Article2001

Are CEOs Rewarded for Luck? The Ones Without Principals Are

1,740 citations0/0 files storedThe Quarterly Journal of Economics

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Corporate Finance and Governance Auditing, Earnings Management, Governance Accounting and Organizational Management

Abstract

The contracting view of CEO pay assumes that pay is used by shareholders to solve an agency problem. Simple models of the contracting view predict that pay should not be tied to luck, where luck is defined as observable shocks to performance beyond the CEO's control. Using several measures of luck, we find that CEO pay in fact responds as much to a lucky dollar as to a general dollar. A skimming model, where the CEO has captured the pay-setting process, is consistent with this fact. Because some complications to the contracting view could also generate pay for luck, we test for skimming directly by examining the effect of governance. Consistent with skimming, we find that better governed firms pay their CEO less for luck.

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References

1986Large Shareholders and Corporate Control 1996Higher market valuation of companies with a small board of directors 1990Performance Pay and Top-Management Incentives 1988Outside directors and CEO turnover 1991The Effects of Board Composition and Direct Incentives on Firm Performance 1990Outside directors, board independence, and shareholder wealth 1985Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition

Cited by

2003Executive Compensation as an Agency Problem 2005Corporate tax avoidance and high-powered incentives 2008Why Has CEO Pay Increased So Much? *2005Identity and the Economics of Organizations 2002Ferreting out Tunneling: An Application to Indian Business Groups 2002Managerial Power and Rent Extraction in the Design of Executive Compensation 2005Governance Mechanisms and Equity Prices 2018Anticompetitive Effects of Common Ownership

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