Review Executive Compensation-Devers 2007

Journal of Management
http://jom.sagepub.com
Executive Compensation: A Multidisciplinary Review of Recent Developments

Cynthia E. Devers, Albert A. Cannella, JR, Gregory P. Reilly and Michele E. Yoder
Journal of Management 2007; 33; 1016
DOI: 10.1177/0149206307308588
The online version of this article can be found at:
http://jom.sagepub.com/cgi/content/abstract/33/6/1016
Published by:
http://www.sagepublications.com
On behalf of:
Southern Management Association
Additional services and information for Journal of Management can be found at:
Email Alerts: http://jom.sagepub.com/cgi/alerts
Subscriptions: http://jom.sagepub.com/subscriptions
Reprints: http://www.sagepub.com/journalsReprints.nav
Permissions: http://www.sagepub.com/journalsPermissions.nav
Citations http://jom.sagepub.com/cgi/content/refs/33/6/1016
Downloaded from http://jom.sagepub.com by on April 16, 2009
Executive Compensation: A Multidisciplinary

Review of Recent Developments
Cynthia E. Devers*
University of WisconsinMadison, School of Business, Madison, WI 53706
Albert A. Cannella, Jr.

Tulane University, A. B. Freeman School of Business,
7 McAlister Drive, New Orleans, LA 70118
Gregory P. Reilly
University of Connecticut, Storrs, CT 06269
Michele E. Yoder
University of WisconsinMadison, School of Business, Madison, WI 53706
The failure to document a consistent and robust relationship between executive pay and firm
performance has frustrated scholars and practitioners for over three quarters of a century.
Although recent compensation research has revealed alternative theoretical frameworks and
findings that hold the potential to significantly improve our understanding of executive compensation, to date this diverse literature lacks theoretical integration. Accordingly, we develop a
framework to organize and review these recent findings. We further identify methodological
issues and concerns, discuss the implications of these concerns, and provide recommendations
for future research aimed at developing a more integrated research agenda.
Keywords: executive compensation; compensation design; incentive pay; corporate governance;
risk; agency theory; behavioral theory
In their 1997 review, Gomez-Mejia and Wiseman argued that the narrow focus of executive
compensation research excluded consideration of alternative theoretical perspectives and
methodologies; thus, it threatened to make the field stagnant. In response, they posed a series
*Corresponding author: Tel.: (608) 263-2138
E-mail address: cdevers@bus.wisc.edu
Journal of Management, Vol. 33 No. 6, December 2007 1016-1072
DOI: 10.1177/0149206307308588
2007 Southern Management Association. All rights reserved.
1016
Devers et al. / Executive Compensation
1017
of questions designed to expand the scope of executive compensation research and practice.
In the decade that followed, scholars from a number of disciplines have examined compensation through a wide variety of theoretical lenses. Although this work has uncovered new
insights that hold the potential to significantly improve our understanding of executive compensation, the disparate nature of this research restricts scholars capacity to effectively integrate these insights into a more completely developed perspective. Thus, although
Gomez-Mejia and Wiseman argued for broadening the focus of compensation research in
1997, our review of the recent literature suggests the pendulum may have swung too far.
Accordingly, in this review we develop a framework to organize and evaluate recent compensation research with the purpose of laying the foundation for the development of a more
unifying future research agenda. We focused our attention on studies published since the
1997 Gomez-Mejia and Wiseman review. We attempted to identify every executive compensation study published in the past decade in management, psychology, finance, economics,
and accounting journals. Our initial efforts revealed several hundred published articles in the
compensation arena. Given space constraints, we focused on executive compensation articles
published in the most widely cited journals of each discipline, which resulted in a final sample of 99 articles (see Appendix). In sum, 44% of the articles were from management journals, 34% were from finance journals, 12% were from accounting journals, and the
remaining 10% were from economics, psychology, or other journals.
We begin by organizing executive compensation research into two main categories: (1) relationships between pay and performance and (2) relationships among pay and behaviors.
Traditionally, executive compensation scholars have focused most heavily on the relationships
between pay and performance (Finkelstein & Hambrick, 1996). However, because scholarly
interest in the behavioral consequences of compensation has grown significantly, over the past
decade a substantial amount of executive compensation research has occurred within both categories. Therefore, we further organized the literature in each main category into two subcategories (for a total of four), with one set containing work examining the determinants of
compensation and the other containing work examining the consequences of compensation
(see list below). A brief description of each study, by subcategory, is provided in the Appendix.
I.
Relationships between pay and performance

A. The influence of performance on pay
1. Principal-agent model influences
2. Performance surprises
3. Governance influences
B. The influence of pay on performance
1. Pay plan adoption
2. Elements of pay
3. Top management team pay and pay dispersion
II.
Relationships among pay and behaviors
A. The influence of pay on executive actions
1. Goal alignment
2. Strategic choices
3. Individual choices
4. Goal misalignment
1018
Journal of Management / December 2007
5. Risk preference alignment

6. Contextual influences
7. Stock options
B. The influence of executive actions and other factors on pay
1. Contextual influences
2. Governance influences
3. Human capital and social influences
In the following sections, we review recent research in each of these areas. We then discuss cross-area work. Finally, we conclude by identifying methodological issues and concerns, discussing the implications of these concerns, and offering future research directions
and suggestions aimed at advancing our knowledge of executive compensation.
Relationships Between Pay and Performance

The Influence of Performance on Pay
Researchers examining the influence of performance on executive pay generally depict
compensation as a reward for prior performance, or as a means of ex post settling up (Fama,
1980). Scholars often refer to this relationship as the sensitivity of pay to performance.
