A few bad apples: An analysis of CEO performance pay and firm productivity

Document Type

Article

Publication Date

1-1-2010

Abstract

We investigate the relationship between CEO performance pay incentives and firm productivity. In general, we find an inverse U-shaped relationship between productivity and the sensitivity of CEO wealth to share value (delta) and a positive relationship between productivity and the sensitivity of CEO option wealth to stock return volatility (vega). Thus, a high delta associated with CEO risk-aversion lowers productivity, but a high vega from stock options offsets this effect. In looking at delta and vega jointly, we also find that options do not always achieve their intended purpose. These results are stronger among firms that are weakly governed or when high transaction costs prevent the writing of an optimal compensation contract. © 2010 Elsevier Inc..

Identifier

79960935240 (Scopus)

Publication Title

Journal of Economics and Business

External Full Text Location

https://doi.org/10.1016/j.jeconbus.2010.02.001

ISSN

01486195

First Page

273

Last Page

306

Issue

4

Volume

62

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