This paper examines the relationship between CEO and director compensation and firm performance, particularly in the context of cronyism. The authors model CEO and director compensation using firm characteristics, CEO characteristics, and governance variables. They find a significant positive relationship between CEO and director compensation, which they hypothesize could be due to unobserved firm complexity or excessive compensation. The study also finds that excess compensation (both director and CEO) is associated with poor firm performance. Using a fixed effects model, they conclude that the evidence supports the hypothesis of excessive compensation due to mutual back scratching or cronyism, independent of poor governance variables. The results suggest that excessive compensation negatively impacts firm performance, consistent with the cronyism hypothesis.This paper examines the relationship between CEO and director compensation and firm performance, particularly in the context of cronyism. The authors model CEO and director compensation using firm characteristics, CEO characteristics, and governance variables. They find a significant positive relationship between CEO and director compensation, which they hypothesize could be due to unobserved firm complexity or excessive compensation. The study also finds that excess compensation (both director and CEO) is associated with poor firm performance. Using a fixed effects model, they conclude that the evidence supports the hypothesis of excessive compensation due to mutual back scratching or cronyism, independent of poor governance variables. The results suggest that excessive compensation negatively impacts firm performance, consistent with the cronyism hypothesis.