Conceptualizing payperformance sensitivity as the dollar change in executive wealth associated with each dollar change in shareholder wealth, Jensen and Murphy (1990) found an
average increase in CEO compensation of $3.25 for every $1,000 increase in shareholder
wealth. Given that greater payperformance sensitivity should indicate greater alignment of
executive and shareholder interests, the authors concluded that the sensitivity of CEO pay to
firm performance was quite low. Nevertheless, scholars continue to scrutinize this relationship with zeal. Although some recent work continues to focus on the main effect of performance on pay, other studies have emphasized the influence of moderators and other factors.
Because Jensen and Murphys 1990 work remains the seminal payperformance sensitivity study, it commonly serves as a benchmark against which other findings are compared.
However, depending on the sample used, the timeframe studied, and the variables included,
the levels of payperformance sensitivity observed appear to vary widely. For example,
using panel data from 1980 to 1994, Hall and Liebman (1998) concluded that CEO pay
performance sensitivity was about four times higher than Jensen and Murphys study had
indicated. Because they used more recent data and had more comprehensive information
regarding CEO stock and stock option holdings, Hall and Liebman argued that they were
able to produce a more precise estimate of the sensitivity of CEO pay to firm performance
than Jensen and Murphy (1990). Additionally, they concluded that the sensitivity of CEO
compensation to firm performance has been increasing over time largely because of the proliferation of stock options.
Principal-agent model influences. Scholars have also begun to more precisely examine
payperformance sensitivity by including the effects of other variables in their models. Some of
this work explicitly tests arguments from the principal-agent model of executive compensation.
1019
For example, Aggarwal and Samwick (1999a) examined the effects of the volatility of firm
returns on compensation. Controlling for stock price variance, they found a median CEO
payperformance sensitivity of $14.52 per $1,000 change in shareholder wealth and a
median payperformance sensitivity for other executives of $3.30. Furthermore, their results
showed that as the volatility of firm returns increased, payperformance sensitivity
decreased. They concluded that examinations of payperformance sensitivity that fail to
adjust for volatility may be biased toward zero. Kraft and Niederprum (1999) offered additional support for this conclusion. Specifically, using data from a sample of German firms,
they found that as the variance in return on equity (ROE) increased, the sensitivity of top
managers salaries to ROE decreased.
In a more recent study, Aggarwal and Samwick (2003) demonstrated that higher levels of
executive responsibility were associated with greater payperformance sensitivity.
Specifically, controlling for executives characteristics, they demonstrated that the median
payperformance sensitivity of executives with divisional authority was $1.22 per $1,000
increase in shareholder wealth lower than executives with oversight authority and $5.65 per
$1,000 lower than that of CEOs. Adding further support for the notion that hierarchical level
matters, they demonstrated that although the median top management team (TMT) pay
performance sensitivity was $32.32 per $1,000, CEOs accounted for between 42% and 58%
of those aggregate TMT incentives. Finally, they demonstrated that, for divisional executives, the volatility of divisional performance decreased pay-for-divisional-performance sensitivity, but increased pay-for-firm performance sensitivity, suggesting support for the
principal-agent argument that executives pay is tied less to firm performance when information asymmetries regarding effort are reduced.
Drawing again on principal-agent arguments, Aggarwal and Samwick (1999b) examined
the use of relative performance evaluation (RPE) in managers compensation. Specifically,
they examined the influences of own-firm and rival-firm performance. Results indicated a
positive relationship between both own-firm and rival-firm performance and managers compensation. However, findings further suggested that although some evidence of RPE in shortterm compensation existed, the ratio of own to rival payperformance sensitivity was lower
in more competitive industries. Thus, although principal-agent models overlook competition
effects, these models do help to explain the use of RPE.
More recently, Leone, Wu, and Zimmerman (2006) examined the effects of stock returns on
CEOs stock-based compensation. They found that although CEO cash-based compensation
was twice as sensitive to negative stock returns as it was to positive stock returns, returns exhibited symmetrical effects on stock-based compensation. They concluded that their findings were
consistent with the notion that unrealized losses are reflected immediately in CEO cash compensation, but unrealized gains are not, thereby reducing the costs of ex post settling up.
Performance surprises. Although the majority of payperformance sensitivity studies
examine general performance effects, some scholars have examined the effects of performance surprises on compensation. For example, in a cross-sectional study, Baber, Kang, and
Kumar (1998) found that unexpected earnings and stock returns directly influenced changes
in cash-based and total compensation, but not changes in stock-based compensation. They
further found that although the persistence of unexpected current-period earnings positively
1020
moderated the effects of unexpected earnings on cash-based and total compensation, it negatively moderated those same effects on stock returns. Relatedly, Boschen, Duru, Gordon,
and Smith (2003) used time-series analysis to examine the differential effects of accounting
performance and stock returns on CEO pay. They found that unexpectedly good market and
accounting performance both led to initial increases in CEO pay; however, the results
diverged over time. Specifically, unexpectedly good stock price performance provided positive, but diminishing, increases, with a positive net benefit over several years. However,
although unexpectedly good accounting performance led initially to pay increases, it resulted
in lower pay in subsequent years. Thus, the long-run net gain in pay from unexpectedly good
accounting performance was zero. Accordingly, the authors point out the importance of considering the differential effects of unexpectedly good market and accounting performance on
compensation over multiple periods.
Governance influences. Conyon and Peck (1998) examined the role of governance structures on the performance-to-pay relationship. They found that boards and compensation committees comprised of higher proportions of outside directors were more likely to tie TMT pay
to market performance. Furthermore, supporting the impact of governance structures, Ke,
Petroni, and Safieddine (1999) found that accounting performance (return on assets; ROA)
was related to CEO compensation in diffusely held (public) firms but not closely held (private) firms. They concluded that compensation in closely held firms was based more on subjective than objective performance measures. In related work, Kraft and Niederprum (1999)
also found that ownership concentration was negatively related to both executive pay level
and payperformance sensitivity. However, more recently, Hartzell and Starks (2003) examined the influence of institutional investor concentration on managerial pay. Their results
demonstrated that although institutional ownership concentration was negatively related to
managers total compensation, it was positively related to the sensitivity of managerial pay to
firm performance. Finally, the only recent meta-analysis in this area demonstrated that firm
size accounted for over 40% of the variance in total CEO pay, whereas firm performance contributed less than 5% (Tosi, Werner, Katz, & Gomez-Mejia, 2000).
