CEO excess compensation: The impact of firm size and managerial power |
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| Institution: | 1. John T. Steed School of Accounting, Price College of Business Administration, University of Oklahoma, United States;2. Culverhouse School of Accountancy, Culverhouse College of Commerce and Business Administration, University of Alabama, United States;1. School of Management, Zhejiang University, China;2. International Institute for Financial Studies and RCFMRP, Jiangxi University of Finance & Economics, China;3. School of Economics and Academy of Financial Research, Zhejiang University, China;1. Carroll School of Management, Boston College, Chestnut Hill, MA, USA;2. School of Business, University of Kansas, Lawrence, KS, USA |
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| 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. |
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