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Compensation and Firm Performance

Author

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  • Ronald G. Ehrenberg
  • George T. Milkovich

Abstract

This paper uses stochastic simulation and my U.S. econometric model to examine the optimal choice of monetary policy instruments. Are the variances, covariances, and parameters in the model such as to favor one instrument over the other, in particular the interest rate over the money supply? The results show that the interest rate and the money supply are about equally good as policy instruments in terms of minimizing the variance of real GNP. The variances of some of the components of GNP are, however, much larger when the money supply is the policy instrument, as is the variance of the change in stock prices. Therefore, if one's loss function is expanded beyond simply the variance of real GNP to variances of other variables, the interest rate policy does better. The results thus provide some support for what seems to be the Fed's current choice of using the interest rate as its primary instrument. Stochastic simulation is also used to estimate how much of the variance of real GNP is due to the error terms in the demand for money equations. The results show that the contribution is not very great even when the money supply is the policy instrument.

Suggested Citation

  • Ronald G. Ehrenberg & George T. Milkovich, 1987. "Compensation and Firm Performance," NBER Working Papers 2145, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2145
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    References listed on IDEAS

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    1. Ronald G. Ehrenberg & Leif Danziger & Gee San, 1982. "Cost-of-Living Adjustment Clauses in Union Contracts," NBER Working Papers 0998, National Bureau of Economic Research, Inc.
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    Cited by:

    1. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    2. Alan B. Krueger, 1988. "Are Public Sector Workers Paid More Than Their Alternative Wage? Evidence from Longitudinal Data and Job Queues," NBER Chapters, in: When Public Sector Workers Unionize, pages 217-242, National Bureau of Economic Research, Inc.
    3. John M. Abowd, 1989. "Does Performance-Based Managerial Compensation Affect Subsequent Corporate Performance?," NBER Working Papers 3149, National Bureau of Economic Research, Inc.
    4. Harry J. Holzer, 1990. "Wages, Employer Costs, and Employee Performance in the Firm," ILR Review, Cornell University, ILR School, vol. 43(3), pages 147-1-164-, April.
    5. Jones, Derek C. & Kato, Takao, 1996. "The determinants of chief executive compensation in transitional economies: Evidence from Bulgaria," Labour Economics, Elsevier, vol. 3(3), pages 319-336, October.
    6. George Kominis & Clive R. Emmanuel, 2005. "Exploring the reward preferences for middle level managers," Qualitative Research in Accounting & Management, Emerald Group Publishing, vol. 2(1), pages 54-76, April.
    7. Brunello, Giorgio & Graziano, Clara & Parigi, Bruno, 2001. "Executive compensation and firm performance in Italy," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 133-161, January.
    8. Gómez-Mejía, Luis R. & Saura, M. D., 1996. "The linkages between business strategies and compensation policies using miles and snow's framework," DEE - Working Papers. Business Economics. WB 7055, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    9. Erica L. Groshen, 1988. "Why do wages vary among employers?," Economic Review, Federal Reserve Bank of Cleveland, vol. 24(Q I), pages 19-38.

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