The majority of recent work reviewed above demonstrates that the link between firm performance and executive compensation becomes more or less elusive, depending on the variables examined and the pay elements considered. As our review also shows, most recent
work in this area draws from principal-agent theory or sociopolitical/power theories, with
little attention paid to other theoretical bases. For example, the extant literature is fairly silent
on labor market influences. Thus, some variables we believe may be relevant to developing
a deeper understanding of the relationship between performance and pay include labor
market considerations, such as executive reputation, human capital, discretion, industry
mobility, and industry pay. Furthermore, Hambrick, Finkelstein, and Mooney (2005) suggested that extremely high executive job demands may result in pressure that negatively
affects firm performance. They also discuss the role that high incentive pay might play in
further increasing such pressure. Accordingly, the concept of how executive job demands
affect pay mix may shed more light on the payperformance relationship.
Regulation, specifically tax and accounting treatments of pay, is another factor that likely
influences executive compensation. For example, we expect that such regulations influence
1021
the mix of compensation provided to executives through providing favorable or unfavorable

treatment of various pay package components (e.g., salary, performance-contingent compensation, etc.). Because different elements of pay have different effects on executive behaviors
and, presumably, on firm performance, we speculate that examining the effects of regulation
on compensation offers important avenues for future research.
Finally, we note that although much of the work in this area examines the effect of performance on total pay level, given that executives appear to perceive that unique elements of pay
(e.g., stock options, restricted stock) have differential risk properties (Devers, McNamara,
Wiseman, & Arrfelt, in press; Larraza-Kintana, Wiseman, Gomez-Mejia, & Welbourne, in
press), there is value in developing greater knowledge of how performance and the other factors mentioned above affect the actual structuring of executive pay packages.
The Influence of Pay on Performance

Scholars examining the influence of pay on performance conceptualize compensation as
a motivational tool; thus it is the predictor, rather than the predicted, variable in these
models. Prior research into the consequences of compensation has commonly examined the
influence of total pay or aggregate pay measures (i.e., pay mix) on firm outcomes. However,
considerable literature suggests that firm performance is not only a function of managerial
decisions, but also of factors outside managers control (McGahan & Porter, 1997; Yermack,
1997). Indeed, the results of research examining the ability of pay to influence performance
have produced equivocal results and raised questions concerning the efficacy of executive
compensation, as currently designed, to adequately align the interests of managers and
shareholders (Devers et al., in press). Given that there is a good deal of noise in firm-level
performance measures (Brush, Bromiley, & Hendrickx, 1999), and the relatively empirically
equivocal nature of the pay-to-performance relationship (Tosi et al., 2000), recent attention
has been directed toward examining the performance implications of pay plans and structures, individual pay elements (e.g., stock options), and top management team pay and pay
dispersion. We review this work below.
Pay plan adoption. Some scholars have argued for the importance of examining the
effects of pay plan adoption on firm performance. Specifically, Wallace (1998) examined the
adoption of residual income-based (RI) compensation plans by comparing a sample of firms
that adopted such plans against a control sample that used accounting-based performance
measures. Results demonstrated that RI plans were positively related to increases in residual
income; however, they were not significantly related to shareholder wealth increases, suggesting, you get what you measure and reward (Wallace, 1998, p. 275). Balachandran
(2006) examined investment decisions of firms using RI plans. Results demonstrated that RI
plans led to increased RI deliveredsuggesting again that, you get what you pay for
(Balachandran, 2006, p. 1).
Morgan and Poulsen (2001) examined the adoption of proposals for executive pay-forperformance plans. Results demonstrated that plan proposals were significantly associated with
increases in shareholder wealth, particularly for plans that targeted executives. They also found
1022
that in the year before and the year after proposals, proposing firms had better stock-price
performance than nonproposing firms and that proposing firms maintained positive stock-price
performance and experienced increased accounting earnings after plan implementation.
Core and Larcker (2002) examined the effects of targeted ownership programs, which require
executives to own minimum levels of firm stock. Their results showed that, although prior to
plan adoption sample firms exhibited low levels of executive equity ownership and stock price
performance, executive equity ownership increased significantly 2 years following adoption.
They also found that excess accounting and stock returns both increased after plan adoption.
Finally, Hogan and Lewis (2005) examined the effects of economic profit plans (EPPs),
which reward managers when earnings exceed the cost of capital, on strategy and performance. Results showed that although EPPs had no significant effect on shareholder value
overall, after partitioning adopters into anticipated and surprise adopters, they found that
anticipated EPP adopters managed assets more efficiently, had higher profitability, and created greater shareholder value than a set of comparable firms that were predicted to adopt
EPPs but, instead, did not.
Elements of pay. Some scholars have examined the effects of distinct pay elements on performance. For example, Certo, Daily, Cannella, and Dalton (2003) considered how investors
responded to the stock and stock option holdings of initial public offering (IPO) firm executives. They proposed that investors view stock options more favorably when IPO executives
also hold equity. Using data from 193 IPOs they found weak support for the prediction that
stock options increase valuation, but strong support for the argument that options interact
with equity ownership to increase IPO firm valuation.
Hanlon, Rajgopal, and Shevlin (2003) also concluded that stock options had positive performance implications as they found that TMT stock option grants positively influenced
future firm performance. Specifically, they found that $1.00 of option grant value (Black
Scholes) was associated with approximately $3.71 of future undiscounted operating income
growth over the 5 years following the grants. However, interestingly, they found the relationship between stock option grants and firm performance to be concave rather than linear, such
that it increased at a decreasing rate, thereby demonstrating the importance of considering
nonlinear associations between options and firm performance. Finally, combining an elemental perspective with an international view, Kato, Lemmon, Luo, and Schallheim (2005)
examined the adoption of stock-option compensation by Japanese firms following a regulatory change in 1997 that permitted their use. They found abnormal returns of 2% around
announcement dates and increased operating performance post-adoption.
