Performance Pay and Top Management Incentives

Murphy, Kevin J.; Jensen (Deceased), Michael C.

doi:10.2139/ssrn.94009

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Performance Pay and Top Management Incentives

Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998

50 Pages Posted: 8 Mar 2001

See all articles by Kevin J. Murphy

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Michael C. Jensen (Deceased)

Harvard University - Business School (HBS); SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

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 Classification: G31, G32, J31, J33

Suggested Citation: Suggested Citation

Murphy, Kevin J. and Jensen (Deceased), Michael C., Performance Pay and Top Management Incentives. Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998, Available at SSRN: https://ssrn.com/abstract=94009 or http://dx.doi.org/10.2139/ssrn.94009