Download this Paper Open PDF in Browser

CEO Compensation, Director Compensation, and Firm Performance: Evidence of Cronyism

48 Pages Posted: 19 Apr 2002  

Ivan E. Brick

Rutgers Business School

Oded Palmon

Rutgers Business School

John K. Wald

University of Texas at San Antonio

Date Written: May 1, 2002

Abstract

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

Brick, Ivan E. and Palmon, Oded and Wald, John K., CEO Compensation, Director Compensation, and Firm Performance: Evidence of Cronyism (May 1, 2002). Available at SSRN: https://ssrn.com/abstract=303574 or http://dx.doi.org/10.2139/ssrn.303574

Ivan E. Brick

Rutgers Business School ( email )

111 Washington Avenue
Newark, NJ 07102
United States
973-353-5155 (Phone)
973-353-1233 (Fax)

Oded Palmon

Rutgers Business School ( email )

Room 5123
100 Rockafeller Road
Piscataway, NJ 08854
United States
848-445-4209 (Phone)
848-445-3907 (Fax)

John K. Wald (Contact Author)

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)

Paper statistics

Downloads
1,774
Rank
6,952
Abstract Views
6,118