The Relations of Degree of Operating Leverage, Return on Equity to Managerial Compensation: The Moderating Role of Firm Size

Abstract

This study investigated the effect of firm size on the relationship between the Degree of Operating Leverage (DOL) and the Return On Equity (ROE) with Managerial Compensation (MComp) using the data of companies listed on the Tehran Stock Exchange. First, we examined how operating leverage can relate differently to top manager salaries. Second, we investigated whether ROE is associated with MComp. Last, we explored how firm size moderates the relationships between MComp, operating leverage, and ROE. Our findings show that the DOL has a significant negative relationship with MComp. ROE has a significant positive relationship with MComp. Firm size moderates the negative relationship between operating leverage and MComp. Firm size strengthens the positive relationship between ROE and MComp. The level of MComp reflects the degree of business risk and management efficiency, which in a way can indicate the effort and ability of senior managers. In companies with low operating leverage and high ROE, management usually receives more compensation. Because the hierarchical structure or other characteristics of a firm may change with firm size, firm size can play a unique role in determining management compensation levels.