Executive Compensation

Abstract

Economic profit (EP) is often portrayed as a gauge of company and executive performance that can align the interests of shareholders and corporate executives. We report the results of an investigation into the relationship between EP and compensation paid to “named executive officers” (NEOs) for an extensive sample of companies, over several years. Although the original objective was to establish the share of EP that is typically paid as compensation to NEOs, the empirical relationship between the two variables is negligible to nonexistent. Instead, most firm-level NEO compensation is explained by a company size measure, in particular, total assets, with some additional explanatory power added by operating income and industry type.