533. Lucian A. Bebchuk & Yaniv Grinstein, Firm Expansion and CEO Pay, 11/2005.
Abstract: We study the extent to which decisions to expand firm size are associated with
increases in subsequent CEO compensation. Controlling for past stock performance, we find a
positive correlation between CEO compensation and the CEO’s past decisions to increase firm
size. This correlation is economically meaningful; for example, other things being equal,
CEOs who in the preceding three years were in the top quartile in terms of expanding by
increasing the number of shares outstanding receive compensation that is higher by one-third
than the compensation of CEOs belonging to the bottom quartile. We also find that stock
returns are correlated with subsequent CEO pay only to the extent that they contribute to
expanding firm size; only the component of past stock returns not distributed as dividends is
correlated with subsequent CEO pay. Finally, we find an asymmetry between increases and decreases in size: while increases in firm size are followed by higher CEO pay, decreases in firm size are not followed by reduction in such pay. The association we find between CEOs’ compensation and firm-expanding decisions undertaken earlier during their service could provide CEOs with incentives to expand firm size.