CEO incentive contracts, monitoring costs, and corporate performance
The after-tax real wage of the average worker in the United States has fallen 13 percent in the last 20 years, while the average chief executive officer has received a pay raise of over 300 percent. This glaring contrast has sparked a flood of papers analyzing CEO compensation contracts. One of the main justifications for the extraordinary pay of top CEOs is that they receive contracts that link CEO compensation to the performance of the firm. The empirical literature, however, has found little evidence that CEO contracts provide such incentives. The compensation of CEOs appears to respond very little to the performance of their firms.> This article addresses three reasons why the previous literature may have been underestimating the response of compensation to firm performance. First, only firms where monitoring the CEOcis costly should have CEO compensation that is performance-sensitive. Restricting the sample to these firms yields a 67 percent increase in the performance sensitivity of compensation contracts. Second, the parameter that measures the performance sensitivity of CEO pay is negatively correlated to performance, causing it to be underestimated in standard regressions. Finally, econometricians do not observe exactly what compensation boards use as performance measures. Correcting this error shows that the elasticity of CEO pay with respect to firm performance is 10 times higher than previously believed.
Volume (Year): (1996)
Issue (Month): Jan ()
|Contact details of provider:|| Postal: 600 Atlantic Avenue, Boston, Massachusetts 02210|
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:fip:fedbne:y:1996:i:jan:p:39-50. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.