Firm performance versus managerial power In determining CEO compensation: a critical study

Abstract

To answer the question if chief executive officers (CEOs) are compensated according to their performance or to their power in the company, the current study attempts to provide a rich literature review concerningAgency Theory (AT)and Management Power Theory (MPT) in explaining top management compensation. In practice, some empirical studies tie senior compensation tomanagement power in order to test MPT and find that management power is an important determinant of senior compensation; whileotherstudies tie senior compensation to firm performance in order to test ATand find that top management compensation is affected essentially by firm performance.However, many studies’ results show no support for the theories, which is used by researchers as a basis for criticism. Studies’ results vary from supporting to not supporting either AT or MPT perhaps because results are conducted in different circumstances and use different proxies for variables. This is why the debate ofhow senior management compensation is decided is still ongoing