Does Performance-Based Managerial Compensation Affect Subsequent Corporate Performance?

John Abowd ()

No 3149, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: An effective performance-based compensation system must increase the probability of high performance corporate outcomes in order to justify the incremental expense relative to a straight salary system. A positive relation between current performance and current compensation indicates that the pay system is performance-based in practice, if not explicitly. This study considers whether increasing the sensitivity of current compensation to current performance is associated with higher performance in the future. For accounting-based performance measures, there is only weak evidence that greater performance-based compensation is associated with improved future performance. However, for economic and market performance measures, there is stronger evidence. Payment of an incremental 10% bonus for good economic performance is associated with a 30 to 90 basis point increase in the expected after tax gross economic return in the following fiscal year. Payment of an incremental raise of 10' following a good stock market performance is associated with a 400 to 1200 basis point increase in expected total shareholder return. These results are comparable in magnitude when compared to the intrinsic variability of the performance measure considered.

Date: 1989-10
Note: LS
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Citations: View citations in EconPapers (5)

Published as ILRR, Vol. 43, no. 3 (1990): 52S-73S.

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