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Firm performance and executive compensation in the savings and loan industry

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  • Hermalin, Benjamin E.
  • Wallace, Nancy E.

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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Suggested Citation

  • Hermalin, Benjamin E. & Wallace, Nancy E., 2001. "Firm performance and executive compensation in the savings and loan industry," Journal of Financial Economics, Elsevier, vol. 61(1), pages 139-170, July.
    • Handle: RePEc:eee:jfinec:v:61:y:2001:i:1:p:139-170
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    1. Benjamin E. Hermalin, 1994. "Heterogeneity in Organizational Form: Why Otherwise Identical Firms Choose Different Incentives for Their Managers," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 518-537, Winter.
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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