The Dynamic Structure of CEO Compensation: An Empirical Study
- The Dynamic Structure of CEO Compensation: An Empirical Study
- Han, Joong H.
- CEO compensation; multi-period agency theory
- Issue Date
- Series/Report no.
- KDI Working Paper Series;07-23
- Multi-period agency theories posit that the CEO's current performance can be
compensated both today and tomorrow, suggesting that expected future rewards
can e®ectively substitute immediate pay-for-performance. This paper investigates
the dynamic view by using partial adjustment models of CEO pay. We ？nd that
target pay levels are set on \long-run" past ？rm performance and that the devia-
tion of the actual pay level causes near-complete convergence to the target in one
year. Such e®ects are more pronounced for the ？rms with weak external corpo-
rate governance. Overall, the ？ndings here indicates that pay-for-\current-only"-
performance sensitivity signi？cantly understates the incentive e®ects of CEO pay.
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