On the Importance of CEO Effort on Firm Performance and Compensation: An Analysis Using Gaussian Copula Marginal Regression Approach

Abstract

CEO effort is a vital determinant of a company’s profitability and for shareholder wealth. While effort is not an observable construct, its effects and results are palpable and it is defined as the final point to which the management directs its work. For an agent to perform at optimal levels, a principal grants various incentives with the objective of aligning their interests with that of the CEO but several studies have proven that this method does not completely alleviate agency problems. CEOs can take advantage of their managerial discretion and prioritize their personal interests. In this paper, we analyze the impact of CEO efforts on compensation and performance of mining companies. Our results indicate that in periods of economic growth, the companies enjoy marginal returns that do not seem to be the direct result of CEO effort. Also, we have found the CEO’s provide sub-optimal levels of effort during periods of economic growth but receive compensation that is approximately 6 percent greater than that received during recessionary periods.