Graduation Year

2025

Date of Submission

12-2024

Document Type

Open Access Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Nishant Dass

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Abstract

This study investigates the relationship between firm performance and CEO compensation, revisiting and extending the foundational framework established by Jensen and Murphy (1990). The sample comprises compensation data for the Chief Executive Officer (CEO) of all publicly traded companies on the Wharton Research Data Services (WRDS) Compustat – ExecuComp dataset from 1994 to 2023. Using Ordinary Least Squares (OLS) regression models, the analysis evaluates the sensitivity of CEO pay to changes in shareholder wealth and other performance metrics, while accounting for structural and temporal shifts driven by corporate governance, macroeconomic environment, and legislation. The findings reveal that changes in shareholder wealth are positively associated with CEO compensation: a $1,000 increase in shareholder wealth corresponds to a 0.022% rise in total current compensation and a 0.051% increase in total direct compensation. CEOs who simultaneously serve as Chair of the Board receive an estimated 2.48% higher total compensation. Legislative influences, particularly the Sarbanes-Oxley Act (SOX), significantly shape pay structures, with post-SOX periods witnessing an 11.0% decline in stock options awarded (using the Black-Scholes method).

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