Abstract

We investigate the link between abnormal CEO compensation and firm performance, asking whether high unexplained compensation relative to several benchmarks is a sign of hard-to-measure but desirable executive attributes or is instead a symptom of unsolved agency problems. We find that abnormally high CEO pay predicts worse future firm performance. Abnormally high compensation that is performance-contingent is a less ominous signal about the future success of the firm. But abnormal levels of even performance-contingent compensation predict worse future performance. We conclude that abnormally high CEO pay can be useful as an independent indicator of agency problems.

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