CEO Pay,Shareholder Returns,and Accounting Profits

We assess the impact on CEO pay (including salary, cash bonus, and benefits in kind) of changes in both accounting and shareholder returns in 99 British companies in the years 1972-89. After correcting for heterogeneity biases inherent in the standard specifications of the problem, we find a strong positive relationship between CEO pay and within-company changes in shareholder returns, and no statistically significant relationship between CEO pay and within-company changes in accounting returns. Differences between firms in long-term average profitability do appear to have a substantial effect on CEO pay, while differences between firms in shareholder returns add nothing to the within-firm pay dynamics.These findings call into question the rationale for explicitly share-based incentive schemes.