CEO Compensation and Real Estate Prices: Pay for Luck or Pay for Action?

59 Pages Posted: 8 Aug 2018 Last revised: 26 Mar 2019

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University Questrom School of Business

Benjamin Bennett

Ohio State University (OSU) - Department of Finance

Claudia Custodio

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Dragana Cvijanovic

University of North Carolina Kenan-Flagler Business School

Date Written: February 28, 2019

Abstract

This paper uses real estate price shocks to study the sensitivity of CEO pay to luck. Evidence that CEOs are paid for lucky events that are outside of their control is commonly interpreted as inefficient contracting. However, compensating CEOs for luck can be part of efficient contracting if boards want to provide CEOs with incentives to act or respond to the lucky event. We use real estate price shocks to test whether CEOs are paid for luck, or paid to act or respond to luck. We distinguish between pay for luck and pay for action by exploiting GAAP accounting rules. In the US real estate used in the firm's operations is not market-to-market, thus a change in the value of real estate is only accounted for when the CEO reacts to the change in property value by, for instance, selling the real estate asset. We show that CEO compensation is associated with responses to real estate luck, which mostly explains the pay for luck. Our results challenge the inefficient contracting interpretation of pay for luck.

Keywords: pay for luck; real estate prices; executive compensation

Suggested Citation

Albuquerque, Ana M. and Bennett, Benjamin and Custodio, Claudia and Cvijanovic, Dragana, CEO Compensation and Real Estate Prices: Pay for Luck or Pay for Action? (February 28, 2019). Kenan Institute of Private Enterprise Research Paper No. 18-39. Available at SSRN: https://ssrn.com/abstract=3212867 or http://dx.doi.org/10.2139/ssrn.3212867

Ana M. Albuquerque

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

Benjamin Bennett

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://sites.google.com/site/benjaminbennettfinance/

Claudia Custodio (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Dragana Cvijanovic

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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