Pay-Performance Sensitivity and Production Efficiency
نویسنده
چکیده
We examine the interaction between risk (uncertainty) and production efficiency in determining pay-performance sensitivity in optimal executive compensation. Particularly, we show that the risk-incentive trade-off is exacerbated (attenuated) as production efficiency increases when the efficiency level is greater (less) than the level of compensation risk. This result suggests that the optimality of CEO compensation is a complex function of diverse corporate environments, specifically risk and production efficiency. Given that internal capital market efficiency is a major source of production efficiency in a multi-segment setting, we also discuss the empirical implications for optimal compensation and internal capital markets. JEL classification: G30; G32; J33
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