Executive Pay Dispersion, Corporate Governance and Firm Performance

Review of Quantitative Finance and Accounting, Vol. 30, pp. 315-338, 2008

Posted: 20 Nov 2008

See all articles by Kin‐Wai Lee

Kin‐Wai Lee

Nanyang Technological University (NTU)

Baruch Lev

New York University - Stern School of Business

Gillian H. H. Yeo

Nanyang Technological University (NTU) - Division of Accounting

Date Written: November, 19 2008

Abstract

Much of the research on management compensation focuses on the level and structure of executives' pay. In this study, we examine a compensation element that has not received so far considerable research attention - the dispersion of compensation across managers - and its impact on firm performance. We examine the implications of two theoretical models dealing with pay dispersion - tournament vs. equity fairness. Tournament theory stipulates that a large pay dispersion provides strong incentives to highly qualified managers, leading to higher efforts and improved enterprise performance, while arguments for equity fairness suggest that greater pay dispersion increases envy and dysfunctional behaviour among team members, adversely affecting performance. Consistent with tournament theory, we find that firm performance, measured by either Tobin's Q or stock performance, is positively associated with the dispersion of management compensation. We also document that the positive association between firm performance and pay dispersion is stronger in firms with high agency costs related to managerial discretion. Furthermore, effective corporate governance, especially high board independence, strengthens the positive association between firm performance and pay dispersion. Our findings thus add to the compensation literature a potentially important dimension: managerial pay dispersion.

Keywords: Compensation, Corporate Governance, Performance, Pay dispersion

JEL Classification: G30, G34, J33, L22

Suggested Citation

Lee, Kin Wai and Lev, Baruch Itamar and Yeo, Gillian H. H., Executive Pay Dispersion, Corporate Governance and Firm Performance (November, 19 2008). Review of Quantitative Finance and Accounting, Vol. 30, pp. 315-338, 2008 , Available at SSRN: https://ssrn.com/abstract=1304009

Kin Wai Lee (Contact Author)

Nanyang Technological University (NTU) ( email )

S3-B2A-19 Nanyang Avenue
Singapore 639798
Singapore

Baruch Itamar Lev

New York University - Stern School of Business ( email )

40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)

HOME PAGE: http://www.baruch-lev.com

Gillian H. H. Yeo

Nanyang Technological University (NTU) - Division of Accounting ( email )

Nanyang Business School
Singapore, 639798
Singapore

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