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Firm Performance and Executive Compensation in the Savings and Loan Industry

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Author Info
Benjamin E. Hermalin (University of California at Berkeley)
Nancy E. Wallace (University of California at Berkeley)

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Abstract

Previous empirical analyses of the relationship between executive compensation and firm performance are often interpreted as suggesting that this relationship is weak. Although an absolute term like "weak" is ambiguous in this context, relative terms, such as "stronger," are meaningful. We argue that a stronger relationship can be found if a more appropriate specification is used in estimation. Specifically, an implicit assumption in the previous literature is that all firms use the same compensation scheme. Theoretically, this is a difficult assumption to accept. Moreover, we show that it is rejected empirically as well. When we allow different firms to use different compensation schemes, we indeed find a relationship between executive pay and firm performance that is about 2.8 times larger than that found using previous methods.

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File URL: http://129.3.20.41/eps/fin/papers/9710/9710006.pdf
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Publisher Info
Paper provided by EconWPA in its series Finance with number 9710006.

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Length: 27 pages
Date of creation: 31 Oct 1997
Date of revision:
Handle: RePEc:wpa:wuwpfi:9710006

Note: Type of Document - PDF file (figures in Newtable2.pdf); prepared on IBM PC ; pages: 27 ; figures: In PDF format in file Newtable2.pdf
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Web page: http://129.3.20.41

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Related research
Keywords: Executive compensation random-coefficients models savings and loans

Other versions of this item:

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G39 - Financial Economics - - Corporate Finance and Governance - - - Other
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

Cited by:
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  1. Benjamin E. Hermalin & Andrew K. Rose, 1999. "Risks to Lenders and Borrowers in International Capital Markets," NBER Working Papers 6886, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Montmarquette, Claude & Rullière, Jean-Louis & Villeval, Marie-Claire & Zeiliger, Romain, 2004. "Redesigning Teams and Incentives in a Merger: An Experiment with Managers and Students," IZA Discussion Papers 1057, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Elijah Brewer, III & William Curt Hunter & William E. Jackson, III, 2004. "Investment opportunity set, product mix, and the relationship between bank CEO compensation and risk-taking," Working Paper 2004-36, Federal Reserve Bank of Atlanta. [Downloadable!]
  4. Alex Edmans & Xavier Gabaix & Augustin Landier, 2007. "A Calibratable Model of Optimal CEO Incentives in Market Equilibrium," NBER Working Papers 13372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Gregory E. Sierra & Eli Talmor & James S. Wallace, 2004. "A unified analysis of executive pay: the case of the banking industry," Supervisory Policy Analysis Working Papers 2004-02, Federal Reserve Bank of St. Louis. [Downloadable!]
  6. Lionel Martellini & Branko Urosevic, 2003. "On the Valuation and Incentive Effects of Executive Cash Bonus Contracts," Economics Working Papers 784, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  7. Claude Montmarquette & Jean-Louis Rullière & Marie-Claire Villeval & Romain Zeiliger, 2002. "Redesigning Teams and Incentives: A Real Effort Experiment with Managers of a Merged Company," CIRANO Working Papers 2002s-86, CIRANO. [Downloadable!]
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