| Summary: | Our study examines the relationship between executive compensation structure and firm performance, and other determinants such as corporate governance mechanisms, growth opportunities and business risk. Our sample consists of 207 randomly selected U.S. firms from the Fortune 500 list for year 2003 (inclusive of all sectors). We also explore the possibility that compensation structure and firm performance are endogenously determined. Our results show that endogeneity significantly affects the conclusion regarding the relationship between compensation structure and its determinants. Both ordinary least squares and two stage least squares regressions suggest that firm performance positively affects the extent of equity-based compensation and incentive-based compensation in executive compensation structures. However, under two stage least squares regressions, the relationships between compensation structure and the corporate governance variables are changed from positive to negative, suggesting that corporate governance mechanisms are substitutes rather than facilitators of executive incentive alignment schemes.
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