The moderating effect of CEO narcissism on pay-performance sensitivity

Azevedo, Yuri Gomes Paiva; Nakao, Silvio Hiroshi

doi:10.1590/1808-057x20241909.en

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Original Article • Rev. contab. finanç. 35 (95) • 2024 • https://doi.org/10.1590/1808-057x20241909.en copy

The moderating effect of CEO narcissism on pay-performance sensitivity

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

This study aims to examine whether the Chief Executive Officer (CEO) narcissism has a moderating effect on pay-performance sensitivity. We fill a gap in the existing literature, which overlooks the behavioral aspects of agents in the design of executive compensation plans, by providing evidence of the moderating effect of CEO narcissism on pay-performance sensitivity. We shed light on the fact that shareholders and potential investors might face higher agency costs when investing in firms led by narcissistic CEOs, considering that narcissistic CEOs tend to receive higher levels of compensation than their peers, regardless of the company’s performance. This study also has implications for board members and recruiters, who may take this psychological aspect into account when proposing compensation schemes to CEOs. The results extend the prior discussion on low pay-performance sensitivity (or its non-significance) by suggesting that this might be partially attributed to the psychological characteristics of CEOs, which play a role in the design of executive compensation. A sample of 1,057 non-financial U.S. firms (8,869 firm-year observations) during the period 2002-2018 was analyzed using system generalized method of moments (GMM-SYS) regressions due to the endogenous relationship between CEO compensation and firm performance. The main results show that CEO narcissism reduces the association between CEO compensation and firm performance, supporting the prediction that narcissism can be viewed as a “dark side” in the design of executive compensation plans. This finding is robust to alternative measures of pay-performance sensitivity, and further robustness checks indicate that our results are not driven by CEO overconfidence. Therefore, this study contributes to the literature by providing, to the best of our knowledge, the first empirical evidence of the moderating effect of CEO narcissism on pay-performance sensitivity.

Keywords:
corporate governance; pay-performance sensitivity; CEO narcissism; personality traits

Variable	Definition	Source
CEOCashComp	Measure of CEO cash compensation, computed as the sum of the logarithms of salaries, bonuses, and other cash payments.	ExecuComp
CEOTotComp	Measure of CEO total compensation, computed as the sum of the logarithms of salaries, bonuses, the grant date value of restricted stock awards, and the grant date Black-Scholes value of options granted.	ExecuComp
RET	Measure of annual stock returns, computed as the total holding period return for a sale of a security on the date in question, taking into account and reinvesting all distributions to shareholders.	CSRP
ROA	Measure of return on assets, computed as the ratio of operating income to total assets.	Compustat
ROE	Measure of return on equity, computed as the ratio of net income to total equity.	Compustat
ROS	Measure of return on sales, computed as the ratio of operating income to total sales.	Compustat
EBITDA	Measure of earnings before interest, taxes, depreciation, and amortization, divided by total assets.	Compustat
Narc	Measure of CEO narcissism, computed as the ratio of the use of first-person singular pronouns to the total number of first- and third-person pronouns.	Thomson Reuters Eikon
HighNarc	Measure of high narcissism, computed as a dummy variable equal to 1 if a CEO is classified above the median, and 0 otherwise.	Thomson Reuters Eikon
Size	Measure of firm size, computed as the logarithm of total assets.	Compustat
Debt	Measure of debt, computed as the ratio of total debt to total assets.	Compustat
Growth	Measure of firm growth, computed as the change in net sales compared to net sales in t-1.	Compustat
Ownership	Measure of CEO ownership concentration, calculated as the number of CEO shares divided by the total number of shares outstanding.	ExecuComp
Duality	Measure of CEO duality, computed as a dummy variable equal to 1 if a CEO is chairman of the board, and 0 otherwise.	ExecuComp
Turnover	Measure of CEO turnover, computed as a dummy variable equal to 1 if a new CEO is appointed, and 0 otherwise.	ExecuComp
Committee	Measure of CEO presence on the committee that makes the firm’s compensation decisions, computed as a dummy variable equal to 1 if a new CEO is appointed, and 0 otherwise.	ExecuComp

