This paper investigates the relationship between CEO and director compensation and firm performance, hypothesizing that excessive compensation may be linked to cronyism or weak corporate governance. Using data from Standard and Poor’s Execucomp and COMPUSTAT, the authors model CEO and director compensation using firm, CEO, and governance characteristics. They find a significant positive relationship between CEO and director compensation, which could be due to unobserved firm complexity or excessive compensation associated with cronyism. They also find that excess compensation is associated with firm underperformance, suggesting that excessive compensation may negatively affect firm performance. The study tests whether excessive compensation for CEOs and directors is linked to poor firm performance. They use a fixed effects model and find that firm performance, measured by future excess returns, is negatively related to excess director compensation. This result supports the cronyism hypothesis, suggesting that excessive compensation may be due to mutual back scratching or cronyism rather than firm complexity. The authors also examine the impact of director compensation on CEO compensation and find a significant positive relationship between the two. They test whether this relationship is due to cronyism or firm complexity and find that the negative relationship between excess compensation and firm performance is consistent with the cronyism hypothesis. They further test the robustness of their findings and find that excess director compensation is significantly positively related to variables associated with poor governance. These results suggest that excessive compensation is associated with poor governance and that the relationship between CEO and director compensation is not fully captured by governance quality variables. Overall, the study concludes that excessive compensation is associated with poor firm performance and that the evidence is consistent with cronyism. The findings suggest that excessive compensation may be due to mutual back scratching or cronyism rather than firm complexity. The study provides evidence that excessive compensation has an effect on firm performance that is independent of the poor governance variables discussed in previous studies.This paper investigates the relationship between CEO and director compensation and firm performance, hypothesizing that excessive compensation may be linked to cronyism or weak corporate governance. Using data from Standard and Poor’s Execucomp and COMPUSTAT, the authors model CEO and director compensation using firm, CEO, and governance characteristics. They find a significant positive relationship between CEO and director compensation, which could be due to unobserved firm complexity or excessive compensation associated with cronyism. They also find that excess compensation is associated with firm underperformance, suggesting that excessive compensation may negatively affect firm performance. The study tests whether excessive compensation for CEOs and directors is linked to poor firm performance. They use a fixed effects model and find that firm performance, measured by future excess returns, is negatively related to excess director compensation. This result supports the cronyism hypothesis, suggesting that excessive compensation may be due to mutual back scratching or cronyism rather than firm complexity. The authors also examine the impact of director compensation on CEO compensation and find a significant positive relationship between the two. They test whether this relationship is due to cronyism or firm complexity and find that the negative relationship between excess compensation and firm performance is consistent with the cronyism hypothesis. They further test the robustness of their findings and find that excess director compensation is significantly positively related to variables associated with poor governance. These results suggest that excessive compensation is associated with poor governance and that the relationship between CEO and director compensation is not fully captured by governance quality variables. Overall, the study concludes that excessive compensation is associated with poor firm performance and that the evidence is consistent with cronyism. The findings suggest that excessive compensation may be due to mutual back scratching or cronyism rather than firm complexity. The study provides evidence that excessive compensation has an effect on firm performance that is independent of the poor governance variables discussed in previous studies.