Does Executive Compensation Work? Evidence from Shareholder Value Creation Over CEO Tenure
45 Pages Posted: 2 Aug 2008 Last revised: 1 Jul 2016
Date Written: November 2, 2008
The empirical research examining the association between CEO pay and various ac-counting, stock, and economic outcomes has not produced a consistent set of results. I be-lieve that these mixed results are partially attributable to the mismatch of time horizons, in which researchers measure CEO pay and firm performance. This study examines the associa-tion of CEO pay (level and pay-performance sensitivity) with shareholder value creation over CEO tenure, and thus matches CEO pay with shareholder interests in a better way than prior studies. Using a sample of CEOs whose tenure began in or after 1992 and ended in or before 2006, I find the ratio of total CEO pay to total shareholder value added to be 2-3%. I also find that CEOs with higher total pay level, on average, created more value for shareholders. Further, higher median pay-for-performance sensitivity over CEO tenure is associated with higher abnormal stock returns cumulated over CEO tenure and higher CEO pay efficiency. The results hold after I control for the effects of corporate size, book-to-market ratio, risk and corporate governance.
Keywords: Executive compensation, pay-for-performance, corporate governance, value based management.
Keywords: executive compensation, pay-for-performance, corporate governance, value based management
JEL Classification: G32, J33, J41, M4
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