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Firm Expansion and CEO Pay

Lucian A. Bebchuk
Harvard University - Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Yaniv Grinstein
Cornell University - Samuel Curtis Johnson Graduate School of Management

Harvard Law and Economics Discussion Paper No. 533, 2005
Johnson School Research Paper No. 27-06

Abstract:
We study the extent to which decisions to expand firm size are associated with increases in subsequent CEO compensation. Investigating a broad universe of firm-expansion choices, we find, controlling for performance and firm characteristics, a positive and economically meaningful correlation between CEO compensation and the CEO's past decisions to increase firm size. We demonstrate that the identified correlation is not driven by large corporate acquisitions, and that it remains significant and economically meaningful when firms making large acquisitions during the relevant period are excluded. We further find an asymmetry between size increases and decreases: while size increases are positively correlated with subsequent CEO pay, size decreases are not negatively correlated with subsequent CEO pay. The identified association between expansion decisions and subsequent CEO pay is relevant for assessing CEO incentives with respect to a broad range of choices made by firms.

Keywords: executive compensation, firm size, acquisitions, distributions, repurchases, stock issuance, empire-building, sales growth, pay for performance, options

JEL Classifications: D23, G32, G38, J33, J44, K22, M14

Working Paper Series

Date posted: November 07, 2005 ; Last revised: May 10, 2009

Suggested Citation

Bebchuk, Lucian A. and Grinstein, Yaniv, Firm Expansion and CEO Pay. Harvard Law and Economics Discussion Paper No. 533, 2005; Johnson School Research Paper No. 27-06. Available at SSRN: http://ssrn.com/abstract=838245

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Contact Information

Lucian A. Bebchuk (Contact Author) Harvard University - Harvard Law School ( email ) Cambridge, MA 02138 United States 617-495-3138 (Phone) 617-496-3119 (Fax) HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/
National Bureau of Economic Research (NBER) 1050 Massachusetts Avenue Cambridge, MA 02138 United States
European Corporate Governance Institute (ECGI) c/o ECARES ULB CP 114 B-1050 Brussels Belgium
Yaniv Grinstein Cornell University - Samuel Curtis Johnson Graduate School of Management ( email ) Sage Hall Ithaca, NY 14853 United States 607-255-8686 (Phone) 607-254-4590 (Fax)