Can Extrinsic Reward Lead to Better Performance? Evidence From CEO Pay

Abstract

The relationship between CEO extrinsic reward and firm performance is of great importance from both scholarly and practical perspectives. This study used the COMPUSTAT dataset tracing CEOs and their firm performance over twenty years. The results indicate that both CEO pay and company profit in the previous year had positive effects on company profit in the current year. In addition, there was a moderating effect of previous year’s company profit on the relationship between CEO pay in the previous year and company profit in the current year, in such a way that the effect of CEO pay on future company profit was more positive for less profitable companies. Furthermore, we found a curvilinear relationship between CEO pay and company profit, indicating that excessive CEO compensation was detrimental to company profit. Future research and implications are discussed.