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Excess pay and deficient performance

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  • Mary Ellen Carter
  • Lei Li
  • Alan J. Marcus
  • Hassan Tehranian

Abstract

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.

Suggested Citation

  • Mary Ellen Carter & Lei Li & Alan J. Marcus & Hassan Tehranian, 2016. "Excess pay and deficient performance," Review of Financial Economics, John Wiley & Sons, vol. 30(1), pages 1-10, September.
    • Handle: RePEc:wly:revfec:v:30:y:2016:i:1:p:1-10
    DOI: 10.1016/j.rfe.2015.08.003
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