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Excess pay and deficient performance
Author(s) -
Carter Mary Ellen,
Li Lei,
Marcus Alan J.,
Tehranian Hassan
Publication year - 2016
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2015.08.003
Subject(s) - executive compensation , compensation (psychology) , agency (philosophy) , sign (mathematics) , pay for performance , principal–agent problem , economics , business , microeconomics , psychology , social psychology , finance , incentive , corporate governance , mathematics , mathematical analysis , philosophy , epistemology
We investigate the link between abnormal CEO compensation and firm performance, asking whether high unexplained compensation relative to several benchmarks is a sign of hard‐to‐measure but desirable executive attributes or is instead a symptom of unsolved agency problems. We find that abnormally high CEO pay predicts worse future firm performance. Abnormally high compensation that is performance‐contingent is a less ominous signal about the future success of the firm. But abnormal levels of even performance‐contingent compensation predict worse future performance. We conclude that abnormally high CEO pay can be useful as an independent indicator of agency problems.