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Why are CEOs paid for good luck? An empirical comparison of explanations for pay-for-luck asymmetry

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  • Campbell, T. Colin
  • Thompson, Mary Elizabeth

Abstract

We independently and jointly test multiple proposed explanations for chief executive officer (CEO) pay-for-luck asymmetry, comparing their contributions to the observed asymmetry. Measuring luck based on both stock and operating performance, we analyze pay asymmetry for both the average and median CEO. We document that favorable labor market opportunities—measuring executive retention concerns—most consistently underlie pay asymmetry across specifications, while CEO power and bankruptcy avoidance incentives are only weakly related. However, none of these independently explains pay asymmetry across our expanded tests. Our results highlight important empirical modeling concerns and provide valuable insight for future theoretical and empirical work.

Suggested Citation

  • Campbell, T. Colin & Thompson, Mary Elizabeth, 2015. "Why are CEOs paid for good luck? An empirical comparison of explanations for pay-for-luck asymmetry," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 247-264.
    • Handle: RePEc:eee:corfin:v:35:y:2015:i:c:p:247-264
    DOI: 10.1016/j.jcorpfin.2015.09.006
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    Cited by:

    1. Lucas W. Davis and Catherine Hausman, 2020. "Are Energy Executives Rewarded for Luck?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6), pages 157-180.
    2. Clement Olalekan Olaniyi & Olaolu Richard Olayeni, 2020. "A new perspective into the relationship between CEO pay and firm performance: evidence from Nigeria’s listed firms," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 22(2), pages 250-277, December.
    3. Michael Haylock, 2022. "Distributional differences in the time horizon of executive compensation," Empirical Economics, Springer, vol. 62(1), pages 157-186, January.
    4. Reza, Syed Walid, 2020. "Profit skimming, asymmetric benchmarking, or the effects of implicit incentives? Evidence from natural disasters," Journal of Multinational Financial Management, Elsevier, vol. 57.
    5. Anthony J. Vine, 2016. "Using Pythagorean Expectation to Determine Luck in the KFC Big Bash League," Economic Papers, The Economic Society of Australia, vol. 35(3), pages 269-281, September.
    6. Haylock, Michael, 2020. "Executives' short-term and long-term incentives - a distributional analysis," University of Tübingen Working Papers in Business and Economics 131, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    7. Shang, Xiaodan & Luo, Chuanjian & Wen, Qian, 2020. "Do Chinese executives reward for luck?," Economic Modelling, Elsevier, vol. 92(C), pages 318-325.
    8. Amore, Mario Daniele & Schwenen, Sebastian, 2020. "The Value of Luck in the Labor Market for CEOs," CEPR Discussion Papers 14839, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Executive compensation; Pay-for-luck; Pay asymmetry; Executive retention; Governance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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