No abstract

We examine what determines executive compensation in privately held firms. Our study is motivated by the fact that most studies in this area rely on data from publicly traded firms. Further, the few studies that are based on data from privately held firms only examine a limited number of determinants of executive compensation. Previous studies also assume that the quality of compensation contracts is identical across executives. Based on unique data from our survey we create a quality index on each executive's bonus plan. We conjecture that the pay to performance relation is stronger for better designed bonus plans.Our findings indicate that the pay to performance relation is weak and insignificant. Board size is the only corporate governance characteristic that explains variations in executive compensation.Executive characteristics like skills, title and educational attainment all explain variations in executive compensation. Contrary to our expectations we do not find a stronger pay to performance relation in firms with better designed bonus plans.