Is the Pay-Performance Relationship Always Positive?

27 Pages Posted: 12 Feb 2007

See all articles by Piet J. W. Duffhues

Piet J. W. Duffhues

Tilburg University - Tilburg University School of Economics and Management

Rezaul Kabir

University of Twente - Department of Finance and Accounting

Date Written: February 2007

Abstract

This study examines the widespread belief that executive pay should reflect firm performance. We compile a hand-collected data set of compensation paid to executive directors of Dutch listed companies and analyze if executive compensation is indeed determined by firm performance. A variety of accounting-based and capital market-based performance measures are used. The analysis also encompasses both contemporaneous and lagged relationships, and controls for firm, time and industry characteristics. Our robust empirical analysis fails to detect a positive pay-performance relationship. The finding questions the conventional wisdom that executive pay helps to align shareholder interests with those of managers. It is consistent with the view that powerful managers can influence their own pay. The results of the study suggest that other means of resolving agency problems and novel explanations of executive compensation may provide useful insights.

Keywords: Executive compensation, Managerial remuneration, Firm performance, Corporate governance

JEL Classification: G30, G34, J33, M52

Suggested Citation

Duffhues, Piet J. W. and Kabir, Rezaul, Is the Pay-Performance Relationship Always Positive? (February 2007). Available at SSRN: https://ssrn.com/abstract=962030 or http://dx.doi.org/10.2139/ssrn.962030

Piet J. W. Duffhues

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Rezaul Kabir (Contact Author)

University of Twente - Department of Finance and Accounting ( email )

Faculty of Behavioral, Management & Social Science
P. O. Box 217
Enschede, 7500 AE
Netherlands
+31 53 489 5477 / 5355 (Phone)

HOME PAGE: http://https://people.utwente.nl/r.kabir

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