The dependence of pay-performance sensitivity on the size of the firm

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125 Scopus citations

Abstract

I analyze the relationship between firm size and the extent to which executive compensation depends on the wealth of the firm's shareholders. I use a simple agency model to motivate an econometric model of this relationship. Estimating this model on chief executive officer (CEO) compensation data using nonlinear least squares, I determine that pay-performance sensitivity (as defined by Jensen and Murphy (1990b)) appears to be approximately inversely proportional to the square root of firm size (however measured). I also analyze the properties of pay-performance sensitivity for "teams" of executives working for the same firm and show it to have similar properties as CEO pay-performance sensitivity.

Original languageEnglish (US)
Pages (from-to)436-443
Number of pages8
JournalReview of Economics and Statistics
Volume80
Issue number3
DOIs
StatePublished - Aug 1998

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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