TMT pay and pay dispersion. Although we found that the majority of compensation
research still focuses on CEOs, some scholars have broadened their focus to include TMTs.
Much of this work examines the effects of pay dispersion. Much prior pay dispersion
research has tended to focus on the consequences of pay disparity across hierarchical levels
(vertical differentiation; e.g., tournament theory; Lazear & Rosen, 1981; Main, OReilly, &
Wade, 1993). In general, this literature suggests that although vertical pay dispersion can
increase individual motivation, it can also decrease productivity and collaboration and lead
to shorter tenures, higher turnover, and, at times, lower firm performance. More recent work
1023
appears to support these conclusions. For example, Carpenter and Sanders (2002) examined
the interplay between CEO pay and TMT pay and its influence on firm performance. They
found that both the level of total TMT pay and the ratio of long-term to total TMT pay are
related (albeit imperfectly) to that of CEOs. They further demonstrated that the proportion
of long-term pay, as well as the alignment of TMT pay with CEO pay and with managerial
complexity, is positively correlated with performance. This work suggests that the influence
of CEO pay structure on firm performance is mediated by TMT pay, such that CEO pay
influences TMT pay, which subsequently affects performance. These results highlight the
importance of considering both CEO pay and TMT pay in executive compensation research.
In a more recent study, Carpenter and Sanders (2004) employed a contingency view of
information processing to examine the relationship between TMT pay and multinational firms
market-to-book value. Results demonstrated that that although CEO pay did not affect MNC
performance, TMT total pay and long-term incentive pay positively influenced subsequent year
performance and, further, the CEO-TMT pay gap was negatively related to performance. The
degree of firm internationalization (complexity) positively moderated all relationships. Finally,
Graffin, Wade, Porac, and McNamee (in press) explored TMT pay dispersion in firms with a
celebrity CEO. Results showed that the compensation increases bestowed on celebrity CEOs
(winners of a CEO of the year contest) are also captured by the other top managers of that firm;
however, pay dispersion among these TMTs is higher than in non-celebrity-CEO firms.
Additionally, they found that the pay dispersion differences in firms with celebrity CEOs are
more sensitive to ongoing accounting performance than those in non-celebrity-CEO firms.
Whereas tournament theory (vertical differentiation) studies have tended to dominate pay
dispersion research in prior decades, recent scholarly interest has appeared to shift, in part,
toward horizontal pay dispersion, or differences in pay among executives of the same hierarchical level (peers). Researchers considering horizontal pay dispersion typically assume that
individuals perceived economic value (e.g., skills, knowledge, and human capital) determines
their level of pay (Wade, OReilly, & Pollock, 2006). Drawing on social comparison
(Festinger, 1954) and fairness (Adams, 1965) theories, scholars generally argue that executives who believe they are paid less than their peers will be characterized by perceptions of
inequity, jealousy, and decreased satisfaction (Pfeffer & Langton, 1993), all of which threaten
both individual and firm performance. However, the evidence from these studies is mixed
(Henderson & Fredrickson, 2001). For example, Bloom (1999) concluded that pay dispersion
among professional athletes had a negative effect on team performance, whereas Conyon,
Peck, and Sadler (2001) found no relationship between pay dispersion and firm performance.
Other researchers have attempted to address these inconsistencies by examining the situational contingencies that may influence the effects of pay dispersion. For example, Siegel
and Hambrick (2005) argued that because technological intensiveness requires interdependence among TMT members, pay disparity will be more detrimental to firm performance in
high-technology firms than in low-technology firms. Examining the effects of vertical, horizontal, and overall pay dispersion, they reported consistent support for their argument.
Furthermore, Shaw, Gupta, and Delery (2002) concluded that dispersion is associated with
higher levels of workforce performance when used in conjunction with individual incentives
and in independent work contexts, but is less effective when used without incentives and in
contexts requiring high employee interdependence. Finally, Henderson and Fredrickson
1024
(2001) tested behavioral vs. economic (tournament) theory explanations for both the cause
and performance effects of pay dispersion between CEOs and TMT members. A behavioral
view suggests that pay disparities negatively affect group coordination. Conversely, an economic view suggests that larger pay gaps create tournaments that substitute for monitoring.
Henderson and Fredrickson concluded that behavioral and economic theories are complementary in explaining the consequences and effects of pay dispersion. Specific to performance, they found that both behavioral theory (more equal pay helps teams collaborate) and
tournament theory (shirking is reduced through competition) explain the effect of pay dispersion on firm performance. However, they also found greater pay dispersion under conditions
of high coordinationa conclusion difficult to reconcile with Shaw et al. (2002) and Siegel
and Hambrick (2005). Finkelstein and Hambrick suggested that TMT pay dispersion may
have important substantive consequences for how the team functions as a group (1996,
pp. 294295). Although overall research evidence supports this claim, precisely how
dispersion exerts its influence remains unclear. Given that strategic choices are strongly
influenced by executives idiosyncratic preferences (Cannella & Holcomb, 2005; Hitt &
Tyler, 1991), we encourage additional research capable of more clearly determining both
whether and how pay dispersion impacts TMT cooperation and, ultimately, firm performance.
In sum, although the two areas reviewed above (pay as an antecedent of performance and
performance as an antecedent of pay) exist concurrently, they remain almost completely disconnected. Accordingly, with the exception of a few studies noted in a following section,
little attention has been paid to the complexities inherent in determining the nonrecursive
effects that are likely to occur in the payperformancepay arena. Thus, important questions
remain. For example, scholars often use evidence of performance-to-pay sensitivity to support pay-to-performance theorizing and vice versa. However, the question of to what extent
we can expect evidence from models that examine whether performance predicts pay or pay
predicts performance to converge remains unanswered. Furthermore, work comparing and
contrasting the effects of variable ordering is virtually nonexistent. Therefore, questions
regarding the role of time and the temporal structuring of variables in compensation models
also remain unaddressed.
