Abstract
This study examines the effect of firm financial efficiency on executive compensation with an emphasis on the US apparel industry. We find that both annual efficiency levels and cumulative efficiency changes obtained from the Data Envelopment Analysis (DEA) are positively associated with CEO pay. The effect is stronger for technological changes and changes in scale efficiency. Our results seem to support the pay-for-efficiency paradigm, a stricter version of the pay-for-performance framework under the efficient contracting explanation for CEO pay.
Highlights
IntroductionFrom 1978 to 2014, the inflation-adjusted average CEO compensation in the USA increased by 997% compared to about 11% for a typical worker (Mishel & Davis, 2015)
CEO compensation has been a hot topic of discussion for decades
In an attempt to circumvent the issues described above, we propose the use of the more comprehensive performance measure estimated in line with data envelopment analysis techniques (DEA) called the Malmquist Productivity Index
Summary
From 1978 to 2014, the inflation-adjusted average CEO compensation in the USA increased by 997% compared to about 11% for a typical worker (Mishel & Davis, 2015). A nationwide survey of 1,202 people by the Rock Center of Stanford University revealed that CEO compensation is not accurately set relative to the average worker in the firm. Many CEOs saw their pay go up even as their companies performed poorly (Jensen & Murphy, 2010). This disconnect between CEO pay and firm performance brought to the forefront once again the question of why CEOs are exorbitantly paid for the performance they produce. We attempt to put forward another measure, the firm’s financial efficiency, as an explanation for executive compensation levels
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