CEO Compensation and Real Estate Prices : Pay for Luck or Pay for Action?

This paper uses variation in real estate prices to test whether CEOs are paid for luck or to respond to luck. We distinguish between pay for luck and pay for responding to luck by exploiting GAAP accounting rules. In the United States, real estate used in the firm’s operations is not marked-to-market. Thus a change in the value of real estate is only accounted for when the CEO reacts to the change in property value by, for instance, selling the real estate asset. We show that CEO compensation is associated with responses to real estate luck, which mostly explains pay for luck. Our results challenge the inefficient contracting interpretation of pay for luck.