Firm Performance and Executive Compensation in the Savings and Loan Industry

27 Pages Posted: 25 Mar 1998

See all articles by Benjamin E. Hermalin

Benjamin E. Hermalin

University of California, Berkeley

Nancy Wallace

University of California, Berkeley - Real Estate Group

Abstract

Previous empirical analyses of the relationship between executive compensation and firm performance are often interpreted as suggesting that this relationship is weak. Although an absolute term like "weak" is ambiguous in this context, relative terms, such as "stronger," are meaningful. We argue that a stronger relationship can be found if a more appropriate specification is used in estimation. Specifically, an implicit assumption in the previous literature is that all firms use the same compensation scheme. Theoretically, this is a difficult assumption to accept. Moreover, we show that it is rejected empirically as well. When we allow different compensation schemes, we indeed find a relationship between executive pay and firm performance that is about 2.8 times larger than that found using previous methods.

JEL Classification: G39, D21, J33, G21

Suggested Citation

Hermalin, Benjamin E. and Wallace, Nancy E., Firm Performance and Executive Compensation in the Savings and Loan Industry. Available at SSRN: https://ssrn.com/abstract=68980 or http://dx.doi.org/10.2139/ssrn.68980

Benjamin E. Hermalin (Contact Author)

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7575 (Phone)
510-643-1420 (Fax)

Nancy E. Wallace

University of California, Berkeley - Real Estate Group ( email )

Berkeley, CA 94720-1900
United States

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