The Relation Between CEO Compensation Gap and Future Performance －Evidence from Korea－

This study examines the relation between the gap of CEO compensation and the future performance. Based on tournament theory and behavior theory, we investigate whether the CEO compensation gap between CEO pay and other executive directors reflects the result of competition at work or not. In addition, we examine whether a company managed by an owner manager CEO including intimate group or a professional CEO follows tournament theory or not and whether if the compensation gap reflects superior CEO's performance, then the number of contestants, which is measured by a CEO's span of intimacy, has a weaker impact on the association between CEO compensation gap and future performance or not. There are three major conclusions from our investigation of the effect of CEO compensation gap on the future performance. First, the higher compensation gap is likely to raise the probability of the future performance. Second, in the type of CEO group, the gap of compensation in a firm follows tournament, not behavioral theory. Finally, compensation gap does not affect the probability of the future performance where the company has a different hierarchy structure of board. Our study contributes to the literature in the following ways. First, this study is among the first to investigate the effect of CEO compensation gap on company performance in a much clearer setting than extant literature, using a unique data set. Second, we extend the literature on executive compensation disclosures from the economic perspective. Third, our paper contributes to the literature on the economic consequences of corporate governance by considering a hierarchy structure of board.