Using Panel Data to Estimate the Economic Determinants of CEO Compensation

The present study uses the latest data available from ExecuComp in order to estimate an economic model of the determinants of CEO compensation. Examining 975 CEO’s over the period 1992-2002, the present study finds that experience had a positive effect on CEO pay, while industry specific dummy variables had little, if any, effect on compensation. Performance measures, such as net income per sales and return on equity, had very little effect on CEO pay. The results of the present study corroborate many anecdotal assertions that CEO pay is not linked to firm performance. However, the results of the present study indicate that experience is one of the most important factors affecting CEO compensation. Gender was not found to play a significant role; however, this result may be due to the fact that less than 2% of the CEOs in the sample used in the present study were women. These results suggest that years of experience may actually play more of role in the determination of CEO pay than how well the CEO manages the firm.