The Relationship Between Executive Compensation And Firm...

INTRODUCTION The relationship between executive compensation and firm performance is a topic of major concern amongst academics, professionals, and regulators. In an effort to identify a relationship between executive pay and firm performance, scholars have conducted research since 1925 and have established that compensation packages are the primary means of incentivizing managers to achieve certain financial targets or goals. These goals include certain performance measures that can be broken down into three main categories: accounting based, measures, market based measures, and non-financial based measures. Additionally, compensation packages have become an increasingly researched topic due to the surge in levels of compensation in†¦show more content†¦Additional features include benefit plans, tailored life insurance and retirement plans. Additionally, a unique characteristic of an executive’s compensation package is the executive s ability to negotiate features of their compe nsation packages. This paper will primarily focus on the long-term incentives offered by firms today. To effectively understand compensation packages, it is critical to understand agency theory. Agency theory represents the differences in goals between management (agent) and the firm’s shareholders (principal). According to Murphy (1998), compensation plans are a solution to the goal incongruence between management and its shareholders and will be explained later in this paper. The purpose of this paper is to understand the relationship between certain firm characteristics and the use of financial or non-financial performance measures in determining executive compensation. Prior research will be discussed to establish the role, nature, and impact of compensation packages. Furthermore, this paper will explore the relationship between a firm’s profitability, growth, and size when determining the use of financial versus non-financial measures when setting executive compensation, if any relationship exists. II. LITERATURE REVIEW Although there is a substantial amount of research available regarding executive compensation, the nature of this research is inconclusive. This can be