The Dependence Of Pay--Performance Sensitivity On The Size Of The Firm

Scott Schaefer

The Review of Economics and Statistics, 1998, vol. 80, issue 3, 436-443

Abstract: I analyze the relationship between firm size and the extent to which executive compensation depends on the wealth of the firm's shareholders. I use a simple agency model to motivate an econometric model of this relationship. Estimating this model on chief executive officer (CEO) compensation data using nonlinear least squares, I determine that pay-performance sensitivity (as defined by Jensen and Murphy (1990b)) appears to be approximately inversely proportional to the square root of firm size (however measured). I also analyze the properties of pay- performance sensitivity for "teams" of executives working for the same firm and show it to have similar properties as CEO pay-performance sensitivity. © 1998 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Date: 1998
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