CEO Compensation and Firm Performance: Evidence from the S&P 500 1993–2016

This master’s thesis paper examines the relationship between CEO compensation and firm performance in the United States stock market S&P 500. Corporate governance has been an essential topic in an accounting and finance domain related to business studies and academic publications during the past decades. Executive, especially the CEO, compensation has growth rapidly these days, which has caused criticalness of the justification among shareholders and stakeholders. In particular, the compensation of the CEO has been heated discussion among academic and business world. The importance of corporate governance is growing more extensive, and the relationship between principles and agents in business is tightly bounded. The purpose of this thesis is to examine the effect of the CEO’s compensation on firm stock performance in S&P 500 firms from 1993 to 2016. The thesis uses executive compensation data of the Compustat Execucomp database and S&P 500 firms’ financial data from the same database. The paper aims to to find how CEO compensation products, salary, bonus, and other compensation, are associated with firm performance. Additionally, the paper strives to find how CEO compensation was associated in 1993–2003 and 2004–2016 periods and compares those two characters results. Moreover, the thesis examines the pre-crisis period 2004–2006 and the crisis period 2007–2009 outcomes. The study finds a negative relationship between executive compensation and profitability, as measured by ROA and ROE. There is found a negative association with firm value, as measured by Tobin’s Q, and managerial compensation. The results show that applying corporate governance; a high valued CEO decrease firm performance or value