Executive compensation, corporate governance and corporate performance: A simultaneous equation approach
Managerial and Decision Economics
School of Management, University of Southampton, Southampton, United Kingdom; School of Management and Business, Aberystwyth University, Aberystwyth, United Kingdom; Department of Finance, University of Ghana Business School, University of Ghana, Accra, Ghana
This paper investigates the association between executive compensation and performance. It uniquely utilises a comprehensive set of corporate governance mechanisms within a three-stage least squares (3SLS) simultaneous equation framework. Results based on estimating a conventional single equation model indicate that the executive pay and performance sensitivity is relatively weak, whereas those based on estimating a 3SLS model generally suggest improved executive pay and performance sensitivity. Our findings highlight the need for future research to control for possible simultaneous interdependencies when estimating the executive pay and performance link. The findings are generally robust across a raft of econometric models that control for different types of endogeneities, executive pay and performance proxies. © 2013 John Wiley & Sons, Ltd.