Executive compensation has risen dramatically beyond the rising levels of an average worker's wage over the years. This has been a hot topic for discussion, especially with the crisis in the financial sector and the controversy over the federal bailout. The government is even considering a cap on highflying salaries for executives (New York Times, February 9, 2009). Consider the following data, which link total compensation of the 455 highest-paid CEOs in 2006 with two performance measures (industry-adjusted return on assets (Adj ROA) and industry-adjusted stock return (Adj Stock Return)) and the firm's size (Total Assets). The complete data, labeled Executive Compensation, are available on the text website.
a. Estimate three simple linear regression models that use compensation as the response variable with Adj ROA, Adj Stock Return, or Total Assets as the explanatory variable. Which model do you select? Explain.
b. Estimate multiple regression models that use various combinations of two, or all three explanatory variables. Which model do you select? Explain.