You Can Pay Me Now and You Can Pay Me Later: The Dynamic Response of Executive Compensation to Firm Performance
John F. Boschen
College of William and Mary - Mason School of Business; National Bureau of Economic Research (NBER)
Kimberly J. Smith
College of William and Mary - Mason School of Business
JOURNAL OF BUSINESS, Vol 68 No 4, October 4, 1995
Empirical studies estimating the impact of firm performance on executive pay have primarily concentrated on the short-run response. In this study, we present estimates of the complete dynamic response of CEO pay to firm performance. We find that 1) the cumulative response of pay to firm performance is roughly ten times that of the contemporaneous response, 2) a one-time innovation in firm performance typically raises pay over the next four to five years, and 3) compensation arrangements have shifted toward greater performance sensitivity and longer-term pay arrangements over the four decades studied.
JEL Classification: J33
Date posted: August 25, 1998
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