Executive Pay and Firm Performance

Abstract

This study examines the effects of executive compensation policy and organizational structure on the performance of 439 large U.S. corporations between 1981 and 1985. Companies with long-term incentive plans enjoyed significantly greater increases in ROE (return on equity) than did companies without such plans, and by 1985 long-term incentive plans had been nearly universally adopted by large corporations. Corporate success was not significantly related to the level of, or degree of equity in, executive pay, or to the steepness of pay differentials across executive ranks; it was, however, positively related to the extent of hierarchical structure, which appears to have been the primary mechanism for sorting individuals by human capital endowments and performance.