A Few Bad Apples: An Analysis of CEO Performance Pay and Firm Productivity

66 Pages Posted: 27 May 2008 Last revised: 28 Feb 2010

See all articles by Laarni T. Bulan

Laarni T. Bulan

Cornerstone Research

Paroma Sanyal

Brandeis University - Department of Economics

Zhipeng Yan

New Jersey Institute of Technology

Date Written: October 1, 2009

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-Performance Sensitivity, Productivity

JEL Classification: G32, G30, L2, O3

Suggested Citation

Bulan, Laarni Tobia and Sanyal, Paroma and Yan, Zhipeng, A Few Bad Apples: An Analysis of CEO Performance Pay and Firm Productivity (October 1, 2009). Journal of Economics and Business, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1137922

Laarni Tobia Bulan (Contact Author)

Cornerstone Research ( email )

Boston, MA
United States

Paroma Sanyal

Brandeis University - Department of Economics ( email )

Waltham, MA 02454
United States

Zhipeng Yan

New Jersey Institute of Technology ( email )

United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
247
Abstract Views
1,254
rank
138,775
PlumX Metrics