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

44 Pages Posted: 31 Oct 2008 Last revised: 28 Sep 2013

See all articles by Robert Daines

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2005

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.

Suggested Citation

Daines, Robert and Nair, Vinay B. and Kornhauser, Lewis A., The Good, the Bad and the Lucky: CEO Pay and Skill (August 1, 2005). NYU Working Paper No. CLB-06-005, Rock Center for Corporate Governance Working Paper No. 32, Available at SSRN: https://ssrn.com/abstract=1291573

Robert Daines (Contact Author)

Stanford Law School ( email )

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Stanford Graduate School of Business ( email )

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Vinay B. Nair

University of Pennsylvania - Finance Department ( email )

The Wharton School
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215-898-6200 (Fax)

Lewis A. Kornhauser

New York University School of Law ( email )

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New York, NY 10012-1099
United States
(212) 998-6175 (Phone)
(212) 995-4341 (Fax)

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