CEO control, corporate performance and pay-performance sensitivity

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

doi:10.1016/j.jebo.2014.07.004

CEO control, corporate performance and pay-performance sensitivity

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

Research output: Contribution to journal › Article › peer-review

27 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 language	English
Pages (from-to)	166-174
Number of pages	9
Journal	Journal of Economic Behavior and Organization
Volume	106
DOIs	https://doi.org/10.1016/j.jebo.2014.07.004
State	Published - 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

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title = "CEO control, corporate performance and pay-performance sensitivity",

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.",

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AU - Amzaleg, Yaron

AU - Azar, Ofer H.

AU - Ben-Zion, Uri

AU - Rosenfeld, Ahron

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N2 - 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.

AB - 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.

KW - Board structure

KW - Corporate governance

KW - Executive compensation

KW - Pay-performance sensitivity

KW - Rent extraction

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CEO control, corporate performance and pay-performance sensitivity

Abstract

Keywords

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