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Executive Compensation and Firm Performance: Big Carrot, Small Stick

Author

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  • Wallsten, S.

Abstract

The statistical link between executive compensation and firm performance is well established. I explore two features of the relationship that have not yet been addressed empirically. First, does the relationship itself change depending on firm performance? I find that, on average, executives are rewarded in good years but are not punished in bad years. This result is consistent with a model that attempts to induce risk-taking behavior by rewarding good performance and limiting downside punishment. Second, does the relationship change with the executive's rank in the company? I find that the top executive's compensation is most strongly linked with performance, the second-highest ranking executive less so, and the third-highest even less. This result is consistent with linking compensation to performance only to the extent that the employee has some direct influence on it.

Suggested Citation

  • Wallsten, S., 2000. "Executive Compensation and Firm Performance: Big Carrot, Small Stick," Papers 99-017, United Nations World Employment Programme-.
    • Handle: RePEc:fth:unwoem:99-017
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    Cited by:

    1. Manika Kohli, 2017. "How Responsive Executive Compensation is to Corporate Performance? An Indian Perspective," Indian Journal of Commerce and Management Studies, Educational Research Multimedia & Publications,India, vol. 8(2), pages 07-18, May.
    2. Akram, Farheen & Abrar ul haq, Muhammad, 2018. "Assessing the Effect of Managerial Power on Firm Performance through the Perceptual Lens of Executive Remuneration," MPRA Paper 100050, University Library of Munich, Germany, revised 2019.

    More about this item

    Keywords

    ENTERPRISES ; EXECUTIVES ; COMPENSATION;
    All these keywords.

    JEL classification:

    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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