Is there an inverse U-shaped relationship between pay and performance?

Hsien-Chang Kuo, Dan Lin, Donald Lien, Lie-Huey Wang and Li-Jen Yeh

The North American Journal of Economics and Finance, 2014, vol. 28, issue C, 347-357

Abstract: Given the increasing concerns about the escalation in executive compensation, this study aims to provide new insights into the link between executive pay and firm performance by empirically testing for an inverse U-shaped relationship. For this purpose, we re-examine the relation using a nonlinear model. Our results show a significant inverse U-shaped relationship between executive pay and firm performance. The finding provides support for both optimal contracting and managerial power theories with the former dominating at low level of firm performance and the latter dominating at high level of firm performance.

Keywords: Executive compensation; Firm performance; Pay-for-performance (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:28:y:2014:i:c:p:347-357

DOI: 10.1016/j.najef.2014.03.007

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