CEO Pay and Company Performance

This paper examines the link between CEO cash compensation and company performance. We test for the influence of CEO pay on firm performance over a cross section of companies applying the same approach that is used by Lewellen, Loderer, Martin and Blum [1992]. In our study we account for the degree of common stock ownership by the CEO of each company as well. We find a positive and significant connection between the pay of CEOs and the performance of their respective firms. From our results it appears that CEO pay is used to align the interests of shareholders with company CEOs, reducing agency costs within the firm.