Performance pay sensitivity: Do top management incentives align with shareholder value creation?

Arising from the principal-agent consideration, Jensen and Murphy (1990b) studied pay-performance sensitivity (including pay, options, stockholdings, dismissal) for chief executive officers (CEOs) in 1980s. They found that CEO wealth changes $3.25 every $1,000 change shareholder wealth. In this study, we revisit issue of linkage between pay performance but with difference only include observable measures estimate. Our data on compensation stems ExecuComp database S&P 1500 firms, Center Research Security Prices (CRSP) (total: 23,737 firm-year observations). We find $5.34 Almost all is attributed to through stock options CEO’s inside stockholdings. Today, incentives generated by have increased thirteen times, total has almost doubled value, compared when estimated 1980s first time. Despite sensitivity, hypothesize internal external political forces negatively affect incentives. Compensation constraints reduce hereby maximize Further research how varies absolute relative corporate required determine if are consistent maximization.