Incentive Alignment, CEO Pay Level, and Firm Performance: A Case of “Heads I Win, Tails You Lose”?

Abstract

In recent years, rewarding CEOs with long-term forms of compensation (e.g., stock options, performance plans, restricted stock) has become more popular than using year-end pay adjustments. Surprisingly, there is little empirical evidence to support the benefits of this trend. This study found that the benefits of long-term compensation flowed primarily to CEOs as they received significantly greater levels of total compensation than CEOs in firms that emphasized year-end pay adjustments. Paradoxically, however, firms that emphasized year-end pay adjustments performed significantly better than firms that were heavy users of long-term forms of contingent compensation. © 2001 John Wiley & Sons, Inc.