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Executive pay relative to that of average workers has risen dramatically worldwide. Such a high level of executive pay raises the question of whether a steep rise in executive pay affects firm value. This study examined the relationship between executive pay and firm value. A panel smooth transition regression model is adopted to determine an optimal level of executive pay that maximizes firm value for a sample of 512 Taiwanese-listed firms over the period 2006-2011. The finding is that when the ratio of executive pay to net income after tax exceeds 2.71%, the firm value increases. The results suggest a correlation between large executive ownership (corresponding to high executive pay) and both increased operational efficiencies and firm value. These findings may be useful when contemplating executive compensation policy.

Executive pay relative to that of average workers has risen dramatically worldwide. Such a high level of executive pay raises the question of whether a steep rise in executive pay affects firm value. This study examined the relationship between executive pay and firm value. A panel smooth transition regression model is adopted to determine an optimal level of executive pay that maximizes firm value for a sample of 512 Taiwanese-listed firms over the period 2006-2011. The finding is that when the ratio of executive pay to net income after tax exceeds 2.71%, the firm value increases. The results suggest a correlation between large executive ownership (corresponding to high executive pay) and both increased operational efficiencies and firm value. These findings may be useful when contemplating executive compensation policy. [ABSTRACT FROM AUTHOR]