Political Contributions and CEO Pay

Using campaign contributions to measure CEO's political connections, we find that a one standard deviation increase in political connections is associated with a 9% increase in CEOs' annual compensation and a 17% decrease in his pay-performance sensitivity. Political rents increase with the strength of the CEO's politician and whether he or she is in power. The effects exist after accounting for potential endogeneity, selection bias and broader measures of social networks. Finally, the portion of the compensation explained by political connections is associated with an average increase of 0.3% in firms' operating performance. Our findings suggest large benefits to shareholders from CEOs' political connections at relatively low direct costs