	N	Mean	Std. Dev.	Min.	Max.
CEOCashComp (in thousands)	8,869	1,192	980	218	6870
CEOTotComp (in thousands)	8,869	7,725	8,732	3,313	55,339
RET	8,869	0.011	0.030	-0.082	0.110
ROA	8,869	0.093	0.079	-0.212	0.319
ROE	8,869	0.101	0.387	-2.181	1.819
ROS	8,869	0.054	0.125	-0.605	0.357
EBITDA	8,869	0.051	0.087	-0.297	0.277
Narc	8,869	0.234	0.102	0	0.530
Size (in millions)	8,869	10,824	2,283	0,010	149,244
Debt	8,869	0.545	0.217	0.092	1.216
Growth	8,869	0.076	0.196	-0.451	0.927
Ownership	8,869	0.012	0.033	0	0.2287
Duality	8,869	0.514	0.499	0	1
Turnover	8,869	0.129	0.336	0	1
Committee	8,869	0.002	0.051	0	1

		1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
1	CEOCashComp	1.000
2	CEOTotComp	0.575	1.000
3	RET	0.033	0.041	1.000
4	ROA	0.190	0.251	0.088	1.000
5	ROE	0.239	0.312	0.091	0.693	1.000
6	ROS	0.187	0.301	0.070	0.765	0.589	1.000
7	EBITDA	0.194	0.261	0.085	0.937	0.681	0.847	1.000
8	Narc	0.055	0.047	-0.007	0.001	0.008	0.045	0.014	1.000
9	Size	0.591	0.651	-0.045	0.023	0.200	0.195	0.046	0.063	1.000
10	Debt	0.290	0.247	-0.031	-0.119	0.113	-0.038	-0.102	-0.015	0.468	1.000
11	Growth	0.037	0.077	0.099	0.259	0.216	0.221	0.254	0.000	-0.077	-0.141	1.000
12	Ownership	-0.207	-0.190	0.037	-0.032	-0.104	-0.145	-0.043	-0.047	-0.453	-0.165	0.077	1.000
13	Duality	0.255	0.181	0.020	0.057	0.088	0.053	0.057	0.055	0.181	0.125	0.004	0.083	1.000
14	Turnover	-0.111	-0.115	-0.037	-0.039	-0.036	-0.046	-0.045	-0.007	0.011	0.018	-0.074	-0.244	-0.179	1.000
15	Committee	0.012	-0.024	0.029	-0.005	0.005	-0.021	-0.011	0.009	-0.013	-0.000	0.008	0.008	0.028	0.000	1

	Dependent variable: CEOCashComp
	1	2	3	4	5
RET	1.077**
RET	(0.442)
ROA		0.559**
ROA		(0.233)
ROE			0.090*
ROE			(0.052)
ROS				0.277**
ROS				(0.144)
EBITDA					0.496***
EBITDA					(0.215)
Narc	0.082	0.207**	0.096	0.129	0.113
Narc	(0.070)	(0.095)	(0.070)	(0.073)	(0.073)
RET x Narc	-2.737
RET x Narc	(1.860)
ROA x Narc		-1.657**
ROA x Narc		(0.802)
ROE x Narc			-0.378*
ROE x Narc			(0.222)
ROS x Narc				-1.269**
ROS x Narc				(0.524)
EBITDA x Narc					-1.435**
EBITDA x Narc					(0.730)
Size	0.027	0.027	0.026	0.026	0.032
Size	(0.027)	(0.026)	(0.027)	(0.026)	(0.027)
Debt	0.044	0.052	0.023	0.030	0.046
Debt	(0.073)	(0.073)	(0.072)	(0.072)	(0.074)
Growth	0.187***	0.168***	0.182***	0.108***	0.166***
Growth	(0.033)	(0.034)	(0.033)	(0.027)	(0.035)
Ownership	-1.004	-1.042	-1.031	0.186***	-1.055
Ownership	(0.803)	(0.797)	(0.797)	(0.033)	(0.799)
Duality	0.037	0.038	0.037	0.037	0.038
Duality	(0.025)	(0.025)	(0.025)	(0.025)	(0.025)
Turnover	-0.096***	-0.096***	-0.097***	-0.095***	-0.097***
Turnover	(0.018)	(0.018)	(0.018)	(0.018)	(0.018)
Committee	0.758***	0.763***	0.777***	0.774***	0.768***
Committee	(0.216)	(0.216)	(0.215)	(0.216)	(0.217)
Intercept	4.038***	3.969***	4.025***	4.002***	3.920***
Intercept	(0.306)	(0.303)	(0.307)	(0.305)	(0.303)
Mean VIF	2.38	2.64	3.20	2.73	2.40
Breusch-Pagan/Cook-Weisberg test	195.00***	232.35***	190.10***	201.06***	241.81***
Wald chi2	284.84***	281.59***	280.04***	275.81***	286.74***
Arellano-Bond test	-11.911***	-11.897***	-11.895***	-11.880***	-11.687***

