Previous work by Aggarwal and Samwick [Aggarwal, R., Samwick, A., 1999. The other side of the tradeoff: the impact of risk on executive compensation. Journal of Political Economy 107 pp. 65–105] has documented the importance of controlling for the variance of firm stock returns when estimating pay–performance sensitivities. They find that pay–performance sensitivities are an order of magnitude greater for small vs. large variance firms. Using a comparable sample of CEOs, I provide evidence that when properly controlling for firm size, the negative effect of variance in stock returns on estimated pay–performance sensitivities is greatly diminished. In particular, when using dollar returns as the measure of firm performance, it is imperative to properly control for firm size.

ABSTRACT: We study turnover and promotions of division managers in multidivisional firms. Turnover is negatively related to divisional accounting performance, positively related to industry performance, but not significantly related to firm performance or the performance of other divisions. Consistent with tournament theory, promotions are significantly related to whether one division is performing better than others, but are not significantly related to the magnitude of any performance difference. A simple performance metric, divisional ROA, appears more closely related to job allocation decisions than several alternatives. Our evidence is consistent with the hypothesis that accounting information is used by firms when evaluating managerial personnel.