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Pay for Performance in Volatile Markets

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Author Info

  • Miles Cahill

    ()
    (Department of Economics, College of the Holy Cross)

  • Alaina George
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    Abstract

    In recent years, literature has suggested that executive compensation schemes conform to principal-agent models of incentive pay. Specifically, when analyzing total compensation (including stock options), executive pay seems to be positively related to the market performance of the corporation's stock. However, such studies were performed during the recent bull market of the 1990s. This paper estimates a model of incentive pay using data from more recent volatile markets of 1999-2001, and finds that the incentive component of executive pay has at least diminished, and has perhaps reversed. Thus, incentive pay may be something of a "fair weather" phenomenon.

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    Bibliographic Info

    Paper provided by College of the Holy Cross, Department of Economics in its series Working Papers with number 0302.

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    Date of creation: Dec 2003
    Date of revision:
    Publication status: Published in American Economist, Fall 2005, Vol. 49:2, pp. 3-25.
    Handle: RePEc:hcx:wpaper:0302

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    Keywords: incentive pay; stock options; executive pay; market volatility;

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