	Dependent variable: CEOTotComp
	1	2	3	4	5
RET	1.611**
RET	(0.665)
ROA		0.448
ROA		(0369)
ROE			0.081
ROE			(0.067)
ROS				0.177
ROS				(0.231)
EBITDA					0.245
EBITDA					(0.338)
Narc	0.101	0.350	0.089	0.161	0.151
Narc	(0.106)	(0.151)	(0.103)	(0.113)	(0.112)
RET x Narc	-5.165*
RET x Narc	(2.881)
ROA x Narc		-3.308**
ROA x Narc		(1.336)
ROE x Narc			-0.406
ROE x Narc			(0.290)
ROS x Narc				-1.968**
ROS x Narc				(0.843)
EBITDA x Narc					-2.444**
EBITDA x Narc					(1.222)
Size	-0.126***	-0.128***	-0.127***	-0.124***	-0.116***
Size	(0.036)	(0.036)	(0.036)	(0.036)	(0.036)
Debt	0.078	0.036	0.052	0.029	0.062
Debt	(0.116)	(0.117)	(0.115)	(0.116)	(0.119)
Growth	0.277***	0.305***	0.277***	0.312***	0.301***
Growth	(0.047)	(0.051)	(0.047)	(0.049)	(0.052)
Ownership	-1.495	-1.579	-1.504	-1.540	-1.549
Ownership	(1.071)	(1.064)	(1.065)	(1.059)	(1.070)
Duality	0.090***	0.092**	0.090***	0.089***	0.092***
Duality	(0.032)	(0.032)	(0.032)	(0.032)	(0.032)
Turnover	-0.039	-0.039	-0.040	-0.038	-0.043
Turnover	(0.027)	(0.027)	(0.027)	(0.027)	(0.027)
Committee	1.301***	1.294***	1.321***	1.313***	1.305***
Committee	0.485)	(0.493)	(0.483)	(0.489)	(0.490)
Intercept	4.243***	4.223***	4.252***	4.225***	4.133***
Intercept	(0.361)	(0.368)	(0.363)	(0.363)	(0.363)
Mean VIF	2.38	2.64	3.20	2.73	2.40
Breusch-Pagan/Cook-Weisberg test	138.22***	152.91***	130.67***	134.02***	148.32***
Wald chi2	800.60***	802.29***	798.49***	807.31***	781.12***
Arellano-Bond test	-13.873***	-13.871***	-13.854***	-13.869***	-13.650***

	Dependent variable: CEOCashComp
	1	2	3	4	5
RET	0.443**
RET	(0.178)
ROA		0.231*
ROA		(0.233)
ROE			0.018
ROE			(0.017)
ROS				-0.006
ROS				(0.084)
EBITDA					0.201
EBITDA					(0.130)
Overconf	-0.009	0.002	-0.006	-0.009	-0.003
Overconf	(0.011)	(0.017)	(0.011)	(0.011)	(0.012)
RET x Overconf	-0.031
RET x Overconf	(0.339)
ROA x Overconf		-1.142
ROA x Overconf		(0.149)
ROE x Overconf			-0.037
ROE x Overconf			(0.029)
ROS x Overconf				-1.021
ROS x Overconf				(0.087)
EBITDA x Overconf					-0.096
EBITDA x Overconf					(0.138)
Size	0.027	0.027	0.026	0.027	0.032
Size	(0.027)	(0.026)	(0.027)	(0.026)	(0.027)
Debt	0.047	0.053	0.026	0.031	0.047
Debt	(0.072)	(0.073)	(0.072)	(0.072)	(0.074)
Growth	0.187***	0.164***	0.180***	0.182***	0.163***
Growth	(0.033)	(0.034)	(0.033)	(0.033)	(0.034)
Ownership	-0.999	-1.023	-1.024	-1.021	-1.033
Ownership	(0.801)	(0.794)	(0.796)	(0.796)	(0.796)
Duality	0.037	0.038	0.038	0.038	0.039
Duality	(0.025)	(0.025)	(0.025)	(0.025)	(0.025)
Turnover	-0.096***	-0.096***	-0.096***	-0.095***	-0.097***
Turnover	(0.018)	(0.018)	(0.018)	(0.018)	(0.018)
Committee	0.762***	0.784***	0.783***	0.784***	0.787***
Committee	(0.212)	(0.212)	(0.213)	(0.214)	(0.214)
Intercept	4.061***	4.014***	4.052***	4.034***	3.941***
Intercept	(0.308)	(0.303)	(0.307)	(0.306)	(0.304)
Mean VIF	1.18	1.51	1.22	1.24	1.20
Breusch-Pagan/Cook-Weisberg test	200.56***	238.87***	197.31***	206.30***	248.43***
Wald chi2	295.19***	289.96***	289.43***	285.26***	294.56***
Arellano-Bond test	-11.893***	-11.865***	-11.850***	-11.853***	-11.657***

