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Agency theory is a paramount framework for understanding the relation between boards of directors, who represent owners’
interests, and chief executive officers (CEOs). It explains the agency relationships in which one party, called a principal delegates
authority to another one – an agent (Young and Buchholtz, 2002). When the goals, interests, or risk preferences of the principal and
the agent are misaligned, agency conflict occurs. A firm can incur notable expenses to neutralize this conflict. Considerable literature
empirically examines the effect of executive pay on agency conflict (Kang et al., 2002; Coles et al., 2006; Cambini et al., 2015);
however, the results are mixed.
The use of a variety of methods and indicators to evaluate firm performance and compensation causes a significant differentiation
across empirical outcomes. Prior research shows that tying executive compensation closely to firm results can help to align interests
and minimize agency costs (Walsh and Seward, 1990; Matsumura and Shin, 2005). However, some studies report no relation between
executive compensation and firm performance (Gomez-Mejia et al., 1999; Firth et al., 2006; Parthasarathy et al., 2006), and others
indicate an unexpected negative association (Malmendier and Tate, 2009; Balafas and Florackis, 2013; Cooper et al., 2013). In
addition, the literature usually only investigates the influence of CEO compensation on firm performance, or vice versa, and does not
address the issue of interrelation. We fill this gap by examining the relation between CEO compensation and firm performance
simultaneously. We investigate whether companies tie CEO remuneration to particular financial indicators and the effect of pay level
on accounting- and market-based firm performance.

Type of service: Academic Paper writing
Type of asignment:Essay
Subject: Finance
Pages/words: 4/1100
Number of sources: 10
Academic level: Undergraduate
Paper Format: Harvard
Line spacing: Double
Language style: UK English