Firm Performance and Executive Compensation in the Savings and Loan Industry

Benjamin Hermalin and Nancy E. Wallace
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Nancy E. Wallace: University of California at Berkeley

Finance from University Library of Munich, Germany

Abstract: Previous empirical analyses of the relationship between executive compensation and firm performance are often interpreted as suggesting that this relationship is weak. Although an absolute term like "weak" is ambiguous in this context, relative terms, such as "stronger," are meaningful. We argue that a stronger relationship can be found if a more appropriate specification is used in estimation. Specifically, an implicit assumption in the previous literature is that all firms use the same compensation scheme. Theoretically, this is a difficult assumption to accept. Moreover, we show that it is rejected empirically as well. When we allow different firms to use different compensation schemes, we indeed find a relationship between executive pay and firm performance that is about 2.8 times larger than that found using previous methods.

Keywords: Executive compensation; random-coefficients models; savings and loans (search for similar items in EconPapers)
JEL-codes: D21 G21 G39 J33 (search for similar items in EconPapers)
Pages: 27 pages
Date: 1997-10-31
Note: Type of Document - PDF file (figures in Newtable2.pdf); prepared on IBM PC ; pages: 27 ; figures: In PDF format in file Newtable2.pdf
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Firm performance and executive compensation in the savings and loan industry (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:9710006

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