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

Laarni Bulan; Paroma Sanyal; Zhipeng Yan

doi:10.1016/j.jeconbus.2010.02.001

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

Laarni Bulan, Paroma Sanyal, Zhipeng Yan

MT School of Management

Research output: Contribution to journal › Article › peer-review

22 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 language	English (US)
Pages (from-to)	273-306
Number of pages	34
Journal	Journal of Economics and Business
Volume	62
Issue number	4
DOIs	https://doi.org/10.1016/j.jeconbus.2010.02.001
State	Published - Jul 2010

All Science Journal Classification (ASJC) codes

General Business, Management and Accounting
Economics and Econometrics

Keywords

CEO
Executive compensation
Pay-for-performance sensitivity
Productivity

Access to Document

10.1016/j.jeconbus.2010.02.001

Cite this

@article{8bbcef23c3444db999c2687374c092e9,

title = "A few bad apples: An analysis of CEO performance pay and firm productivity",

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.",

keywords = "CEO, Executive compensation, Pay-for-performance sensitivity, Productivity",

author = "Laarni Bulan and Paroma Sanyal and Zhipeng Yan",

year = "2010",

month = jul,

doi = "10.1016/j.jeconbus.2010.02.001",

language = "English (US)",

volume = "62",

pages = "273--306",

journal = "Journal of Economics and Business",

issn = "0148-6195",

publisher = "Elsevier Inc.",

number = "4",

}

TY - JOUR

T1 - A few bad apples

T2 - An analysis of CEO performance pay and firm productivity

AU - Bulan, Laarni

AU - Sanyal, Paroma

AU - Yan, Zhipeng

PY - 2010/7

Y1 - 2010/7

N2 - 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.

AB - 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.

KW - CEO

KW - Executive compensation

KW - Pay-for-performance sensitivity

KW - Productivity

UR - http://www.scopus.com/inward/record.url?scp=79960935240&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=79960935240&partnerID=8YFLogxK

U2 - 10.1016/j.jeconbus.2010.02.001

DO - 10.1016/j.jeconbus.2010.02.001

M3 - Article

AN - SCOPUS:79960935240

SN - 0148-6195

VL - 62

SP - 273

EP - 306

JO - Journal of Economics and Business

JF - Journal of Economics and Business

IS - 4

ER -

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

Abstract

All Science Journal Classification (ASJC) codes

Keywords

Access to Document

Other files and links

Fingerprint

Cite this