Essays on executive compensation

This dissertation investigates one of the most critical issues in recent corporate governance research, executive compensation. It includes two essays on how executives should be paid and which parties can monitor those decisions.First essay, "Are Foreign Investors Really Beneficial? Evidence from South Korea", examines whether foreign investors impact corporate governance by analyzing the relation between foreign share ownership and pay-performance sensitivity. The essay tests our hypotheses using a sample of Korean firms, an emerging market with unique characteristics. The essay finds that firms with higher foreign share ownership have greater significant payperformance sensitivity, suggesting that foreign investors may be good monitors. The essay controls for the endogenous bias that foreign investors may only invest in firms that have already exhibited good governance practices, and the results are unchanged. Moreover, the essay finds some evidence that changes in foreign ownership (Hartzell and Starks, 2003) are associated with long-run positive changes in pay-performance sensitivity, but not the other way around. The results suggest that foreign shareholders promote improved corporate governance in Korea, consistent with Aggarwal et al (2010).Second essay, "Does a Salary Cap Really Work?", investigates the effectiveness of salary cap system in Korea in order to give the policy implication to the U.S. government on limiting executive compensation. The essay investigates the effectiveness of a form of an executive salary cap system and finds that only firms with a high level of effective external monitors set their salary cap significantly sensitive to firm performance (cap-performance sensitivity). The difference between the salary cap and actual pay (the gap) varies by the level of monitoring. Therefore, the existence of an efficient external monitoring system may be critical for a salary cap system to be successful. It also finds evidence suggesting that incentive structures created by a salary cap may properly work only in the presence of an effective external monitoring system by improving better pay-performance sensitivity. Since it is almost impossible to determine an optimal level for a salary cap, it concludes that improving firm-level governance may be more important to thwart highly excessive compensation than legalizing the upper limit.