Relationship Between Return on Equity, Total Shareholder Return, and CEO Compensation

Karin Huo, Walden University


Chief executive officer (CEO) compensation continues to increase in spite of economic downturns and reach historic highs each year, to the dismay of shareholders and the general public. The public's lack of understanding of the relationship between firm performance and CEO compensation has impacted negative views toward executive compensation. There should be a high correlation between a CEO's compensation and firm performance if the company's goal is to align the interests of management and shareholders; however, the relationship does not always appear to exist in practice. Grounded in agency theory, the purpose of this correlational study was to examine the relationship between return on equity (ROE), total shareholder return (TSR), and total CEO compensation in the Canadian financial services industry. Archival data from publicly traded Canadian financial services companies were collected and analyzed. Multiple regression techniques were used to identify a statistically significant model, F(2,195) = 9.216, p< .000, R2=.086. Changes in ROE were found to be more significantly sensitive than changes in TSR relative to the impact on changes in CEO compensation. This study may contribute to positive social change by providing information that could help compensation committees regarding decisions about executive incentive compensation packages. This study may also help compensation committees address societal perception and concerns regarding the significant perceived differences in compensation between executives and employees.