Performance Pay and Top-Management Incentives

Michael Jensen and Kevin Murphy (kjmurphy@usc.edu)

Journal of Political Economy, 1990, vol. 98, issue 2, 225-64

Abstract: The authors' estimates of the pay-performance relation (including pay, options, stockholding, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 changes in shareholder wealth. Although the incentives generated by stock ownership are large relative to pay and dismissal incentives, most CEOs hold trivial fractions of the firms' stock, and ownership levels have declined over the past fifty years. The authors hypothesize that public and private political forces impose constraints that reduce the pay-performance sensitivity. Declines in both the pay-performance relation and the level of CEO pay since the 1930s are consistent with this hypothesis. Copyright 1990 by University of Chicago Press.

Date: 1990
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Working Paper: PERFORMANCE PAY AND TOP MANAGEMENT INCENTIVES (1988)
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