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

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconbus

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