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Does Performance-Based Managerial Compensation Affect Subsequent Corporate Performance?

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  • John M. Abowd

Abstract

An effective performance-based compensation system must increase the probability of high performance corporate outcomes in order to justify the incremental expense relative to a straight salary system. A positive relation between current performance and current compensation indicates that the pay system is performance-based in practice, if not explicitly. This study considers whether increasing the sensitivity of current compensation to current performance is associated with higher performance in the future. For accounting-based performance measures, there is only weak evidence that greater performance-based compensation is associated with improved future performance. However, for economic and market performance measures, there is stronger evidence. Payment of an incremental 10% bonus for good economic performance is associated with a 30 to 90 basis point increase in the expected after tax gross economic return in the following fiscal year. Payment of an incremental raise of 10' following a good stock market performance is associated with a 400 to 1200 basis point increase in expected total shareholder return. These results are comparable in magnitude when compared to the intrinsic variability of the performance measure considered.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3149.

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Date of creation: Oct 1989
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Publication status: published as ILRR, Vol. 43, no. 3 (1990): 52S-73S.
Handle: RePEc:nbr:nberwo:3149

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Cited by:
  1. Charles Brown, 1992. "Wage Levels and Method of Pay," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 366-375, Autumn.
  2. Francois Lecointe & Philippe Ducos & Patrick Artus, 1992. "Rachats d'entreprise avec endettement (LBO et MBO) : motivations micro-économiques, effets sur l'efficacité des entreprises et risques macro-économiques," Économie et Prévision, Programme National Persée, vol. 102(1), pages 89-104.

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