Modeling the Relationship Between the Components of Executive Compensation: A Copula Approach

• Activity Number: 517
• Type: Contributed
• Date/Time: Wednesday, August 4, 2010 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Padma Rao Sahib *+ and Ruud Koning and Harmen De Weerd
• Companies: University of Groningen and University of Groningen and University of Groningen
• Keywords: copula models ; executive compensation ; bonuses ; inference on the margin

Abstract

In this paper we examine the distribution of individual components of the compensation (fixed salary, stock based compensation and bonuses) of executives. We do so by using copula techniques, While copula models have been used in finance and insurance, they have not been any applications to individual data on compensation. In the existing literature, compensation is either modeled as the sum of its components or each component is modeled independently. The relationship between these components is not addressed beyond simple correlations. Applying these models to compensation data on executives demonstrates that large positive deviations in fixed salary often occur with with large positive deviations in variable compensation (bonuses or stock based compensation). This effect is not observed in the relationship between bonuses and stock based compensation, suggesting an offsetting effect.