DP11417 CEO Incentives: Measurement, Determinants, and Impact on Performance

Author(s): Lin Peng, Ailsa A Röell, Hongfei Tang
Publication Date: July 2016
Keyword(s): Executive compensation, pay-for-performance elasticity
JEL(s): G32, G34
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11417

We examine, both theoretically and empirically, the determinants and performance impact of three measures of CEO incentives: pay-performance elasticity (PPE), semi-elasticity (PPSE), and sensitivity (PPS). Larger, more R&D intensive, and low-idiosyncratic risk firms have higher PPE and PPSE, resolving puzzling prior empirical findings based on PPS. Performance is generally hump-shaped in PPE and PPSE; shortfalls relative to predicted levels appear particularly detrimental to firm performance, suggesting that the average firm's incentives are at the low end of the optimal range. Overall, the results obtained with the PPE and PPSE measures accord better with economic intuition than those obtained using PPS.