Earnings Returns and CEO Cash Compensation: A Longer-Term Perspective
Posted: 29 May 1995
This paper examines the longer-term relation between CEO cash compensation and changes in firm value. Following the methodology of Jensen and Murphy we find that the sensitivity over longer windows (6 to 10 years) is on average nine times greater than the one year sensitivity reported in Jensen and Murphy. Estimating elasticities also shows that the sensitivity of CEO pay to changes in firm value increased as the measurement window increased. However the estimated elasticities are all lower than others reported in the literature. These results provide some additional support for the use of earnings based pay packages. They also pose an interesting question in light of the results of Easton Harris and Ohlson (1992). Specifically why is the increase in the correspondence between earnings-based pay and returns less pronounced than the increase in the correspondence between earnings and returns over longer windows?
JEL Classification: J33
Suggested Citation: Suggested Citation