There are several reasons for the lack of attention to the alignment between pay for performance models and performance for pay models. First, the models themselves are quite complex,
and require extensive time-sequential data. Many executive compensation studies are cross-sectional, though the more recent approaches have involved panel models. Second, the theory behind
these two approaches is very different, and not necessarily consistent. Pay-to-performance
approaches typically draw on motivational theories in psychology, whereas performance-to-pay
studies are virtually always grounded in agency theory. These theories are not necessarily reconcilable, because they draw on very different fundamental assumptions, point to different variables, and highlight somewhat different mid-level research questions. Finally, there are simple
time-dependent effects (i.e., the influences of CEO tenure, age, and temporal incentives) whose
effects must be teased out to reconcile the two broad approaches. This greatly increases the complexity of an already complex research problem. Still, although addressing these questions is difficult, we strongly believe that more rigorous examinations of the interrelatedness (or lack thereof)
between pay-to-performance and performance-to-pay relationships are critically important if we
wish to further understanding of executive compensation.
1025
Relationships Among Pay and Behaviors

The Influence of Pay on Executive Actions
Agency scholars suggest that incentive pay aligns the interests of executives and shareholders by curbing executive opportunism and discouraging risk aversion. However, given
the equivocal nature of payperformance research, a two-pronged approach to analyzing the
interest alignment argument seems appropriate. First, although many scholars attempt to
gauge the efficacy of interest alignment by examining the relationships between pay and performance, implicit in the interest alignment argument is the assumption that pay influences
behavior, which, in turn, affects performance. Thus, much prior compensation research has
focused on the direct (but admittedly coarse and distal) pay-to-performance relationship.
However, because firm performance is a function of both executives actions and exogenous
forces (McGahan & Porter, 1997; Yermack, 1997), it is not surprising that pay-to-performance
research has returned somewhat equivocal results (Tosi et al., 2000). As a result, more
recently, scholars have begun to examine more proximal and direct behavioral outcomes of
compensation to evaluate interest alignment predictions. Second, embedded within the interest alignment logic are separate goal alignment and risk preference alignment arguments,
each of which is hypothesized to affect different behaviors. Therefore, both should be separately, but concurrently, considered in compensation theory and research. We outline goal
and risk-preference alignment arguments and research below.
Goal alignment. The majority of compensation research and practice is grounded in positive agency theory predictions suggesting that because it ties pay to firm outcomes, incentive pay will reduce the threat of executive opportunism by motivating executives to engage
in actions that maximize firm performance. However, although it is widely believed that
incentive pay reduces opportunism, we argue that a strict interpretation of the positive
agency argument suggests that rather than dispatching executives self-interest, incentive pay
is intended to take advantage of executives self-interest by channeling their focus away from
extracting opportunistic rents and toward maximizing shareholder wealth. More specifically,
by linking compensation to firm performance, incentive pay is intended to motivate executives to focus on shareholder value-maximizing, rather than shareholder value-detracting but
personal value-increasing actions (e.g., shirking, excessive perquisite consumption).
Following this logic, studies concerned with the influence of pay on behaviors have generated much scholarly knowledge in recent years. We review this work below.
Strategic choices. When executives reveal private information to investors, increased
transparency reduces information asymmetry, makes monitoring easier, and decreases the
prospects of moral hazard, thus, better aligning goals. In testing the goal alignment capability of incentive pay, Nagar, Nanda, and Wysocki (2003) found support for their prediction
that information disclosures are positively influenced by both the CEOs ratio of stock-based
to total compensation and the CEOs average value of shareholdings.
Executive attention also appears important to goal alignment. For example, Cho and Hambrick
(2006) examined airline activities during the 10-year period after industry deregulation. They
1026
investigated whether the extent of performance-based pay affected the degree to which TMTs
focused attention on strategic issues that were more relevant in the post- versus prederegulation environment. Results indicated that performance-based pay directed managerial attention
toward specific postderegulation relevant issues and, further, that the effect of TMT composition and pay on strategic change is fully mediated by managerial attention.
Finally, Mehran, Nogler, and Schwartz (1998) used liquidation policy to investigate the effect
of pay structure on goal alignment. Their evidence showed that voluntary liquidations that
increased shareholder value were positively related to the percentage of shares owned by the
CEO and positively related to the sensitivity of CEO option compensation to stock price change.
Individual choices. Some scholars have suggested that shareholder value creation is
related more to the individual choices of managers than to their strategic choices. For
example, Rynes, Gerhart, and Parks (2005) argued that pay influences motivation and performance through both incentive and sorting effects, with the latter influencing the types of
individuals who are attracted to (self-selection) and retained by organizations (Gerhart &
Milkovich 1992; Lazear 1986). Indeed, recent work highlights the effect of pay on executives effort levels and their decisions to select into firms and either remain with their firms
or leave. For example, Dunford, Boudreau, and Boswell (2005) found that the percentage of
underwater stock options held by executives was positively related to job search.
Furthermore, this relationship was moderated by beliefs about the adequacy of pay and
employment alternatives. The authors concluded that when options were underwater, executives incurred greater risk, thus, they were more likely to search for better employment
options than to expend more effort. Similarly, Carter and Lynch (2004) investigated the
effect of stock option repricing on employee turnover. Although they did not find that repricing underwater options affected executive turnover, using forfeited stock options to proxy for
employee turnover, they did find that repricing helped prevent employee turnover because of
underwater options. In related work, Banker, Lee, Potter, and Srinivasan (2001) argued that
increased performance resulting from the adoption of incentive pay plans derives from selfselection and effort. Results showed that capable employees seek out jobs where superior
skills are rewarded; thus, they are drawn to jobs with greater levels of incentive pay.
