Purpose This article helps boards and executive teams understand the conditions under which incentive pay is more or less likely to align with performance—particularly when factoring in CEO origin and firm size. It highlights two often-overlooked strategic variables: the CEO’s origin (internal promotion vs. external hire) and firm size. Design/methodology/approach We analyze a comprehensive dataset of publicly traded firms in the USA and Canada. By examining how CEO background and company scale moderate the pay–performance relationship, the study integrates agency theory and the Resource-Based View (RBV) to reveal important contextual effects. Findings Internally promoted CEOs consistently deliver stronger returns for each dollar of compensation, especially in small and mid-sized firms where their firm-specific knowledge and networks create immediate value. External hires can bring fresh perspectives but face integration challenges that weaken the compensation–performance link in the short term. Practical implications Boards should avoid one-size-fits-all pay packages. Instead, they should tailor compensation strategies to CEO origin and firm size, aligning incentives with the leader’s ability to deliver results. This approach improves succession planning, onboarding processes, and overall governance effectiveness. Originality/value This article provides actionable guidance for directors, compensation committees, and executive recruiters. By integrating succession planning and compensation design, it offers a clear framework for aligning CEO pay with firm performance in diverse strategic contexts.
Elias et al. (Tue,) studied this question.
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