing dividends (Jensen and Meckling, 1976;Fenn and Liang, 2001). The negative relationship between DUMMY_DIV and debt-to-equity ratio and between DUMMY_REP and debt-to-equity ratio show that companies with higher leverage prefer not to distribute either cash dividends or carry out share repurchases (Regressions 1, 2, 3, and 4). If a company has high leverage, it is not likely to have extra cash for dividend distribution (Dittmar, 2000;Jagannathan et al., 2000).

International Journal of Accounting and Financial Reporting
Finally, this paper finds dividend payout policy increases relative dividend size (Regressions 7 and 8). The coefficient of share repurchase is larger than that of cash dividend, suggesting that share repurchases contribute more to relative dividend size. The finding is in accord with the literature that share repurchases have become a more important way of distributing dividends to shareholders (Brav et al., 2005;Allen and Michaely, 2003).

Regression Models for Dividend Type and Relative Dividend Size Using 2006 Data With Stock and Option Award Information
We estimate four separate regression models for dividend type and relative dividend size, respectively using 2006 data including stock and option award information in ExecuComp's dataset. Table 10 shows the relationship between dividend type and CEO compensation, CEO characteristics, and firm characteristics.
In Table 10, the relationship between DUMMY_DIV and salary, salary percentage, market capitalization, book-to-market ratio, and free cash flow is positive, whereas the relationship between DUMMY_DIV and option awards is negative (Regressions 9 and 10). The relationship between DUMMY_REP and stock awards percentage, market capitalization and free cash flow is positive, whereas the relationship between DUMMY_REP and debt-to-equity ratio is negative (Regressions 11 and 12). The sample has 848 observations that come from the merger of Compustat and ExecuComp datasets in 2006. Dividend types include DUMMY_DIV and DUMMY_REP. DUMMY_DIV equals one when companies distribute cash dividends, and zero when companies do not do so. DUMMY_REP equals one when companies repurchase shares, and zero when companies do not do so. The sum of salary, bonus, stock awards, and option awards is total compensation. SALARY_PCT is calculated as salary divided by total compensation. Similarly, BONUS_PCT is calculated as bonus divided by total compensation. STOCK_AWARDS_PCT is calculated as stock awards divided by total compensation. OPTION_AWARDS_PCT is calculated as option awards divided by total compensation. MKT_CAP is market capitalization of the company. DEBT_EQUITY is long-term debt divided by equity. BOOK_MARKET is book-to-market ratio. F_CASHFLOW is free cash flow. ***, **, *, denote significance levels of 1%, 5%, and 10%, respectively. p-values are presented in parentheses.

Variable
DUMMY_DIV (9) DUMMY_DIV (10)  The estimates of relative dividend size are presented in Table 11. The relationship between relative dividend size and salary, stock awards percentage, option awards percentage, debt-to-equity ratio, book-to-market ratio, free cash flow, DUMMY_DIV and DUMMY_REP is positive (Regressions 13,14,15,and 16). Combining the results of Table 10 and Table 11, it shows the relationships between dependent variables and CEO compensation structure (coming from salary and bonus), firm characteristics, and dividend payout policies are similar to those found in Table 8 and Table 9: CEO salary is positively related to cash dividends and relative dividend size; bonus is negatively associated with cash dividends but is positively related to share repurchases; larger firms with higher free cash flow distribute dividends through cash dividends and share repurchases; dividend payouts increase relative dividend size; and repurchases appear to have become a more important way of distributing dividends to shareholders.
When CEO salary, bonus, stock awards, and option awards are considered as total CEO compensation, the impacts of compensation structure variables on dividend type and relative dividend size are as follows: First, CEO stock awards are positively associated with share repurchases and relative dividend size, which supports the hypothesis. The finding complements the paper by Fenn and Liang (2001). In addition, the relationship between CEO stock awards percentage and share repurchases is positive. This suggests that when stock awards represent a larger percentage of total compensation, CEOs prefer to repurchase shares because their stock award is linked with stock price.
Second, CEO option awards are negatively associated with cash dividends. Brav et al. (2005) suggest that repurchases have become a more flexible method than dividends when a firm distributes earnings. They argued that cash dividends are not important to stock price. Therefore, CEOs with option awards prefer not to have cash dividends. Consistent with the finding by Lambert et al. (1989), the hypothesis that CEOs with option awards prefer to repurchase shares rather than distribute cash dividends is supported Furthermore, this study finds a positive relationship between CEO option awards percentage and share repurchases. This implies that when option awards as a percentage of total compensation are higher, CEOs tend to choose share repurchases rather than cash dividends because share repurchases increase stock price, which increases the value of their options. Finally, the finding supports the hypothesis that stock awards percentage and option awards percentage increase relative dividend size. Murphy (1999) suggests that stock and option awards together represent approximately 50% of a CEO's total compensation. Therefore, little doubt remains regarding the importance of CEO stock and option awards on dividend payout policy. The sample has 848 observations that come from the merge of Compustat and ExecuComp datasets in 2006. Relative dividend size is the sum of cash dividends and share repurchases divided by market capitalization. The sum of salary, bonus, stock awards, and option awards is total compensation. Salary_pct is calculated as salary divided by total compensation. Similarly, bonus_pct is calculated as bonus divided by total compensation. Stock_award_pct is calculated as stock awards divided by total compensation. Option_award_pct is calculated as option awards divided by total compensation. Dummy gender equals one when gender type is male, whereas dummy gender equals zero when gender type is female. Mkt_cap is market capitalization of the company. Debt/Equity is long-term debt divided by equity. BOOK_MARKET is book-to-market ratio. F_CASHFLOW is free cash flow. Dummy dividend equals one when companies distribute cash dividends, whereas dummy dividend equals zero when companies do not distribute cash dividends. Dummy repurchase equals one when companies repurchase shares, whereas dummy repurchase equals zero when companies do not repurchase shares. ***, **, *, denote significance levels of 1%, 5%, and 10% respectively. P value is presented in the parenthesis.

Conclusion
This paper examines how corporate payout policy is affected by CEO compensation structure using data from more than 1,600 firms during 1992-2006. We estimate the effect of CEO compensation structure, firm characteristics, and dividend payout policy on dividend type and relative dividend size. It shows CEO salary has a positive effect on cash dividends and share repurchases. In addition, stock awards or option awards as a percentage of total compensation increase share repurchases, and dividend payout policy (either cash dividends or share repurchases) increases relative dividend size. These results help explain the relationship between corporate payout policy and CEO compensation structure, CEO characteristics, and firm characteristics after controlling industry dummies.
The contribution of this paper is that it is the first (to the best of our knowledge) to examine the relationship between corporate payout policy and CEO compensation structure controlling firm characteristics. Besides, this paper categorizes dividend payout policy by dividend type and relative dividend size. This allows us to analyze the effects of CEO compensation structure on various aspects of dividend policy. Furthermore, it examines not only the amount but also the percentage change of CEO compensation structure to see the effects on dividend type and relative dividend size. The analysis of salary, bonus, stock awards, and option awards as a percentage of total compensation helps us better understand CEOs' dividend payout policy decisions.
The limitation of this paper is that data from stock awards and option awards are available only for 2006 in ExecuComp's dataset. As a result, we are not able to include these variables in the analysis during 1992-2005. Researchers can continue to conduct further research in this area when more awards data are available in the future. Further analysis can be done regarding the relationship between dividend payout policy and CEO compensation structure for: 1) firms that distribute cash dividends only, 2) firms that carry out share repurchases only, 3) firms that pay out nothing, and 4) firms that use both cash dividends and share repurchases.