Corporate Payout Policy and CEO Compensation Structure

Abstract

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. 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.