Executive Compensation and Firm Performance: Big Carrot, Small Stick

S. Wallsten

Working Papers from United Nations World Employment Programme-

Abstract: The statistical link between executive compensation and firm performance is well established. I explore two features of the relationship that have not yet been addressed empirically. First, does the relationship itself change depending on firm performance? I find that, on average, executives are rewarded in good years but are not punished in bad years. This result is consistent with a model that attempts to induce risk-taking behavior by rewarding good performance and limiting downside punishment. Second, does the relationship change with the executive's rank in the company? I find that the top executive's compensation is most strongly linked with performance, the second-highest ranking executive less so, and the third-highest even less. This result is consistent with linking compensation to performance only to the extent that the employee has some direct influence on it.

Keywords: ENTERPRISES; EXECUTIVES; COMPENSATION (search for similar items in EconPapers)
JEL-codes: J31 M12 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2000
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fth:unwoem:99-017

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