The Relevance Of Firms Accounting And Market Performance For CEO Compensation

Abstract

This paper investigates the relationship between several different CEO compensation components and several firm performance metrics using canonical correlation analysis (CCA). The principal findings presented in this paper offer evidence supporting the pay-performance relationship in corporate America. CEOs bonuses are closely associated with accounting measures of performance whereas CEO’s long-term compensation is directly linked to firm’s market performance. Furthermore, a substantial portion of the variance in CEOs bonus is explained by firm performance variables. Firm performance measures have some predictive power for CEO bonus but very little predictive power for other compensation measures.