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A few bad apples: An analysis of CEO performance pay and firm productivity

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  • Bulan, Laarni
  • Sanyal, Paroma
  • Yan, Zhipeng

Abstract

We investigate the relationship between CEO performance pay incentives and firm productivity. In general, we find an inverse U-shaped relationship between productivity and the sensitivity of CEO wealth to share value (delta) and a positive relationship between productivity and the sensitivity of CEO option wealth to stock return volatility (vega). Thus, a high delta associated with CEO risk-aversion lowers productivity, but a high vega from stock options offsets this effect. In looking at delta and vega jointly, we also find that options do not always achieve their intended purpose. These results are stronger among firms that are weakly governed or when high transaction costs prevent the writing of an optimal compensation contract.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 62 (2010)
Issue (Month): 4 (July)
Pages: 273-306

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Handle: RePEc:eee:jebusi:v:62:y::i:4:p:273-306

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Web page: http://www.elsevier.com/locate/jeconbus

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Keywords: CEO Executive compensation Pay-for-performance sensitivity Productivity;

References

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Cited by:
  1. MORIKAWA Masayuki, 2012. "Stock Options and Productivity: An empirical analysis of Japanese firms," Discussion papers 12011, Research Institute of Economy, Trade and Industry (RIETI).
  2. Oxelheim, Lars & Randoy, Trond, 2013. "Globalization of Monitoring Practices: The Case of American Influences on the Dismissal Risk of European CEOs," Working Paper Series 958, Research Institute of Industrial Economics.
  3. Goergen, Marc & Renneboog, Luc, 2011. "Managerial compensation," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1068-1077, September.
  4. Oxelheim, Lars & Randøy, Trond, 2013. "Globalization of monitoring practices: The case of American influences on the dismissal risk of European CEOs," Journal of Economics and Business, Elsevier, vol. 70(C), pages 3-15.

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