The Economic Determinants of the CEO Compensation- Performance Sensitivity
Posted: 28 Jul 1997
Date Written: May 1997
We examine the agency-theory-based economic determinants of the firm-specific CEO compensation-performance sensitivity by using CEO cash compensation (salary plus bonus) as the proxy for CEO compensation and annual accounting earnings as the measure of firm performance. From agency theory, the determinants we examine are the amount of noise in earnings, the level of political constraints, the degree of monitoring difficulty, the investment opportunity set, the agency cost of debt, and the agency cost of equity. Using proxies for these constructs, we find the sensitivity of CEO cash compensation to firm performance (accounting earnings) to be weaker in the presence of noisier earnings, greater political constraints, and greater observability of managerial actions. We also underscore the importance of research design by showing that the CEO compensation- performance sensitivity is at least four times higher for the firm-specific time series regression than for the pooled cross-sectional regression.
JEL Classification: J33, D82, D23
Suggested Citation: Suggested Citation