CORPORATE PAY AND PERFORMANCE: WHO IS LOOKING OUT FOR THE SHAREHOLDERS?

Executive compensation has been hotly debated in academia for a long time, even though in recent years it has become "coffee talk" for mainstream America. Recent "mega" compensation packages have only added fuel to the fire, especially in light of poor corporate and equity market performances. One relevant argument, which has not been included in previous studies and could help explain the mixed results, is the labor-leisure choice argument. Most studies have examined the now "stale" relationship between compensation and performance, with the premise that higher compensation should lead to better performance. There is also a reasonable consensus that this relationship is not true or at least not as economically significant. What is more interesting is the perception that this weak relationship is a result of the bull market of the 1990s. In order to study if this is indeed the case, I examined the relationship from a period prior to the 1990s bull market in U.S. equities. The results show support for the "backward bend" in the compensation structure of executives, suggesting that mega compensation structures may not be the best way to motivate executives and improve corporate performance.