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Too Much Pay-Performance Sensitivity?

Author

Listed:
  • Ivan E. Brick

    (Rutgers Business School)

  • Oded Palmon

    (Rutgers Business School)

  • John K. Wald

    (University of Texas at San Antonio)

Abstract

We examine the relation between pay-performance sensitivity (PPS), the convexity of managerial compensation (Vega), and future stock risk and returns for a large sample of firms between 1992 and 2004. Higher PPS and Vega are both associated with lower future stock returns. Part of this negative relation can be explained by risk-averse managers decreasing equity risk in response to increases in PPS and Vega. However, even after correcting for lower future risk, future stock returns are negatively associated with the magnitude of option sensitivity. This finding is consistent with previous studies that link high option compensation to manager-owner agency problems. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Ivan E. Brick & Oded Palmon & John K. Wald, 2012. "Too Much Pay-Performance Sensitivity?," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 287-303, February.
    • Handle: RePEc:tpr:restat:v:94:y:2012:i:1:p:287-303
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