Testing Effectiveness of Executive Compensation - Discussion

Abstract:     
The executive compensation literature has explored the executive pay-for-performance relation in various contexts and reported mixed findings. As a result, the question of whether executive incentives, and particularly stock options, are effective continues to pose a puzzle to researchers. Gong (JMAR, this issue) uses a long window to examine effectiveness of executive compensation. This note discusses several broad aspects of pay-for-performance studies and their potential manifestation in this line of research and in Gong's study. Specifically, I elaborate on measurement issues and focus on (i) The underlying paradigm: arm’s-length contracting versus managerial power, (ii) The distinction between the pay-for-performance relationship and CEO overpay, (iii) Market efficiency, and (iv) The settling-up problem.

Number of Pages in PDF File: 13

Keywords: Executive, Compensation

JEL Classification: M41

Accepted Paper Series