CEO compensation and the performance of firms in the hospitality industry: a cross-industry comparison

Abstract

This study examines whether industry-specific characteristics can explain the relationship between chief executive officer (CEO) compensation and the performance of firms and, if so, what roles these characteristics may play in affecting the relationship. We developed a fixed effects model that controls for unobserved characteristics (such as managers’ skills, abilities, and talent) which are correlated with the independent variables in the presence of homoscedastic errors. The firm’s fixed effects allow us to take into account unobserved variables that do not mutate over time and by doing so, to address the principal–agent problem in CEO compensation in both the hospitality and non-hospitality industries in the United States over the period 1992–2010. The evidence shows that CEOs in the hospitality industry have been paid less compared to their peers in other industries. This is mainly due to the non-hospitality industries tending to pay higher salaries and to award more bonuses, long-term incentive plans, non-equity incentives as well as restricted stocks. The empirical analysis also reveals that incentives provided to CEOs failed to resolve the principal–agent problem in both hospitality and non-hospitality industries.

Keywords:

• Chief executive officer
• compensation
• firm performance
• agency theory
• hospitality

Notes

1. Formally, the French and Fama definition includes the following SIC codes: 5800–5819 (eating places), 5820–5829 (restaurants), 5890–5899 (eating and drinking places), 7000 (hotels and other lodging places), 7010–7019 (hotels motels), 7040–7049 (membership hotels and lodging), and 7213 services-linen.