CEO Incentives: Measurement, Determinants, and Impact on Performance

89 Pages Posted: 28 May 2016

See all articles by Lin Peng

Lin Peng

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Ailsa Röell

Columbia University, School of International and Public Affairs

Hongfei Tang

Seton Hall University

Date Written: May 26, 2016

Abstract

We examine, both theoretically and empirically, the determinants and performance impact of three measures of CEO incentives: pay-performance elasticity (PPE), semi-elasticity (PPSE), and sensitivity (PPS). Larger, more R&D intensive, and low-idiosyncratic risk firms have higher PPE and PPSE, resolving puzzling prior empirical findings based on PPS. Performance is generally hump-shaped in PPE and PPSE; shortfalls relative to predicted levels appear particularly detrimental to firm performance, suggesting that the average firm’s incentives are at the low end of the optimal range. Overall, the results obtained with the PPE and PPSE measures accord better with economic intuition than those obtained using PPS.

Keywords: CEO compensation, pay-performance elasticity, pay-performance sensitivity, pay-performance semi-elasticity, firm size, and firm performance

JEL Classification: G32, G34

Suggested Citation

Peng, Lin and Röell, Ailsa A. and Tang, Hongfei, CEO Incentives: Measurement, Determinants, and Impact on Performance (May 26, 2016). Available at SSRN: https://ssrn.com/abstract=2784953 or http://dx.doi.org/10.2139/ssrn.2784953

Lin Peng (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Ailsa A. Röell

Columbia University, School of International and Public Affairs ( email )

3022 Broadway
New York, NY 10027
United States
(212) 854-9289 (Phone)

Hongfei Tang

Seton Hall University ( email )

400 S Orange Avenue
South Orange, NJ 07079
United States
973-761-9151 (Phone)

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