The Dependence of Pay–performance Sensitivity on the Size of the Firm
نویسنده
چکیده
I analyze the relationship between firm size and the extent to which executive compensation depends on the wealth of the firm’s shareholders. I use a simple agency model to motivate an econometric model of this relationship. Estimating this model on chief executive officer (CEO) compensation data using nonlinear least squares, I determine that pay–performance sensitivity (as defined by Jensen and Murphy (1990b)) appears to be approximately inversely proportional to the square root of firm size (however measured). I also analyze the properties of pay– performance sensitivity for ‘‘teams’’ of executives working for the same firm and show it to have similar properties as CEO pay–performance sensitivity.
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