Does Executive Compensation Work? Evidence from Shareholder Value Creation Over CEO Tenure

45 Pages Posted: 2 Aug 2008 Last revised: 1 Jul 2016

See all articles by James Jianxin Gong

James Jianxin Gong

California State University at Fullerton

Date Written: November 2, 2008

Abstract

The empirical research examining the association between CEO pay and various ac-counting, stock, and economic outcomes has not produced a consistent set of results. I be-lieve that these mixed results are partially attributable to the mismatch of time horizons, in which researchers measure CEO pay and firm performance. This study examines the associa-tion of CEO pay (level and pay-performance sensitivity) with shareholder value creation over CEO tenure, and thus matches CEO pay with shareholder interests in a better way than prior studies. Using a sample of CEOs whose tenure began in or after 1992 and ended in or before 2006, I find the ratio of total CEO pay to total shareholder value added to be 2-3%. I also find that CEOs with higher total pay level, on average, created more value for shareholders. Further, higher median pay-for-performance sensitivity over CEO tenure is associated with higher abnormal stock returns cumulated over CEO tenure and higher CEO pay efficiency. The results hold after I control for the effects of corporate size, book-to-market ratio, risk and corporate governance.

Keywords: Executive compensation, pay-for-performance, corporate governance, value based management.

Keywords: executive compensation, pay-for-performance, corporate governance, value based management

JEL Classification: G32, J33, J41, M4

Suggested Citation

Gong, Jianxin, Does Executive Compensation Work? Evidence from Shareholder Value Creation Over CEO Tenure (November 2, 2008). AAA 2009 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1196043 or http://dx.doi.org/10.2139/ssrn.1196043

Jianxin Gong (Contact Author)

California State University at Fullerton ( email )

Department of Accounting
Mihaylo College of Business and Economics
Fullerton, CA 92831
United States
(657)278-3897 (Phone)
(657)278-4518 (Fax)

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