Goal misalignment. Although agency scholars argue that incentive pay positively influences interest alignment, interestingly, our broad-based review of the literature suggested
that goal misalignment might be one of the most reliable outcomes of executive pay. For
example, although it is a fairly recent phenomenon, scholars have examined option backdating in some detail. Specifically, Yermack (1997) examined the effects of CEO stock option
awards on stock returns. He found that although stock returns prior to award dates were normal, returns over the subsequent 50 trading days exceeded market returns by over 2%. He
interpreted this evidence as indicating that CEOs opportunistically schedule awards prior to
anticipated stock price increases. Furthermore, Aboody and Kasznik (2000) examined the
effects of scheduled CEO stock option awards on abnormal returns. Although they found
negative abnormal returns prior to scheduled awards, they found positive abnormal returns
in the 30 days following awards. They concluded that CEOs opportunistically release information around scheduled awards. Using a different data source, Chauvin and Shenoy (2001)
1027
found negative abnormal returns prior to CEO stock option grants; however, they found no
evidence of positive abnormal returns after awards.
Lie (2005) attempted to reconcile this mixed evidence. He found that when stock returns
were abnormally low prior to unscheduled executive option awards, they rose to abnormally
high levels after awards. Explaining why these results differed from other studies, he suggested that this pattern has intensified over time, as executives have become more skilled and
aggressive in opportunistically timing awards. He concluded by noting that unless executives
possess an extraordinary ability to forecast the future marketwide movements that drive these
predicted returns, the results suggest that at least some of the awards are timed retroactively
(Lie, 2005, p. 802). Finally, Heron and Lie (2007) appear to have definitively answered the
backdating question. They found that after the Securities and Exchange Commission 2-business-day reporting rule for option grants became effective (August 29, 2002), the return pattern Lie (2005) demonstrated became significantly weaker overall and completely disappeared
for grants reported within 1 day of their grant date. Thus, they concluded that abnormal
returns around option grants were predominately because of option backdating.
Research has also demonstrated that executives may manipulate information to extract
opportunistic rents. For example, using discretionary accruals as a measure of earnings management, Guidry, Leone, and Rock (1999) demonstrated that incentive-based pay appears to
lead managers to maximize their short-term bonuses by emphasizing short-term value creation at the expense of long-term value. Similarly, Bergstresser and Philippon (2006) showed
that incentive pay appears to motivate executives to both manipulate earnings and to cash in
their equity-based pay when stock prices are artificially inflated. Also, Coles, Hertzel, and
Kalpathy (2006) proposed and found that executives attempt to manage earnings around
stock option reissues in an effort to secure option grants at the lowest possible price.
In studying the effects of information manipulation, Burns and Kedia (2006) explored the
effects of CEO compensation on misreporting that ultimately resulted in earnings restatements. They found evidence that the sensitivity of CEOs stock option portfolios to stock
price is strongly related to misreporting. However, they found no such relationship with other
elements of CEO pay. In similar work, OConnor, Priem, Coombs, and Gilley (2006)
explored the effect of stock option grants to CEOs on fraudulent financial reporting. They
found that the association between large CEO stock option grants and fraudulent reporting
was conditioned by CEO duality and director stock options, such that when CEO duality and
board stock options existed simultaneously or were simultaneously absent, increases in CEO
stock option grants decreased fraudulent reporting. However, when CEO duality existed in
the absence of board options, or vice versa, the relationship was positive.
Scholars have also examined the effects of compensation on repricing and corporate payout decisions. For example, under the assumption that executives have control over option
repricing, Callaghan, Saly, and Subramaniam (2004) examined whether repricing is systematically timed to coincide with favorable stock price movements. They observed sharp
increases in stock price in the 20-day period following repricing dates, and interpreted this
as evidence that CEOs can opportunistically manage the timing of option repricing.
Finally, testing the assumption that stock options provide executives with incentives to
reduce dividend payouts, Fenn and Liang (2001) found that stock options were positively
associated with increased open market share repurchases at the expense of dividends. In
1028
related work, Sanders and Carpenter (2003) examined dividend policy from both goal alignment and risk preference alignment perspectives. Using agency and behavioral theory arguments, they asserted that because repurchases generally lead to stock price increases, stock
options should lead to more repurchases. They further suggested that the risk bearing of
stock options motivates executives to redirect funds away from long-term investments
toward repurchases as a means of reducing risks of undesirable stock price fluctuations.
They found that stock repurchase programs were more likely under conditions of information asymmetry between executives and external monitors. They further found that when
CEOs held significant stock option pay, firms were more likely to initiate repurchase
programs. Repurchase announcements were also more prevalent when performance expectations were high and when performance targets were missed.
In sum, the research evidence to date strongly supports the conclusion that executives use
incentive compensation in ways that benefit themselves at the expense of shareholders. This
is not surprising, given the body of research about overall compensation and executive selfinterests. Still, this evidence does not preclude the possibility that incentive compensation
has benefits overall, or that the benefits do not outweigh the costs.
Risk preference alignment. The impetus for the risk preference alignment argument is the
widely held assumption that the risk attitudes of shareholders and executives inherently
diverge. Specifically, scholars argue that because shareholders can diversify their personal
wealth across firms with varying prospects, they are risk-neutral with respect to investment
decisions (Milgrom & Roberts, 1992). On the other hand, because the majority of their personal wealth and human capital are tied directly to their employing firms, executives are overinvested in their respective organizations. Accordingly, precluded from effectively diversifying
employment and personal wealth risk, executives are assumed to be risk-averse (Jensen &
Meckling, 1976). As a result, under the assumption that large returns accrue to large risks
(Sharpe, 1970) scholars argue that agency costs are incurred when executives avoid risk at the
expense of returns (Wiseman & Gomez-Mejia, 1998). Therefore, resolving this issue involves
aligning the risk preferences of risk-averse executives with those of risk-neutral shareholders
(e.g., Bloom & Milkovich 1998; Coffee 1988; Hall & Murphy, 2002; Holmstrom, 1979).
