New insights into executive compensation and firm performance

Giorgio Canarella

47 citations0/0 files storedManagerial Finance

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Corporate Finance and Governance Accounting and Organizational Management Human Resource and Talent Management

Abstract

Purpose This paper aims to examine the relation between executive compensation, firm size and firm performance on a panel of the so‐called “new economy” firms in the USA over the period 1996‐2002. Design/methodology/approach The authors use two measures of performance, total shareholder return and return on assets, and concentrate on total CEO compensation, which includes stock option compensation, as equity‐based compensation practices have been prevalent in new economy firms. The estimation process uses both the feasible generalized least squares method of Parks and Kmenta and the panel corrected standard error method of Beck and Katz. These methodologies investigate error structures that do not conform to the classical ordinary least squares assumptions. Findings The econometric results indicate that estimates on firm size are robust to alternative specifications of the error structures. There is evidence however that the effect of firm size on CEO compensation is more significant after the stock market crash of 2000. The opposite holds true for the estimates on firm performance. In addition, estimates on firm performance are more sensitive to the estimation method and the specification of the error structures. Research limitations/implications The research presented in this paper is a first step in the direction of understanding the pay to performance relation in the “new economy” industries in the USA. Additional research is warranted, which should extend both the time series and the cross section aspects of the data. Originality/value The paper fills an important gap in the existing literature by providing rigorous econometric evidence on the pay to performance relation in the so‐called “new economy” industries. The evidence provided in this paper is relevant as it complements the findings in the literature on executive compensation in the so‐called “old economy” industries, which typically make up the samples of most previous studies.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1973The Pricing of Options and Corporate Liabilities 2001Econometric Analysis of Cross Section and Panel Data 1979Moral Hazard and Observability 1995What To Do (and Not to Do) with Time-Series Cross-Section Data 1990Performance Pay and Top-Management Incentives 1983Agency Problems and Residual Claims 1991Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence

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