We studied the relation of CEO pay and turnover to performance and
characteristics of companies in a new data set that covers large commercial
banks over the period 1982-87. For newly hired CEOs, the elasticity of pay
with respect to assets is about one-third. As experience increases, the
correlation between compensation and assets diminishes for about four years
and then rises back to its initial value. We interpret these findings along
the lines of Rosen's matching model, allowing for adjustments of compensation
and bank assets and for possible dismissal of the CEO. For continuing CEOs,
the change in compensation depends on performance as measured by stock and
accounting returns. The sensitivity of pay to performance diminishes with
experience, and there is no indication that stock or accounting returns are
filtered for aggregate returns. Logit regressions relate the probability of
CEO departure to age and performance. The relevant measure of performance in
this context is stock returns filtered for average returns of banks in the
same year and geographical region.
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