It is important to note that Holmstroms (1979) very rigorous treatment of the incentive
alignment issue concluded rather definitively that complete risk preference alignment
between managers and shareholders can never be achieved, because no amount of incentives
would make executives risk-neutral with respect to their employers. However, incentives can
reduce the extent of risk preference misalignment, and that reduction has been the focus of
most incentive alignment research. Scholars have generally tested the ability of incentive pay
to improve risk preference alignment by examining the extent to which incentives increase
executives risk taking. For example, Datta, Iskander-Datta, and Raman (2001) examined the
influence of CEO stock option compensation on acquisition behavior. They found that option
pay (measured as the ratio of the Black-Scholes value of options granted in the year before
the acquisition to total compensation), was negatively associated with acquisition premiums.
They further found that option pay positively influenced the acquisition of high-growth targets and was associated with greater post-acquisition firm risk. They concluded that stock
option pay improves risk preference alignment by encouraging CEOs to undertake riskier
1029
investments. Relatedly, Rajgopal and Shevlin (2002) examined the relationship between
stock options and risk taking in oil and gas firms. Specifically, they tested whether stock
options encouraged CEO risk taking, measured as the coefficient of variation in expected
future cash flows from exploration. They concluded that stock options increased exploration,
which is viewed as riskier than exploitation.
Desai and Dharmapala (2006) investigated whether incentive levels (the proportion of the
Black-Scholes value of options granted during the year to the sum of salary, bonus and stock
option value) and governance affected tax sheltering. Tax sheltering strategies are generally
proshareholder, however, the authors demonstrated that stock option grants negatively influenced tax sheltering, except in well-governed firms. Because tax avoidance allows executives to
opportunistically divert firm rents to themselves, the authors suggested that executives pass up
tax sheltering opportunities to protect themselves from being tainted by diversion. They concluded that executives consider both firm and personal risks when making strategic decisions
and, thus, unless firms are well-governed, stock option pay does not align risk preferences.
Contextual influences. Carpenter (2000) developed a mathematical model of the relationship between stock option compensation and managerial risk taking. Focusing on the effect
of extremely out-of-the-money (OOTM) options, Carpenter proposed that options exhibit
some nonintuitive effects on risk. The results of her model suggested that although options
that are extremely OOTM can motivate excessive executive risk taking, options deep in the
money (offering high potential value) exacerbate executive risk aversion and lead to
decreases in risk taking. Similarly, another mathematical model produced by Dow and
Raposo (2005) discussed the idea that performance-related compensation creates incentives
for executives to seek overly ambitious, difficult-to-implement strategies. They suggested
that in dynamic contexts shareholders can curb this tendency by committing up front to very
high CEO compensation through ex ante contracting, or, conversely, by committing to
never paying the high compensation such dramatic change requires. Through yet another
theoretical model, Cadenillas, Cvitanic, and Zapatero (2004) considered the effects of incentive pay on firm leverage decisions. Their model suggests that although CEOs control their
own effort and overall project volatility, shareholders control CEO compensation and firm
leverage. Through this model they showed that more highly levered stock encourages good
managers to take greater risks because they can use their higher abilities to correct for negative outcomes. In contrast, low ability managers with highly levered stock will shun risk
because they lack confidence in their abilities.
Examining risk in a different way, Knopf, Nam, and Thorton (2002) suggested that
because the payoff structure of stock options is convex in relation to firm stock price (value
increases with firm volatility), options should mitigate executive risk aversion (hedging
behavior). However, they noted an alternative argument suggesting that the sensitivity of an
option portfolio to stock price positively influences executives risk bearing and, thus, convex
payoff structures induce risk-averse behavior. Testing these competing views they found that
executive risk bearing increased risk aversion, in that sensitivity of stock and options to stock
prices was positively related to firm hedging. Taking a different view, Schrand and Unal
(1998) argued that hedging is a risk-allocation rather than risk-reducing strategy. Testing a
theory of coordinated risk management, they found that core-business risk (credit risk) earned
1030
positive net present value (NPV), whereas homogenous risk (interest rate risk) exhibited a null
NPV effect. They further noted that because firms may not be able to unbundle these two
risks, a more logical way to manage homogenous risk may be to hedge, even in risk-seeking
firms. Their evidence further showed that after thrifts converted from mutual charters to stock
charters, they assumed more risk, and that risk involved more credit risk and less interest rate
risk. They also found evidence that managers who purchased above the median number of
shares at conversion reduced total return volatility after conversion. Conversely, managers
who were granted options at conversion increased total return volatility.
Wiseman and Gomez-Mejia (1998) integrated agency and behavioral decision theories to
re-examine the construct of compensation risk and its influences on executive behavior with
their behavioral agency model (BAM) of managerial risk taking. Although a complete
review exceeds our space limitations, in general, the BAM challenges agency theorys simplistic depictions of risk by suggesting that certain decision situations (e.g., monitoring,
problem framing, and performance) differentially influence executive risk taking. In the
BAM, rather than assuming consistent risk aversion, executives are perceived to be loss
averse, such that their desire to minimize losses exceeds their desire to maximize gains (cf.,
Kahnemen & Tversky, 1979). Following this logic, under the assumption of loss aversion,
executive risk behavior is context- (situation-) dependent, such that negative contexts motivate risk taking and positive contexts motivate risk aversion (Kahnemen & Tversky, 1979).
Although compensation researchers commonly view restricted stock, stock options, stock
ownership, and long-term performance plans as substitutable incentives with similar risk
properties, and therefore often group them into a single measure of pay (i.e., pay mix), the
BAM implies that the individual elements of compensation (e.g., salary, stock options) are
likely to have different implications for risk taking. Building on this argument, recent work
reveals that because different pay elements have different risk properties, each element can
exhibit a unique influence on executive behavior. In light of the popularity of restructuring
executive pay packages, a deeper theoretical and empirical understanding of how different
pay forms motivate behavior, individually and collectively, is essential. We review recent
work in this area below.
