Abstract
A managerial compensation structure based on the pay-for-performance principle has been proposed as a better solution to the agency problem. Within the agency-theory framework, this study examined the determinants of cash compensation for chief executive officers (CEOs) of restaurant firms. After examining the financial data for 73 U.S. restaurant firms for 2002, the study found that restaurant CEO cash compensation was positively correlated with firm size and operating efficiency. Growth, debt leverage, profitability, and stock performance played no role in determining compensation. Large restaurant firms efficiently using assets tended to offer high cash compensation to their CEOs. Our findings have revealed that pay-for-performance was only partially practiced in the restaurant industry. To minimize the agency problem and enhance firm value, the industry should further tie CEO compensation to profitability and stock performance.
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