This paper challenges the widely held belief that CEO compensation is not correlated with firm performance, a view often referred to as the "zero correlation" hypothesis. The authors use a 15-year panel dataset of CEOs in large U.S. firms to measure the sensitivity of CEO compensation to changes in firm value. They find that for moderate changes in firm performance, the median CEO's compensation increases by more than 50%, representing an increase in CEO wealth of $1.8 million. The median elasticity of CEO compensation with respect to firm value is estimated to be 3.9 for 1994, significantly higher than previous estimates that ignored the effects of stock and stock option holdings. The authors also document that both the level of CEO compensation and its sensitivity to firm performance have increased dramatically over the past 15 years. They conclude that CEOs are not paid like bureaucrats and that there is a strong link between CEO compensation and firm performance.This paper challenges the widely held belief that CEO compensation is not correlated with firm performance, a view often referred to as the "zero correlation" hypothesis. The authors use a 15-year panel dataset of CEOs in large U.S. firms to measure the sensitivity of CEO compensation to changes in firm value. They find that for moderate changes in firm performance, the median CEO's compensation increases by more than 50%, representing an increase in CEO wealth of $1.8 million. The median elasticity of CEO compensation with respect to firm value is estimated to be 3.9 for 1994, significantly higher than previous estimates that ignored the effects of stock and stock option holdings. The authors also document that both the level of CEO compensation and its sensitivity to firm performance have increased dramatically over the past 15 years. They conclude that CEOs are not paid like bureaucrats and that there is a strong link between CEO compensation and firm performance.