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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Dec 16, 2017

The Rocky Road from Insight to Understanding



Google Scholar tells us that, over a quarter of a million studies examine the relationship between CEO compensation and firm performance. Aguinis et al. (2018) take much of that work to task. Observing that the distribution of CEO compensation is skewed, they question any work that assumes a normal distribution. Correcting the flaw, Aguinis et al. (2018) conduct their own investigation of this important relationship. Contrary to previous work, they find no consistent empirical relationship between pay and performance. The authors review and discuss their work with a clear eye on its implications for improving our understanding of these relationships.

The authors cannot accept the results of the Aguinis et al. (2018) investigation as it stands. Saying why, they close their commentary with some ideas that should help one understand whether accounting for a skewed CEO pay distribution really does revolutionize one’s understanding of corporate governance.

Practical implications
The statistical insight provided by Aguinis et al. (2018) yields provocative, if not profound, practical implications. While the authors’ review is critical, they aim to foster continued inquiry, not shut it down.

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