CEO control, corporate performance and pay-performance sensitivity

Yaron Amzaleg, Ofer H. Azar, Uri Ben-Zion, Ahron Rosenfeld

Research output: Contribution to journalArticlepeer-review

26 Scopus citations

Abstract

Agency theory suggests that high pay-performance sensitivity (PPS) of CEO's compensation is an important motivation mechanism to the CEO to improve corporate performance. We develop a simple model that suggests that reverse causality should also be considered. Specifically, our model predicts that when good performance is expected, a powerful CEO will push for a contract with higher PPS. Data from 135 Israeli companies over a five-year period confirm the model's main prediction. Our empirical analysis shows that when the CEO is the chairman of the board of directors and thus is more powerful in affecting his compensation scheme, he achieves a high PPS in good periods (in terms of corporate performance), compared to similar powerful CEOs in periods of bad performance, and also compared to less powerful CEOs in good periods.

Original languageEnglish
Pages (from-to)166-174
Number of pages9
JournalJournal of Economic Behavior and Organization
Volume106
DOIs
StatePublished - 1 Jan 2014

Keywords

  • Board structure
  • Corporate governance
  • Executive compensation
  • Pay-performance sensitivity
  • Rent extraction

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

Fingerprint

Dive into the research topics of 'CEO control, corporate performance and pay-performance sensitivity'. Together they form a unique fingerprint.

Cite this