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

Laarni Bulan, Paroma Sanyal, Zhipeng Yan

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)273-306
Number of pages34
JournalJournal of Economics and Business
Volume62
Issue number4
DOIs
StatePublished - Jul 2010

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting(all)
  • Economics and Econometrics

Keywords

  • CEO
  • Executive compensation
  • Pay-for-performance sensitivity
  • Productivity

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