Is the Pay-Performance Relationship Always Positive? Evidence from the Netherlands

Pieter Duffhues, Mohammed Rezaul Kabir

Research output: Contribution to journalArticleAcademic

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Abstract

This study examines the widespread belief that executive pay should reflect firm performance. We compile a hand-collected data set of compensation paid to executive directors of Dutch listed companies and analyze if executive compensation is indeed determined by firm performance. A variety of accounting-based and capital market-based performance measures are used. The analysis also encompasses both contemporaneous and lagged relationships, and controls for firm, time and industry characteristics. Our robust empirical analysis fails to detect a positive pay-performance relationship. The finding questions the conventional wisdom that executive pay helps to align shareholder interests with those of managers. It is consistent with the view that powerful managers can influence their own pay. The results of the study suggest that other means of resolving agency problems and novel explanations of executive compensation may provide useful insights.
Original languageEnglish
Number of pages27
JournalSSRN Working Paper Series
DOIs
Publication statusPublished - Feb 2007

Fingerprint

Performance pay
Managers
Firm performance
Executive compensation
The Netherlands
Executive pay
Agency problems
Listed companies
Empirical analysis
Industry characteristics
Shareholders
Capital markets
Wisdom
Performance measures

Keywords

  • Executive Compensation
  • IR-80066
  • Firm performance
  • Corporate Governance
  • Managerial remuneration

Cite this

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Is the Pay-Performance Relationship Always Positive? Evidence from the Netherlands. / Duffhues, Pieter; Kabir, Mohammed Rezaul.

In: SSRN Working Paper Series, 02.2007.

Research output: Contribution to journalArticleAcademic

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