TY - JOUR
T1 - CEO control, corporate performance and pay-performance sensitivity
AU - Amzaleg, Yaron
AU - Azar, Ofer H.
AU - Ben-Zion, Uri
AU - Rosenfeld, Ahron
PY - 2014/10
Y1 - 2014/10
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
UR - http://www.scopus.com/inward/record.url?scp=84905237181&partnerID=8YFLogxK
U2 - 10.1016/j.jebo.2014.07.004
DO - 10.1016/j.jebo.2014.07.004
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AN - SCOPUS:84905237181
SN - 0167-2681
VL - 106
SP - 166
EP - 174
JO - Journal of Economic Behavior and Organization
JF - Journal of Economic Behavior and Organization
ER -