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Executive Compensation: Much Ado about Nothing?

Recent concerns about the level of executive compensation led to revisiting the question of whether highly compensated corporate employees earn their pay. Several measures of company performance indicate that companies with the most highly compensated employees perform only in a manner consistent with other companies. Our results provide support for those who have recently expressed dismay over compensation levels. Recent concerns about the level of executive compensation led us to revisit the question of whether highly compensated individuals earn their pay. Using data for S&P 500 Index companies during the 1997–2004 period and several measures of company performance, we found on a fairly consistent basis that for both market-based and income-based performance measures, companies with the highest levels of compensation report future performance that is, at best, only consistent with the performance of other companies. In some periods, based on at least one measure of performance, our analysis suggests that the performance of companies who reported the greatest amount of compensation may have been significantly worse than the performance of other companies. These results were consistent even under the assumption that executives’ pay should vary positively with company size. We also found that irrespective of performance, executives at the largest companies were paid the most. In short, recent concerns over the reported amounts of executive compensation maynot be much ado about nothing. These findings not only provide support for the U.S. SEC’s recent adoption of rules expanding companies’ disclosures about executive compensation (Release No. 33-8655), they also lead to this question: If companies’ future performance is unrelated to the level of executive compensation, why should companies give managers above-average salaries, bonuses, and stock-based awards?