	Dependent variable: CEOTotComp
	1	2	3	4	5
RET	0.284
RET	(0.255)
ROA		-0.322
ROA		(0.214)
ROE			-0.005
ROE			(0.023)
ROS				-0.278
ROS				(0.127)
EBITDA					-0.342
EBITDA					(0.198)
Overconf	-0.004	-0.003	0.001	-0.001	-0.005
Overconf	(0.016)	(0.023)	(0.015)	(0.016)	(0.017)
RET x Overconf	0.387
RET x Overconf	(0.519)
ROA x Overconf		0.022
ROA x Overconf		(0.214)
ROE x Overconf			-0.013
ROE x Overconf			(0.036)
ROS x Overconf				0.006
ROS x Overconf				(0.124)
EBITDA x Overconf					0.067
EBITDA x Overconf					(0.188)
Size	-0.127***	-0.127***	-0.127***	-0.124***	-0.114***
Size	(0.036)	(0.036)	(0.036)	(0.036)	(0.036)
Debt	0.078	0.029	0.056	0.026	0.059
Debt	(0.115)	(0.117)	(0.116)	(0.116)	(0.119)
Growth	0.279***	0.301***	0.274***	0.307***	0.298***
Growth	(0.047)	(0.051)	(0.047)	(0.049)	(0.051)
Ownership	-1.471	-1.522	-1.493	-1.525	-1.494
Ownership	(1.067)	(1.063)	(1.064)	(1.064)	(1.069)
Duality	0.089***	0.091***	0.091***	0.091***	0.092***
Duality	(0.032)	(0.032)	(0.032)	(0.032)	(0.032)
Turnover	-0.039	-0.039	-0.039	-0.039	-0.043
Turnover	(0.027)	(0.027)	(0.027)	(0.027)	(0.027)
Committee	1.312***	1.337***	1.331***	1.335***	1.337***
Committee	(0.480)	(0.481)	(0.479)	(0.483)	(0.482)
Intercept	4.277***	4.302***	4.271***	4.268***	4.161***
Intercept	(0.363)	(0.370)	(0.364)	(0.363)	(0.36)
Mean VIF	1.18	1.51	1.22	1.24	1.28
Breusch-Pagan/Cook-Weisberg test	140.22***	154.84***	133.24***	135.57***	151.25***
Wald chi2	810.61***	808.71***	812.56***	813.79***	791.62***
Arellano-Bond test	-13.860***	-13.831***	-13.839***	-13.835***	-13.619***

	Dependent variable: Delta
	1	2	3
Narc	-11.711**		-11.683**
Narc	(5.427)		(5.431)
Over		-0.407	-0.366
Over		(0.956)	(0.957)
Size	5.058***	5.012***	5.069***
Size	(1.647)	(1.623)	(1.646)
Debt	1.024	1.204	1.029
Debt	(1.142)	(1.173)	(1.140)
Growth	0.558	0.647	0.551
Growth	(1.626)	(1.620)	(1.622)
Ownership	307.803***	307.646***	307.692***
Ownership	(111.853)	(111.950)	(111.872)
Duality	-5.560***	-5.659***	-5.556***
Duality	(2.019)	(2.065)	(2.019)
Turnover	0.925	0.888	0.920
Turnover	(0.841)	(0.845)	(0.843)
Committee	1.135	1.065	1.099
Committee	(1.812)	(1.773)	(1.805)
Intercept	-37.524***	-40.715***	-37.632***
Intercept	(12.200)	(13.403)	(12.186)
Industry dummies	Yes	Yes	Yes
Year dummies	Yes	Yes	Yes
F statistic	3.11***	3.09***	3.10***
Adjusted R-squared	0.066	0.065	0.066
Shapiro-Wilk test	22.078***	22.082***	22.078***
Mean VIF	4.11	4.11	4.10
Breusch-Pagan/Cook-Weisberg test	438,593.04***	434,513.83***	438,462.29***

Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade, Departamento de Contabilidade e Atuária Av. Prof. Luciano Gualberto, 908 - prédio 3 - sala 118, 05508 - 010 São Paulo - SP - Brasil, Tel.: (55 11) 2648-6320, Tel.: (55 11) 2648-6321, Fax: (55 11) 3813-0120 - São Paulo - SP - Brazil
E-mail: recont@usp.br

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yuri.azevedo@ufersa.edu.br