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We use compensation data for a sample of 701 US public firms and document a significant positive relation between the level of executive compensation and the subsequent realized stock returns. In present value terms, shareholders in firms incurring a total compensation cost of $78 million above the median experience subsequent incremental wealth gains of $385 million above the median over the 5-year period following compensation awards. The results are robust to the use of size and industry-adjusted measures of compensation and returns, and hold after we segment the sample by firm size and industry. Our evidence is consistent with rational executive labour markets where more talented executives command higher compensation and produce superior returns.
