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This dissertation studies the consequences of paying CEOs too much and paying CEOs too little. My first essay examines the effects of excess executive compensation on the future performance of S&P 1500 companies from 1992-2011. We consider three sources of overpayment: CEO ability, agency cost, and incentive effects of overpayment. We observe an inverted U-shaped relationship between overpayment and future firm performance, which suggests that overpayment is deleterious to future firm performance. We find that pay for ability is indeed related to future performance, and excess pay due to agency cost does not relate to future performance. Once we separate out ability and agency measures from unexplained pay, incentive effects of overpayment disappear. Additionally, we find that this relationship between overpayment and future performance is actual U-shape before controlling for earning's management, implying that overpayment motivates earnings management. Our findings suggest that firms shouldn't overpay CEOs beyond their ability since there is no incentive effect. In the next essay, we examine the effects of relative underpayment of CEOs on the performance of 1500 U.S companies between 1992 and 2011. Our study attempts to explain how CEO underpayment, determined by yearly regressions of pay, affect firm performance and CEO turnover the subsequent year. We find no negative incentive effect for underpaying CEOs as extreme underpayment is associated with positive future firm performance. Conditional on poor past performance, relative CEO underpayment is associated with positive future firm performance, which is consistent with increased pressure to perform. Additionally, we find that relative underpayment of CEOs with good past performance is also associated with positive future firm performance. Our results suggest that underpaying CEOs is value creating for the company. Such a finding underscores the viability of underpayment as an incentive in CEO compensation plans.
CEO Overpayment, CEO Talent, CEO Turnover, CEO Underpayment, Executive Compensation, Firm Performance
Date of Defense
April 4, 2014.
A Dissertation submitted to the Department of Finance in partial fulfillment of the requirements for the degree of Doctor of Philosophy.
Includes bibliographical references.
James Ang, Professor Directing Dissertation; Thomas Zuehlke, University Representative; April Knill, Committee Member; Bong Soo Lee, Committee Member.
Florida State University
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