Does Executive Pay Affect the Level of Firm Performance, or Vice Versa? The Case of Korea

This study examines if there is any significant relationship between executive compensation and the firm performance in Korea. We investigate compensation differentials across regulated and unregulated industries as well as the effects of firm diversification on compensation. Results suggest that current compensation responds to past performance outcomes, but that the effect decays considerably within two years. This contrasts sharply with models of infinitely persistent performance effects implicitly assumed in much of the empirical literature. We find no evidence that boards fail to penalize poor financial performance or reward executives, and that boards in setting compensation discount extreme performance outcomes. Finally, the data suggest that boards may discount extreme performance outcomes relative to performance that lies within some “normal” band in setting compensation. Based on the results of this study, we could suggest the following. For the sustainable development of company, it could be more effective to compensate the executive's performance gradually for some period of time.