Abstract

http://ssrn.com/abstract=1475031
 
 

References (29)



 
 

Citations (17)



 


 



Strategic Flexibility and the Optimality of Pay for Sector Performance


Radhakrishnan Gopalan


Washington University in Saint Louis - John M. Olin Business School

Todd T. Milbourn


Washington University in Saint Louis - John M. Olin Business School

Fenghua Song


Pennsylvania State University - Smeal College of Business

September 17, 2009

Review of Financial Studies, Forthcoming

Abstract:     
While standard contract theory suggests that a CEO should be paid relative to a benchmark that removes the effects of sector performance, there is evidence that CEO pay is strongly and positively related to such sector performance. Many have coined this relationship as pay for luck. In this paper, we offer an explanation. We model a CEO charged with selecting the firm's strategy which determines the firm's exposure to sector performance. To incentivize the CEO to choose optimally, pay contracts will be positively and sometimes asymmetrically related to sector performance. Consistent with our predictions, our empirical analysis indicates that the observed sensitivity of pay to sector performance is almost fully confined to multi-segment firms and is greater in firms that offer greater strategic flexibility to alter sector exposure, for more talented CEOs, and for CEOs as compared to their subordinate executives. Our evidence is robust to alternate explanations such as CEO entrenchment.

Number of Pages in PDF File: 47

JEL Classification: G30, J33

Accepted Paper Series


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Date posted: September 21, 2009  

Suggested Citation

Gopalan, Radhakrishnan and Milbourn, Todd T. and Song, Fenghua, Strategic Flexibility and the Optimality of Pay for Sector Performance (September 17, 2009). Review of Financial Studies, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1475031

Contact Information

Radhakrishnan Gopalan
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
Todd T. Milbourn
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6392 (Phone)
314-935-6359 (Fax)
HOME PAGE: http://www.olin.wustl.edu/faculty/milbourn/
Fenghua Song (Contact Author)
Pennsylvania State University - Smeal College of Business ( email )
University Park, PA 16802
United States
814.863.4905 (Phone)
814.865.3362 (Fax)
HOME PAGE: http://www.personal.psu.edu/fxs16
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