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

42 Pages Posted: 22 Nov 2004  

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

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Date Written: August 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.

Keywords: Executive Compensation, Governance, CEO

Suggested Citation

Daines, Robert and Nair, Vinay B. and Kornhauser, Lewis A., The Good, the Bad and the Lucky: CEO Pay and Skill (August 2005). U of Penn, Inst for Law & Econ Research Paper 05-07; NYU, Law and Economics Research Paper No. 04-035. Available at SSRN: https://ssrn.com/abstract=622223 or http://dx.doi.org/10.2139/ssrn.622223

Robert Daines (Contact Author)

Stanford Law School ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States
650-736-2684 (Phone)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Vinay B. Nair

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-746-0004 (Phone)
215-898-6200 (Fax)

Lewis A. Kornhauser

New York University School of Law ( email )

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

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