The Dependence of pay—Performance Sensitivity on the Size of the Firm
The Review of Economics and Statistics
1998
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.
- DOI
- 10.1162/003465398557537
- Volume
- 80 (3)
- Pages
- 436-443
- Language
- en
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