Analysis shows CEO power modifies the relation between compensation and performance, suggesting complexities in agency conflicts.
We investigate the impact of CEO power on the relation between CEO compensation and firm performance to find how CEO incentive compensation affects firm performance by reducing agency conflicts between managers and shareholders. We measure the CEO pay slice (CPS) for CEO power and the pay-performance sensitivity (PPS) for CEO incentive compensation. Employing standard control variables, we run multiple OLS regressions and show that PPS increases firm performance at the high level of CPS, but the impact of PPS decreases at the low level of CPS. To resolve the potential endogeneity concerns, we perform robustness checks by adopting instrumental variables in a two-stage least square (2SLS) estimation. We also consider the year-effect and find that our results remain the same as before. The finding implies that considering stand-alone associations of either PPS or CPS with firm performance—a common practice in the literature—will not be appropriate because there is an interaction effect between CEO power and incentive compensation.
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Hasan et al. (2025) studied this question.
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