Abstract

http://ssrn.com/abstract=622223
 
 

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The Good, the Bad and the Lucky: CEO Pay and Skill


Robert Daines


Stanford Law School; Stanford Graduate School of Business

Vinay B. Nair


University of Pennsylvania - Finance Department

Lewis A. Kornhauser


New York University School of Law

August 2005

Univ. of Pennsylvania Institute for Law and Economics, Research Paper Series, Forthcoming

Abstract:     
CEO compensation varies widely, even within industries. In this paper, we investigate whether differences in skill explain these differences in CEO pay. Using the idea that skilled CEOs should be more likely to continue prior good performance and more likely to reverse prior poor performance, we develop a new methodology to detect whether skill is related to pay. We find that highly paid CEOs are more skilled than their less well paid peers when pay is performancebased and when there is a large shareholder. This detected link between pay and skill is strong even when we examine industry-wide declines: highly paid CEOs are more likely to reverse the firm's fortunes. We also examine CEO turnovers and show that the firm's post-turnover performance is related to differences between the two CEO's pay levels. These results highlight conditions where pay and skill are linked, and hence identify firms where high pay appears to have no justification.

Number of Pages in PDF File: 42

Keywords: Executive Compensation, Governance, CEO

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Date posted: November 22, 2004  

Suggested Citation

Daines, Robert and Nair, Vinay B. and Kornhauser, Lewis A., The Good, the Bad and the Lucky: CEO Pay and Skill (August 2005). U of Penn, Inst for Law & Econ Research Paper 05-07; NYU, Law and Economics Research Paper No. 04-035. Available at SSRN: http://ssrn.com/abstract=622223 or http://dx.doi.org/10.2139/ssrn.622223

Contact Information

Robert Daines (Contact Author)
Stanford Law School ( email )
559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-736-2684 (Phone)
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States

Vinay B. Nair
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0004 (Phone)
215-898-6200 (Fax)
Lewis A. Kornhauser
New York University School of Law ( email )
40 Washington Square South
New York, NY 10012-1099
United States
(212) 998-6175 (Phone)
(212) 995-4341 (Fax)
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