CEO compensation for luck and skill and corporate governance in US property-liability insurance firms

We examine whether CEO compensation is tied to both luck and skill in U.S. property-liability insurance firms. To estimate luck and skill, an insurer's underwriting margin is regressed on the industry-wide underwriting margin, with the resulting predicted value (the residual) representing luck (skill). The results show that CEO compensation is positively related to exogenous factors (luck), providing support for the skimming view and that CEO skill is an important determinant of CEO compensation as well. Notably, well governed insurers show less CEO pay for luck than poorly governed insurers, whereas insurers with strong corporate governance exhibit greater CEO pay for managerial skill than those with weak corporate governance. These results are robust to an alternative measure of luck and skill. Our findings provide important implications for the role of corporate governance in developing efficient CEO compensation arrangements in the property-liability insurance industry.