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CEO control, corporate performance and pay-performance sensitivity

Author

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  • Amzaleg, Yaron
  • Azar, Ofer H.
  • Ben-Zion, Uri
  • Rosenfeld, Ahron

Abstract

Agency theory suggests that high pay-performance sensitivity (PPS) of CEO's compensation is an important motivation mechanism to the CEO to improve corporate performance. We develop a simple model that suggests that reverse causality should also be considered. Specifically, our model predicts that when good performance is expected, a powerful CEO will push for a contract with higher PPS. Data from 135 Israeli companies over a five-year period confirm the model's main prediction. Our empirical analysis shows that when the CEO is the chairman of the board of directors and thus is more powerful in affecting his compensation scheme, he achieves a high PPS in good periods (in terms of corporate performance), compared to similar powerful CEOs in periods of bad performance, and also compared to less powerful CEOs in good periods.

Suggested Citation

  • Amzaleg, Yaron & Azar, Ofer H. & Ben-Zion, Uri & Rosenfeld, Ahron, 2014. "CEO control, corporate performance and pay-performance sensitivity," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 166-174.
  • Handle: RePEc:eee:jeborg:v:106:y:2014:i:c:p:166-174
    DOI: 10.1016/j.jebo.2014.07.004
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    References listed on IDEAS

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    1. repec:bla:afrdev:v:29:y:2017:i:3:p:429-445 is not listed on IDEAS

    More about this item

    Keywords

    Executive compensation; Corporate governance; Board structure; Rent extraction; Pay-performance sensitivity;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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