CEO excess compensation: The impact of firm size and managerial power

Mary S. Hill, Thomas J. Lopez and Austin L. Reitenga

Advances in accounting, 2016, vol. 33, issue C, 35-46

Abstract: Chief executive officer (CEO) compensation has received a great deal of attention over the past several decades. Critics assert that CEO compensation is “excessive” because it is only weakly linked to firm performance (i.e., managerial rent-extraction). On the other hand, defenders suggest that CEO compensation is “justified” given the incremental shareholder wealth created by CEOs, or that large CEO compensation packages merely reflect labor market forces. Prior research documents that CEO power and firm size are associated with larger compensation, but providing evidence that the larger compensation is excessive (i.e., not economically justified) has proven difficult. For each test firm we identify a potential replacement CEO (i.e., an executive-specific, within-country (US) compensation benchmark) and create an empirical test of excess compensation. We also examine the possibility that excess compensation is conditional upon firm size or CEO power. In spite of an inherent bias against finding excess compensation, the results suggest that the most powerful CEOs receive compensation that is not economically justified. We find no evidence of CEO excess compensation in the largest firms.

Keywords: CEO compensation; Excess compensation; Managerial power (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:33:y:2016:i:c:p:35-46

DOI: 10.1016/j.adiac.2016.04.007

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