Economics and Finance Faculty Publications and Presentations
Document Type
Article
Publication Date
9-2022
Abstract
We examine the relationship between executive compensation and technical efficiency. We highlight heterogeneity in this relationship, identify opportunities for within-sector efficiency gains, and the channels through which such gains occur. Previous research mainly focuses on excessive executive compensation that does not reflect firm performance. We develop unique measures for executive overcompensation and undercompensation, and account for endogeniety. Using firm-level data for the Indian chemical, textile, and pharmaceutical sectors during 2004–2015, we conclude that the median firm overcompensates and large firms undercompensate their executives. Overcompensation decreases firms’ profits as increased executive costs outweigh the benefits of efficiency gains. Firms in the top 10% in terms of sales in their industry undercompensate their executives and experience a median increase in profits when executive compensation increases. This new insight has important implications for executive compensation strategies: for the subset of large firms that undercompensate, increased executive compensation is a channel for improving profitability.
Recommended Citation
Kutlu, L. and Nair-Reichert, U., 2022. Executive compensation and the potential for additional efficiency gains: Evidence from the Indian manufacturing sector. Economic Modelling, 114, p.105931. https://doi.org/10.1016/j.econmod.2022.105931
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Publication Title
Economic Modelling
DOI
10.1016/j.econmod.2022.105931
Comments
Original published version available at https://doi.org/10.1016/j.econmod.2022.105931