How much does the CEO matter? The role of managerial discretion in the setting of CEO compensation

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal

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Original languageEnglish
Pages (from-to)179-199
Journal / PublicationAcademy of Management Journal
Issue number2
Publication statusPublished - Apr 1998
Externally publishedYes


The idea that managerial discretion - defined as latitude of action - may be an important determinant of CEO compensation has been recognized for some time. However, in spite of considerable work that has implicitly invoked related ideas on the sources of potential managerial contribution, a formal test of the discretion hypothesis has yet to be conducted. In addition, few studies have tested the performance consequences of CEO pay. In a sample of Fortune 1,000 firms, we found support for both a main effect of managerial discretion on CEO pay and a contingency effect, whereby firm performance is higher when discretion and pay are aligned than when they are not.