PAY VERSUS PERFORMANCE IN TARP RECIPIENT FIRMS

Agency theory states that management should act in the interest of stakeholders, but according to Arthur Levitt (2005), America has seen the breakdown of corporate governance and buildup in greed which has compromised the fiduciary relationship between management and stakeholders. Dating back to Enron's bankruptcy, we have seen Chief Executive Officers (CEO) walk away with millions, leaving behind shareholders, debt holders, and employee retirement funds in shambles. In response, we now have an increased number of shareholder proposals, new disclosure rules from the SEC (2006) and enhanced limits on executive compensation under TARP, all reflecting the general public's interest in the pay versus performance debate. the pay for performance predicted for TARP recipient firms is partially supported, but only for 2007, which coincides with effective date of the SEC enhanced disclosure laws. None of the performance variables significantly explain CEO compensation in 2006. The one year stock return, EPS, and return on invested capital are significant variables in 2008, but the signs are not positive as expected. This confirms prior research findings that earnings-based performance measures are not useful in explaining compensation in loss years (Jackson, Lopez & Reitenga, 2008).