3. In this problem you are going to analyze the CEO dataset published by Equilar. The file ceo.

xls
provides data on the CEO total compensation including salary, stock options and bonus.
You are free to use the software of your choice to answer the following questions. However, we
strongly encourage you to use STATA or Excel for this exercise.

(a) Find the sample mean, median and standard deviation for each type of compensations and fill
out the table below. Comment on your results in terms of what you learned from this numbers.

Stock & option

Salary Bonus Other Total
awards

Mean $1,104,063 $2,602,992 $447,293 $6,445,048 $10,599,395

Median $1,047,602 $1,958,400 $163,717 $5,632,284 $9,416,076
St. Deviation $377,365 $2,290,980 $1,245,001 $4,232,505 $5,517,902

Comment:

First of all, the data shows that Stock & Option award compensation make up most of the
total compensation for most CEOs. Additionally, it is interesting to note that Salary
compensation is the second lowest of all categories. The salary category’s standard deviation
is also relatively low, which indicates that on average most CEOs earn a salary that is close
to the average indicated above. Interestingly, the “Other” category has a very high standard
deviation. Although it is unclear what the source of this compensation is, it is important to
note that such deviation is largely due to 3-4 large outliers (one CEO had $11M in this
category).

(b) Make a scatter plot of the CEO’s total compensation against the annual stock return. Label the
axis. Are there any outliers? Is there a strong relationship between the two?
Total Comp.
CEO Compensation vs. Annual Stock Return
$35,000,000

$30,000,000

$25,000,000

$20,000,000

$15,000,000

$10,000,000

$5,000,000

$0
-50% -30% -10% 10% 30% 50% 70% 90% 110% 130% 150% Annual Return
There are some outliers on the top of the scatterplot (those with $25M+ total comp.) and also the CEO who is making
~$15M despite the -46% annual stock return, for example. The relationship between the two isn’t strong given that the
correlation is .132 (r =.132), also exemplified visually by the best-fit-line in the graph.
(c) Generate a set of new variables measuring the proportion of the type of pay to the total
compensation. Plot the histograms of the proportion of salary, bonus and stock options and
interpret the resulting findings.

Based on the histogram findings, it is clear that the Salary vs. Total Compensation histogram is
right-skewed. This shows us that most CEOs have a salary that is a relatively low proportion of
their total compensation. Although the skewedness for Bonus vs. Total Compensation is less
drastic compared to the aforementioned, one can see that it is also right-skewed. This therefore
shows that bonus is also a relatively small part of total compensation for CEOs.

When it comes to Stock Option vs. Total Compensation, however, the left-skewed histogram
confirms our prediction stated in part (a) – “Stock & Option award compensation make up most
of the total compensation for CEOs”.
(d) Find the correlation between the CEO’s total compensation and the annual stock return. Interpret
the resulting number.

CEO Comp.

CEO Compensation vs. Annual Stock Return

$35,000,000

$30,000,000

$25,000,000

$20,000,000

$15,000,000

$10,000,000

$5,000,000

$0
-50% -30% -10% 10% 30% 50% 70% 90% 110% 130% 150% Annual Stock Return

The correlation between the CEO’s total compensation and the annual stock return is .132 (r =
.132). This is a weak positive correlation. This shows that although Stock and Award Options
make up a large part of CEO’s total compensation, both factors are not strongly connected. This
implies that just because the annual stock return for a company is low, the CEO’s total
compensation will not necessarily decrease.