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The determinants of CEO compensation: new insights from United States

Author

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  • Ahmed Bouteska
  • Salma Mefteh-Wali

Abstract

Purpose - The purpose of this paper is to examine the determinants of CEO compensation for sample of the US firms. It emphasizes the presence of executive compensation persistence and the importance of CEO power besides performance while setting CEO pay. Design/methodology/approach - The empirical analysis is conducted on a large sample of US firms during the period 2006–2016. It is based on the generalized method of moments (GMM) models to assess the impact of numerous factors on CEO compensation. Findings - The main findings reveal that firm performance proxied by accounting-based proxies, as well as market-based proxies, plays a significant role in explaining variations in levels of executive compensation. Moreover, there is a significant persistence in executive compensation among the US sample firms. The authors also document that poor governance conditions (managerial power hypothesis) lead to high compensation levels offered to CEO. Research limitations/implications - At the end, without a doubt, the analysis has some limitations that prompt the authors to consider future research directions. One future research avenue that can help better explain the effect of firm performance on the CEO compensation is to study this issue using an international sample to determine whether country-level characteristics (e.g. creditor rights, shareholder rights and the enforcement climate) can influence this relationship. Furthermore, it can be worthwhile to deepen the analysis of CEO power and its impact on CEO compensation. It will be interesting to emphasize how the CEO power interacts with the other governance characteristics and some CEO attributes as CEO gender. Practical implications - The paper's findings have implications for practitioners, policymakers and regulatory authorities. First, the findings inform regulators that performance is not the only determinant of CEO pay level. This may warrant increased firm disclosure of the details of the pay structure. Second, the study offers insights to policymakers and members of boards of directors interested in enhancing the design of executive compensation and internal corporate governance, to better align managerial incentives to shareholder interests. Firms should strengthen the board independence and properly constitute the board committees (compensation, risk, nomination…). Originality/value - This paper presents a comprehensive overview of the CEO compensation determinants. It supplements the classic pay-for-performance sensitivity predictions with insights gained from the dynamics of wage setting theory and managerial power theory. The authors develop a composite index to measure the CEO power in order to test the impact of CEO attributes on CEO pay. Additionally, it verifies whether the determinants of CEO pay depend on firm age and size.

Suggested Citation

  • Ahmed Bouteska & Salma Mefteh-Wali, 2021. "The determinants of CEO compensation: new insights from United States," Journal of Applied Accounting Research, Emerald Group Publishing Limited, vol. 22(4), pages 663-686, April.
    • Handle: RePEc:eme:jaarpp:jaar-08-2020-0176
    DOI: 10.1108/JAAR-08-2020-0176
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    Citations

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    Cited by:

    1. Chetna Rath & Asit Tripathy & Sachin Kumar Mangla, 2025. "How the social dimension of ESG influences CEO compensation: Role of CEO and board characteristics," Business Strategy and the Environment, Wiley Blackwell, vol. 34(1), pages 762-777, January.
    2. Sumon Kumar Das & Md Moazzem Hossain, 2026. "The moderating effect of board gender diversity in the relationship between firm performance and CEO compensation—evidence from an emerging economy," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 30(2), pages 599-635, June.
    3. Aarti Verma & Mahesh Chand Garg & Shveta Singh, 2025. "Unveiling the Influence of Women CEOs, CEO Duality and CEO Compensation on Firm Performance: Evidence from India," Indian Journal of Corporate Governance, , vol. 18(2), pages 319-348, December.
    4. María L. Gallén & Carlos Peraita, 2024. "The Influence of Women on Boards on the Relationship between Executive and Employee Remuneration," IJFS, MDPI, vol. 12(3), pages 1-23, August.

    More about this item

    Keywords

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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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