Does CEO Pay Reflect Performance? Some Australian Evidence

Abstract

We examine the relation between Australian CEO pay and accounting and share price performance indicators, as well as firm size, from 1987 to 1992 inclusive. Our results show no evidence of a linkage between CEO pay and performance. This finding is robust to the use of single year or pooled tests, as well as the specific identification of CEO changes. “Long window” analysis of the pay‐performance relation yields similar results. Possible explanations include incomplete disclosure of CEO compensation, the influence of other claimholders (e.g., debtholders), the existence of alternative monitoring mechanisms and the extent to which CEO compensation is effectively deferred. However, subject to these possibilities, our results can be interpreted as consistent with allegations that Australian CEOs have had, by international standards, a relatively small proportion of total compensation “at risk”.