Some critics of big business argue that CEOs are overpaid and that their compensation is not related to the performance of their companies. To test this theory, Chief Executive (Sept. 1999) collected data on executive's total pay and company's performance for each in a sample of 17 CEOs selected from a variety of industries. The data are listed in the table below. (Note: Company performance is the three-year annualized total return to shareholders for the years 1996 to 1998. assuming dividends are reinvested.)
a. Construct a scattergram for these data. Does it appear that CEO pay is related to company performance? Explain.
b. Use the method of least squares to model the relationship between CEO pay (y) and company performance (x).
c. Is CEO compensation related to company performance? Conduct the appropriate hypothesis test using a = .05.
d. Interpret the estimate of ß1 in the context of the problem.
e. Construct a 90% confidence interval for P, and interpret your result in the context of the problem. f. How might the results of part e change if a sample of CEOs from the same industry were used'?