Pay for Performance in Volatile Markets

Miles Cahill () and Alaina George
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Miles Cahill: Department of Economics, College of the Holy Cross

No 302, Working Papers from College of the Holy Cross, Department of Economics

Abstract: In recent years, literature has suggested that executive compensation schemes conform to principal-agent models of incentive pay. Specifically, when analyzing total compensation (including stock options), executive pay seems to be positively related to the market performance of the corporation's stock. However, such studies were performed during the recent bull market of the 1990s. This paper estimates a model of incentive pay using data from more recent volatile markets of 1999-2001, and finds that the incentive component of executive pay has at least diminished, and has perhaps reversed. Thus, incentive pay may be something of a "fair weather" phenomenon.

Keywords: incentive pay; stock options; executive pay; market volatility (search for similar items in EconPapers)
Date: 2003-12
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Published in American Economist, Fall 2005, Vol. 49:2, pp. 3-25.

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Persistent link: https://EconPapers.repec.org/RePEc:hcx:wpaper:0302

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