CEO COMPENSATION AND SUBSEQUENT FIRM PERFORMANCE: AN EMPIRICAL INVESTIGATION

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Abstract

This study develops and uses a two-stage model to examine the correlation between the compensation of 137 CEO’s and the subsequent performance of the 56 companies they manage. This study tests both relationships suggested by the analytical compensation literature and several common assumptions made in the empirical compensation literature. The results suggest that the form of CEO compensation and the relative importance of personal stock ownership both have an effect on subsequent firm performance. Greater reliance on stock options, as a form of CEO compensation, is positively correlated with superior subsequent firm performance, while greater reliance on annual bonuses appears to have the opposite effect. The results also suggest that greater personal stock ownership may not provide the commonly assumed alignment of interest between CEO and stockholder.

Keywords: Compensation, CEO, Stockholder, Stock Option

How to cite this paper: Stammerjohan, W. (2004). CEO compensation and subsequent firm performance: An empirical investigation. Corporate Ownership & Control, 2(1), 86-103. https://doi.org/10.22495/cocv2i1p7