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
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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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