CEO control, corporate performance and pay-performance sensitivity

Yaron Amzaleg, Ofer Azar, Uri Ben-Zion and Ahron Rosenfeld

Journal of Economic Behavior & Organization, 2014, vol. 106, issue C, 166-174

Abstract: Agency theory suggests that high pay-performance sensitivity (PPS) of CEO's compensation is an important motivation mechanism to the CEO to improve corporate performance. We develop a simple model that suggests that reverse causality should also be considered. Specifically, our model predicts that when good performance is expected, a powerful CEO will push for a contract with higher PPS. Data from 135 Israeli companies over a five-year period confirm the model's main prediction. Our empirical analysis shows that when the CEO is the chairman of the board of directors and thus is more powerful in affecting his compensation scheme, he achieves a high PPS in good periods (in terms of corporate performance), compared to similar powerful CEOs in periods of bad performance, and also compared to less powerful CEOs in good periods.

Keywords: Executive compensation; Corporate governance; Board structure; Rent extraction; Pay-performance sensitivity (search for similar items in EconPapers)
JEL-codes: G30 G34 J31 J33 M52 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:106:y:2014:i:c:p:166-174

DOI: 10.1016/j.jebo.2014.07.004

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