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The myth of executive compensation: do shareholders get what they pay for?

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  • Mark Bayless

Abstract

We use compensation data for a sample of 701 US public firms and document a significant positive relation between the level of executive compensation and the subsequent realized stock returns. In present value terms, shareholders in firms incurring a total compensation cost of $78 million above the median experience subsequent incremental wealth gains of $385 million above the median over the 5-year period following compensation awards. The results are robust to the use of size and industry-adjusted measures of compensation and returns, and hold after we segment the sample by firm size and industry. Our evidence is consistent with rational executive labour markets where more talented executives command higher compensation and produce superior returns.

Suggested Citation

  • Mark Bayless, 2009. "The myth of executive compensation: do shareholders get what they pay for?," Applied Financial Economics, Taylor & Francis Journals, vol. 19(10), pages 795-808.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:10:p:795-808
    DOI: 10.1080/09603100802014571
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    Cited by:

    1. Sardar Ahmad & Saeed Akbar & Devendra Kodwani & Anwar Halari & Syed Zubair Shah, 2023. "Compliance or non‐compliance during financial crisis: Does it matter?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2348-2366, July.
    2. Sohail Ahmad Javeed & Tze San Ong & Rashid Latief & Haslinah Muhamad & Wei Ni Soh, 2021. "Conceptualizing the Moderating Role of CEO Power and Ownership Concentration in the Relationship between Audit Committee and Firm Performance: Empirical Evidence from Pakistan," Sustainability, MDPI, vol. 13(11), pages 1-26, June.
    3. Sohail Ahmad Javeed & Lin Lefen, 2019. "An Analysis of Corporate Social Responsibility and Firm Performance with Moderating Effects of CEO Power and Ownership Structure: A Case Study of the Manufacturing Sector of Pakistan," Sustainability, MDPI, vol. 11(1), pages 1-25, January.
    4. Muhammad Fayyaz Sheikh & Syed Zulfiqar Ali Shah & Saeed Akbar, 2018. "Firm performance, corporate governance and executive compensation in Pakistan," Applied Economics, Taylor & Francis Journals, vol. 50(18), pages 2012-2027, April.
    5. Adrian C. H. Lei & Frank M. Song, 2012. "Board structure, corporate governance and firm value: evidence from Hong Kong," Applied Financial Economics, Taylor & Francis Journals, vol. 22(15), pages 1289-1303, August.

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