TISATAFL

Executive compensation has outperformed public markets in the past 40 years. There has been an increase in compensation of about 1167 points while the relative growth of the S&P 500 has been 741 points (Bouteska & Mefteh-Wali). This disparity has shocked academics, the media, and members of the public. C-suite and Directors keep making more money, even in economic down cycles. From this observation, it can be inferred that there is possible collusion. Is upper management just doing an increasingly better job or is there collusion within those governing bodies? The question we aim to answer is: What is the effect of overcompensation on firm performance, taking into account firm size?

In *Is board compensation excessive?* Dah and Frya found that directors are overcompensated more often than not, with their average overcompensation exceeding their average undercompensation, leading to reduced CEO turnover sensitivity and a decrease in CEO pay-for-performance sensitivity (Dah and Frya). This indicates that overpaid directors may be hesitant to remove CEOs to guard against a decrease in their compensation. Additionally, overpaid directors may be reluctant to reduce CEO pay for poor performance. This is most likely due to the CEOs' capability of reducing the Directors' compensation, a direct conflict of interest.

Another study touches on the determinants of CEO compensation through 2006-2016. The study found several categories of determinants that impacted compensation: accounting and performance, CEO power, and governance. CEO pay had a higher correlation on firm performance in more mature firms when compared to younger firms. High CEO power over the board led to an increase in compensation, while strong governance led to a decrease in compensation (Bouteska & Mefteh-Wali).

A paper on the impact of CEO and director compensation on firm performance found a strong positive correlation between the CEO and director compensation values. The paper also found a relationship between overcompensation and underperformance, concluding that overcompensation is due to poor governance and backscratching/collusion (Brick, Palmon, & Wald).

This research prompted us to further explore these relationships and focus on four cases of CEO and director compensation. Through our analysis, we hope to add further evidence of the impact of executive compensation on firm performance.