TY  - JOUR
AU  - Joskow,Paul L.
AU  - Rose,Nancy L.
TI  - CEO Pay and Firm Performance: Dynamics, Asymmetries, and Alternative Performance Measures
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4976
PY  - 1994
Y2  - December 1994
UR  - http://www.nber.org/papers/w4976
L1  - http://www.nber.org/papers/w4976.pdf
N1  - Author contact info:
Paul L. Joskow
Alfred P. Sloan Foundation
E-Mail: joskow@sloan.org

Nancy L. Rose
National Bureau of Economic Research
1050 Massachusetts Avenue
Cambridge, MA  02138
Tel: 617-613-1246
E-Mail: nrose@mit.edu
AB  - This study explores the dynamic structure of the pay-for- performance relationship in CEO compensation and quantifies the effect of introducing a more complex model of firm financial performance on the estimated performance sensitivity of executive pay.  The results suggest that current compensation responds to past performance outcomes, but that the effect decays considerably within two years. This contrasts sharply with models of infinitely persistent performance effects implicitly assumed in much of the empirical compensation literature.  We find that both accounting and market performance measures influence compensation and that the salary and bonus component of pay as well as total compensation have become more sensitive to firm financial performance over the past two decades. There is no evidence that boards fail to penalize CEOs for poor financial performance or reward them disproportionately well for good performance.  Finally, the data suggest that boards may discount extreme performance outcomes -both high and low - relative to performance that lies within some `normal' band in setting compensation.
ER  -