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You Can Pay Me Now and You Can Pay Me Later: The Dynamic Response of Executive Compensation to Firm Performance

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  • Boschen, John F
  • Smith, Kimberly J

Abstract

Empirical studies estimating the impact of firm performance on executive pay have primarily concentrated on the short-run response. In this study, the authors present estimates of the complete dynamic response of CEO pay to firm performance. They find that the cumulative response of pay to performance is roughly ten times that of the contemporaneous response, a onetime innovation in firm performance typically raises pay over the next 4-5 years, and compensation arrangements have shifted toward greater performance sensitivity and longer-term pay arrangements over the four decades studied. Copyright 1995 by University of Chicago Press.

Suggested Citation

  • Boschen, John F & Smith, Kimberly J, 1995. "You Can Pay Me Now and You Can Pay Me Later: The Dynamic Response of Executive Compensation to Firm Performance," The Journal of Business, University of Chicago Press, vol. 68(4), pages 577-608, October.
  • Handle: RePEc:ucp:jnlbus:v:68:y:1995:i:4:p:577-608
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    References listed on IDEAS

    as
    1. Clements, Kenneth W, 1981. "Changes in the Size of the Traded Goods Sector: Theory and Applications," Empirical Economics, Springer, vol. 6(4), pages 203-213.
    2. Brown, Alan & Deaton, Angus S, 1972. "Surveys in Applied Economics: Models of Consumer Behaviour," Economic Journal, Royal Economic Society, vol. 82(328), pages 1145-1236, December.
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    Citations

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    Cited by:

    1. Fred Guy, 2000. "CEO Pay, Shareholder Returns and Accounting Profitability," Working Papers wp155, Centre for Business Research, University of Cambridge.
    2. Giorgio Canarella & Mahmoud M. Nourayi, 2008. "Executive compensation and firm performance: adjustment dynamics, non-linearity and asymmetry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(4), pages 293-315.
    3. Alex Edmans & Xavier Gabaix & Tomasz Sadzik & Yuliy Sannikov, 2009. "Dynamic Incentive Accounts," NBER Working Papers 15324, National Bureau of Economic Research, Inc.
    4. Mark C. Anderson & Rajiv D. Banker & Sury Ravindran, 2000. "Executive Compensation in the Information Technology Industry," Management Science, INFORMS, vol. 46(4), pages 530-547, April.
    5. Sabac, Florin, 2008. "Dynamic incentives and retirement," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 172-200, September.
    6. Chen, Yenn-Ru & Lee, Bong Soo, 2010. "A dynamic analysis of executive stock options: Determinants and consequences," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 88-103, February.
    7. Olson, Eric & Miller, Scott & Wohar, Mark E., 2012. "“Black Swans” before the “Black Swan” evidence from international LIBOR–OIS spreads," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1339-1357.
    8. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, pages 1232-1287.
    9. Gregory Sierra & Eli Talmor & James Wallace, 2006. "An Examination of Multiple Governance Forces within Bank Holding Companies," Journal of Financial Services Research, Springer;Western Finance Association, vol. 29(2), pages 105-123, April.
    10. Hristos Doucouliagos & Janto Haman & Saeed Askary, 2007. "Directors' Remuneration and Performance in Australian Banking," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(6), pages 1363-1383, November.
    11. Chen, Chao-Jung & Hsu, Chung-Yuan & Chen, Yu-Lin, 2014. "The impact of family control on the top management compensation mix and incentive orientation," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 29-46.
    12. Taylor, Lucian A., 2013. "CEO wage dynamics: Estimates from a learning model," Journal of Financial Economics, Elsevier, vol. 108(1), pages 79-98.
    13. Rafel Crespi-Cladera & Carles Gispert & Luc Renneboog, 2001. "Verringern Management-Entlohnungskosten die Agency-Kosten?: Empirische Evidenz von netzwerkorientierten und marktorientierten Unternehmenskontrollsystemen," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 70(2), pages 234-246.
    14. Scott, John L. & Anderson, Randy I. & Webb, James R., 2005. "The labor-leisure choice in executive compensation plans: Does too much pay reduce REIT performance?," Journal of Economics and Business, Elsevier, vol. 57(2), pages 151-163.
    15. Andjelkovic, Aleksandar & Boyle, Glenn & McNoe, Warren, 2002. "Public disclosure of executive compensation: Do shareholders need to know?," Pacific-Basin Finance Journal, Elsevier, vol. 10(1), pages 97-117, January.
    16. repec:bla:afrdev:v:29:y:2017:i:3:p:429-445 is not listed on IDEAS
    17. Frederick Guy, 2000. "CEO Pay, Shareholder Returns, and Accounting Profits," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(3), pages 263-274.
    18. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    19. Mahmoud Nourayi & Sudha Krishnan, 2006. "The impact of incentives on CEO compensation and firm performance," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 53(3), pages 402-420, September.
    20. Gregory E. Sierra & Eli Talmor & James S. Wallace, 2004. "A unified analysis of executive pay: the case of the banking industry," Supervisory Policy Analysis Working Papers 2004-02, Federal Reserve Bank of St. Louis.
    21. Wilbur G. Lewellen, -, 1997. "Hatékonyság és eredményesség
      [Efficiency and effectiveness]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 3-12.
    22. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    23. Unite, Angelo A. & Sullivan, Michael J. & Brookman, Jeffrey & Majadillas, Mary Anne & Taningco, Angelo, 2008. "Executive pay and firm performance in the Philippines," Pacific-Basin Finance Journal, Elsevier, vol. 16(5), pages 606-623, November.

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