43 Indus. & Lab. Rel. Rev. 13-S (1989-1990)
Executive Pay and Firm Performance

handle is hein.journals/ialrr43 and id is 361 raw text is: EXECUTIVE PAY AND FIRM PERFORMANCE
JONATHAN S. LEONARD*
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 significandy 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 corpora-
tions. 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 endow-
ments and performance.

A N executive who earns tens of millions
of dollars in pay per year provokes a
certain critical regard no matter how
efficient his operations. Extremely high
compensation tends to raise questions
concerning the competitive nature of the
labor market determining executive com-
pensation, and the effective degree of
shareholder oversight and control. It has
been justified, however, as part of incen-
tive systems designed to align executives'
interests more closely with those of share-
holders.
This paper examines evidence on the
* The author is Harold Furst Professor of Manage-
ment Philosophy and Values at the Haas School of
Business, University of California-Berkeley, and
Research Associate at the National Bureau of
Economic Research. For helpful comments, he
thanks seminar participants at U.C.-Santa Barbara,
U.C.-Berkeley, Stanford University, the National
Bureau of Economic Research, and the Cornell
Conference on Compensation and Firm Perfor-
mance. He also thanks Edward Lazear, Graef
Crystal, and Michael Guthman for their comments,
Susan Sassalos for research assistance, and the
Institute of Industrial Relations for its support.
The proprietary data used in this analysis were
provided on a confidential basis.

competitive nature of executive and man-
agerial labor markets. Most previous stud-
ies of executive compensation have been
limited to the CEO and a few other
officers whose compensation must be
divulged in accord with SEC regulations.
This paper instead makes use of a large
sample of executives without regard to
whether their pay is in the public domain.
Specifically, I examine executive pay pat-
terns for more than 20,000 executives at
439 corporations between 1981 and 1985,
with particular attention to the role of
human capital, hierarchical structure, and
employer in determining executive pay,
and to evidence of persistent pay differen-
tials across firms. I also present evidence
on the extent of sorting across hierarchies,
and on the responsiveness of executive
base and bonus pay to unit and corporate
performance.
Evidence on those matters cannot, in its
nature, conclusively establish whether the
net effect of high executive salaries is to
transfer wealth from shareholders or,
through their incentive effects, to elicit
effort from executives that results in
improved firm performance and a gain

Industrial and Labor Relations Review, Vol. 43, Special Issue (February 1990). © by Cornell University.
0019-7939/90/43SP $01.00

13-S

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