Executive Compensation: Performance versus Personal Characteristics

Abstract

The purpose of this paper is to present evidence on the determinants of compensation of top-salaried chief executives of American industrial corporations. While a number of previous studies have purported to pursue this topic, prior research has actually been focused on one rather narrow aspect of the executive compensation process. Specifically, the emphasis in previous studies of executive compensation has been placed upon testing the relative importance of sales and profits as determinants of executive salaries, in an effort to shed light upon the targets and objectives of modern managers. Briefly, if the profit-maximization hypothesis of the economist's theory of the firm is to hold, executive salaries must be more closely related to profits than sales-if incomes and sales are more closely related, then a sales maximization objective is inferred. The implicit assumption in these studies is that profits and/or sales are indicators of executive productivity. Since performance is the principal determinant of compensation within the traditional neoclassical marginal productivity approach to wage determination, little attention has been directed to broader determinants of executive compensation, such as the personal characteristics of the individual executives. The intent of this paper is to introduce and test some additional hypotheses concerning executive compensation. We are particularly interested in examining the role of experience, education, business background, and related characteristics which might be considered by a corporate board of directors attempting to recruit and compensate a chief executive in a world of imperfect information.