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Performance Pay and Top Management Incentives
Michael C. Jensen Harvard Business School; Social Science Electronic Publishing (SSEP), Inc. Kevin J. Murphy University of Southern California - Marshall School of Business; University of Southern California - Department of Economics; USC Gould School of Law Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998 Abstract: Our estimates of the pay-performance relation (including pay, options, stockholdings, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. Although the incentives generated by stock ownership are large relative to pay and dismissal incentives, most CEOs hold trivial fractions of their firms' stock, and ownership levels have declined over the past 50 years. We hypothesize that public and private political forces impose constraints that reduce the pay-performance sensitivity. Declines in both the pay-performance relation and the level of CEO pay since the 1930s are consistent with this hypothesis.
JEL Classifications: G31, G32, J31, J33 Accepted Paper SeriesDate posted: March 08, 2001 ; Last revised: November 03, 2006Suggested CitationContact Information
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