CEO compensation, director compensation, and firm performance: Evidence of cronyism?

Ivan E. Brick, Oded Palmon, John K. Wald

Research output: Contribution to journalArticlepeer-review

431 Scopus citations


We model CEO and director compensation using firm characteristics, CEO characteristics, and governance variables. After controlling for monitoring proxies, we find a significant positive relationship between CEO and director compensation. We hypothesize that this relationship could be due to unobserved firm complexity (omitted variables), and/or to excess compensation of directors and managers. We also find evidence that excess compensation (both director and CEO) is associated with firm underperformance. We therefore conclude that the evidence is consistent with excessive compensation due to mutual back scratching or cronyism. The evidence suggests that excessive compensation has an effect on firm performance that is independent of the poor governance variables discussed by previous studies.

Original languageEnglish (US)
Pages (from-to)403-423
Number of pages21
JournalJournal of Corporate Finance
Issue number3
StatePublished - Jun 2006

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management


  • CEO compensation
  • Cronyism
  • Director compensation
  • Firm performance


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