CEO Compensation, Director Compensation, and Firm Performance: Evidence of Cronyism
48 Pages Posted: 19 Apr 2002
Date Written: May 1, 2002
We model CEO and director compensation using firm characteristics, CEO characteristics, and governance variables. We find that director compensation is related to variables that proxy for the level of monitoring and effort required by directors. After controlling for monitoring proxies, we find a significant positive relation between CEO and director compensations. We hypothesize that this relation could be due to unobserved firm complexity (omitted variables), and/or to excessive compensation of directors and managers. We find that these excessive compensations are associated with firm underperformance. Thus, we conclude that excessive compensation may be associated with an environment of ineffective monitoring, which we term cronyism.
Keywords: director compensation, CEO compensation, monitoring, firm performance
JEL Classification: G30, G34
Suggested Citation: Suggested Citation