CEO Compensation and Future Shareholder Returns: Evidence from the London Stock Exchange

47 Pages Posted: 31 Oct 2013 Last revised: 4 Nov 2016

See all articles by Nikolaos Balafas

Nikolaos Balafas

University of Liverpool

Chris Florackis

University of Liverpool (UK)

Date Written: July 04, 2014


This study examines the ex-post consequences of CEO compensation for shareholder value. The main objective is to explore whether companies that pay their CEO excessive fees (in comparison to those of peer firms in the same industry and size group) generate superior future returns and better operating performance. Our analysis, which separately considers the cash-based and incentive/equity-based components of CEO compensation, is based on a large sample of UK-listed companies over the period 1998-2010. We find that CEO incentive pay is negatively associated with short-term subsequent returns. Interestingly, firms that pay their CEOs at the bottom of the incentive-pay distribution earn positive abnormal returns and, also, significantly outperform those at the top of the incentive-pay distribution. Further analysis reveals that such out-performance can be largely explained by the excessive exposure of low-incentive-pay firms to idiosyncratic risk. Finally, evidence from panel regressions suggests that, in addition to its negative relationship with returns, incentive pay is also inversely associated with future operating performance.

Keywords: CEO Compensation; Incentive/Equity-based Pay; Executive Pay; Stock Returns; Operating Performance

JEL Classification: J33; G32; G34

Suggested Citation

Balafas, Nikolaos and Florackis, Chris, CEO Compensation and Future Shareholder Returns: Evidence from the London Stock Exchange (July 04, 2014). Journal of Empirical Finance, vol. 27, pp. 97-115, Available at SSRN: or

Nikolaos Balafas

University of Liverpool

Chatham Street
Brownlow Hill
Liverpool, L69 7ZA
United Kingdom

Chris Florackis (Contact Author)

University of Liverpool (UK) ( email )

The Management School
University of Liverpool
Liverpool, L 697ZH
United Kingdom

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