OTROS PRÉSTAMOS

CEO’s compensation data are hand-collected from the proxy circulars of each company as listed in the System of Electronic Document Analysis and Retrieval (SEDAR)⁴

4 SEDAR is a comprehensive, online archive of securities documents filed by publicly traded companies in Canada.

. During our

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study period, the majority of sample firms (87) had the same Chief Executive Officer over the entire 5-year period. We call this subsample the Permanent CEO Group. The remaining 39 firms experienced one or more changes in CEOs during the study period. We call this subsample the Transient CEO Group. Since 8 firms changed ownership structures in the transient CEO group, we use 31 (39 minus 8) firms to compare the compensation of the new CEOs with the compensation of their predecessors.⁵

We combine the Permanent CEO Group and the Transient CEO Group to conduct multivariate analysis. For the 87 firms that make up the Permanent CEO Group, we obtain the market-to-book (M/B) ratio, the return on assets (ROA), and the debt-to-equity (D/E) ratio of each company from the Compustat database. For 8 firms, ratios are not reported. Thus, for the subsample of permanent CEO firms, we have 79 firms. In the Transient CEO Group, ratios of 6 firms are not available. Therefore, for the subsample of transient CEO firms, we have 33 firms.

As the study covers the period 2003-2007 inclusive, for this group we have a total of 560 observations. The composition of the observations is as follows: 96 from family-controlled firms, 228 from institution-controlled firms, and 236 from widely-held firms.

Eight firms changed CEOs more than once during the 5-year period of our study.

The components of CEO compensation vary among various companies. In this study, the analysis of CEO compensation is based on five different measures of compensation: total compensation, salary, annual bonus, contingent compensation, and all other compensation.

Salary measures the component of compensation that is fixed at the beginning of the year. The annual bonus is the short-term incentive which is often based on accounting measures of performance. Contingent compensation consists of stock options, performance plans, restricted options, and other long-term incentives⁶

5 The compensation of departing and the incoming CEOs are reported separately in the compensation information we found in the proxy circulars. If firms report compensation for a portion of the year for the departing and the incoming CEOs, we annualize the compensation.

. The term ‘contingent’ indicates that such compensation depends on the performance of the underlying asset. All other compensation consists of annual

6 Some firms specify the maximum, target, and threshold of future payouts A firm grants a number of shares to its CEO, and it sets performance goals for the CEO. If firm performance is superior, the CEO can get a contain percentage (e.g.120%) of grant shares, which is the Maximum. If firm performance is average, the CEO gets the same number of shares as they are granted, which is the target. If firm performance is below the required level, the CEO will only get a percentage less than the target (e.g. 80%), which is threshold. We use the target to estimate the compensation.

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pension, annual vocation, lump-sum pension, and retirement allowances. Total compensation is the sum of salary, annual bonus, contingent compensation, and all other compensation.

As salary, annual bonus and all other compensation are typically paid in cash or cash equivalent, the valuation of these three components is straightforward. However, the valuation of the contingent component is complex. We use the Black-Scholes Option Pricing model to calculate the dollar value of total contingent compensation.⁷

Furthermore, to be consistent with prior studies (Jensen and Murphy 1990a and Zhou 2000), we use the standard deviation of the continuously compounded monthly return as our volatility. We use the monthly total return index over a three-year period ending with the grant date. We obtain this data from DataStream. This approach may be criticized on the basis that weekly and annual return may be more appropriate. First, weekly returns have higher autocorrelations than monthly and annual returns. Second, using annual returns to calculate volatility requires data from prior years and that may reduce the number of companies in our sample due to missing data. Third, the volatility as determined from prior years, many of which may be far from the grant date, may not reflect the true volatility of the underlying security.

This process involves several steps.

First, we need to know the number of options granted the exercise price, and the time to expiry.

These data are collected from the proxy statements. Second, we use the 3-month Treasury bill rate as the risk-free rate. We obtain this data from the Bank of Canada. Third, we assume the time period is monthly. Then, if companies provide the grant date only for the grant year, but do not provide a grant date in later years, we assume that the grant date in later years is the same date as the grant year. Fourth, if companies do not give the grant exercise price, we assume that the closing share price on the grant date is the grant exercise price.

Moreover, a number of firms report CEO compensation annually in US dollars. Some of these firms also report the average exchange rate for the year. For these firms, we convert the CEO compensation from US dollars to Canadian dollars using the reported exchange rate. If firms reported CEO compensation annually in US dollars, but do not report the exchange rate, we use the average exchange rate for the year as reported by the Bank of Canada. In addition,

7 Canadian firms under the TSX do not need to report the values of option grants. We estimate the monetary values of options by the Black-Scholes formula (Fischer Black and Myron Scholes 1973). Option value 𝐶0= 𝑆0× 𝑁(𝑑1) − 𝐸/(1 + 𝑅𝑓)^𝑡× 𝑁(𝑑2), where 𝑑1= �ln(𝑆0⁄ ) + �𝑅𝐸 𝑓+ 1/2 × 𝜎²� × 𝑡�/�𝜎 × √𝑡�, and 𝑑2= 𝑑1− 𝜎 × √𝑡. In the formula, 𝑆0 is the value of the stock at the date, 𝐸 is exercise price, 𝑡 is expiration term (in months), 𝑅_𝑓 is the risk-free interest rate on 3-month Canadian Treasury Bills, 𝜎 is volatility, and N(•) is the cumulative standard normal distribution function.

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with the intention of comparing compensation of departing and incoming CEOs, we record salary, bonus, and contingent pay in the year of the grant for both departing and incoming CEOs in the Transient group.