A few bad apples: An analysis of CEO performance pay and firm productivity

Laarni Bulan, Paroma Sanyal and Zhipeng Yan (zyan@njit.edu)

Journal of Economics and Business, 2010, vol. 62, issue 4, 273-306

Abstract: We investigate the relationship between CEO performance pay incentives and firm productivity. In general, we find an inverse U-shaped relationship between productivity and the sensitivity of CEO wealth to share value (delta) and a positive relationship between productivity and the sensitivity of CEO option wealth to stock return volatility (vega). Thus, a high delta associated with CEO risk-aversion lowers productivity, but a high vega from stock options offsets this effect. In looking at delta and vega jointly, we also find that options do not always achieve their intended purpose. These results are stronger among firms that are weakly governed or when high transaction costs prevent the writing of an optimal compensation contract.

Keywords: CEO; Executive; compensation; Pay-for-performance; sensitivity; Productivity (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:62:y::i:4:p:273-306

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