Greater- and Lesser-Paid Chief Executive Officers: Implications for Subsequent Firm Outcomes

One of the most prevalent assumptions regarding chief executive officer (CEO) compensation is that the most talented CEOs will command premium pay on the executive labor market. From an economics perspective, this statement is self-evident; the existence of a reasonably efficient labor market hinges upon this assumption. If such a market exists, it follows that higher-paid CEOs should generally outperform their lower-paid peers in subsequent years. Yet, scarce empirical evidence exists to either support or cast doubt upon this supposition. My dissertation, in which I delve into this fundamental issue, consists of two major sections. In the first essay, I focus on a basic question: Do higher-paid CEOs outperform their lower-paid CEO peers? Finding no consistent evidence of a meaningful relationship, I then examine whether contextual factors at the industry and organization levels moderate the link between pay and subsequent performance. I find little evidence that the pay-performance relationship is accentuated by the industry- or firm-level attributes incorporated in my analyses. In the second essay, I shift the focus to more proximal outcomes of CEO actions, investigating how pay influences firm outcomes other than performance. I specifically examine the associations between persistent CEO underpayment and three organizational outcomes: unrelated diversification, corporate attention to non-shareholder stakeholders, and corporate misconduct. Here, too, my results collectively suggest that persistently underpaid CEOs do not systematically differ from their higher-paid peers, at least in terms of the strategic actions examined.