HOW MUCH DOES THE CEO MATTER - THE ROLE OF MANAGERIAL DISCRETION IN THE SETTING OF CEO COMPENSATION

The idea that managerial discretion-defined as latitude of action-may be an important determinant of CEO compensation has been recognized fo r some time. However, in spite of considerable work that has implicitl y invoked related ideas on the sources of potential managerial contrib ution, a formal test of the discretion hypothesis has yet to be conduc ted. 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 contingen cy effect, whereby firm performance is higher when discretion and pay are aligned than when they are not.