The Dependence of pay—Performance Sensitivity on the Size of the Firm

Scott Schaefer

254 citations0/0 files storedThe Review of Economics and Statistics

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Corporate Finance and Governance Accounting and Organizational Management Corporate Governance and Financial Management

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.

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References

1979Moral Hazard and Observability 1990Performance Pay and Top-Management Incentives 1982Moral Hazard in Teams 1985The effect of bonus schemes on accounting decisions 1987Aggregation and Linearity in the Provision of Intertemporal Incentives 2011The effects of bonus schemes on accounting decisions 1985Corporate performance and managerial remuneration 1987The theory of contracts

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