Stock options. The theory underlying the use of stock option compensation derives from
the financial and economic assertion that stock options offer upside potential, but limit
downside risk (e.g., Sharpe, 1970). Specifically, building on the fundamental assumption of
a positive relationship between risk and return, increased stock price volatility will increase
stock option value (Black & Scholes, 1973; Sharpe, 1970). Therefore, stock option pay
should discourage executive risk aversion. Supporting this view, Sanders (2001) found that
CEO stock ownership (equity) and stock options had different effects on CEOs strategic
decisions (increases in acquisitions and divestitures). More specifically, he argued that
because they contain limited downside risk, stock options should positively influence risk
taking and stock ownership should negatively influence risk taking. Results supported his
prediction; thus, he concluded that stock options lower CEOs perceptions of downside risk.
Nevertheless, other scholars have offered empirical evidence that stock options do not
always lead to behavior that consistently conforms to rational financialeconomic predictions.
For example, Bettis, Bizjak, and Lemmon (2005) found that stock price volatility increased
1031
early option exercise (e.g., exercise prior to expiration), indicating risk aversion. Furthermore,
Heath, Huddart, and Lang (1999) demonstrated that early option exercise was positively associated with stock price appreciation, behavior that is not predicted in normative option valuation models (e.g., Black-Scholes).1 In response, scholars have suggested that these results arise
because risk aversion leads executives to either under- or overvalue options relative to normative model values (Bettis et al., 2005; Hall & Murphy, 2002). Alternatively, others have argued
that stock option valuation is too complex to have much effect on executive behavior with
respect to the timing of exercise (Bergman & Jenter, 2005).
Offering an alternative perspective, Devers, Wiseman, and Holmes (2007) argued that
owing to an endowment effect,2 executives valuations of awarded stock options are likely to
surpass subjective valuations of options not yet awarded. They further argued that because
executives are loss and not risk averse, they would assign a premium to stock price volatility when stock prices are declining, but discount volatility when stock prices are increasing.
Results demonstrated broad support for these predications. Although the majority of compensation research values stock options using normative financial option models, the theory
and evidence put forth by Devers et al. (2007) highlight that there are agency costs associated with stock options that reduce their efficiency as incentive alignment mechanisms.
Furthermore, this research challenges the viability of empirical approaches that use normative models to place values on stock options. As we noted earlier, the assumption of risk neutrality, essential for most of these models, is clearly not viable for most executives.
Building on the BAM, Devers and colleagues (in press) argued that CEOs perceive the
risk properties of unexercisable and exercisable stock options differently. Specifically, they
predicted a linear relationship between the accumulated value of unexercisable options and
strategic risk. However, they argued that when stock options are in the money, exercisable,
and exhibit significant spread value (i.e., the difference between current share price and
option exercise price), CEOs endow their personal wealth with a portion of this value.
Extending the concepts of endowment, loss aversion, and diminishing sensitivity
(Kahneman & Tversky 1979), they further argued that when exercisable options exhibit high
spread value, CEOs will reduce strategic risk investments to mitigate downside compensation risk. Results confirmed these arguments.
In a further extension of the BAM (Wiseman & Gomez-Mejia, 1998), Larraza-Kintana
et al. (in press) examined the effects of employment risk, variability in cash-based pay,
downside compensation risk, and stock option value on CEO risk taking. Drawing on
prospect theory, they proposed that employment risk and variability in cash-based pay create potential loss situations, which positively influence strategic risk taking. Conversely, the
ratio of downside risk to cash-based pay and the value of in-the-money stock options create
potential gain contexts, which negatively influence strategic risk taking. Using survey data
collected from IPO firm CEOs, they found broad support for these predictions.
Efforts to restructure executive compensation have led to calls to replace stock option
grants with restricted stock grants3 (Bebchuk & Fried, 2004). Indeed, a popular belief has
emerged suggesting that restricted stock is a more effective interest alignment mechanism
than stock options (Bebchuk & Fried, 2004). However, recent work appears to indicate that
restricted stock might exacerbate executive risk bearing. For example, Parrino, Poteshman,
and Weisbach recently noted that unlike stock options, restricted shares force managers to
1032
bear both upside and downside risk (2005, p. 30). Indeed, Hall and Murphy (2002) found
that executives place a higher value on restricted stock than they do on stock options.
Furthermore, finding that high-growth firms are more likely to reward executives with stock
options than restricted stock, Bryan, Hwang, and Lilien conclude that although stock options
are efficient incentives, restricted stock likely exacerbates the CEOs unwillingness to take
risky, yet positive net present value projects (2000, p. 689). In support, Devers et al. (in
press) provided empirical evidence that the accumulated value of restricted stock held by
CEOs led to lower strategic risk investments. Because restricted stock carries significant
value on award, they concluded that CEOs endowed their perceptions of personal wealth
with the restricted stock value, which created downside risk that exacerbated risk aversion.
Summary of research on pay and actions. As stated above, earlier executive compensation research focused primary attention on the relationships between pay and performance.
However, more recently scholars have turned attention toward more proximal relationships.
Specifically, as the work reviewed above shows, much of this attention focuses on the relationship between pay and executive actions. The results of this work suggest that pay does
influence executive action, but not necessarily in the simplistic manner prescribed by the
principal-agent framework. For example, although some scholars examining goal alignment
reported evidence that performance-based pay appeared to more closely align executives
and shareholders interests, many more demonstrated the opposite. In fact, as earlier mentioned and consistent with anecdotal evidence, studies examining several executive behaviors, including option backdating, earnings manipulation, and dividend policy, suggest that
goal misalignment is perhaps the most predictable outcome of incentive pay.
Although the majority of studies in this section focused on goal alignment, some have
examined the efficacy of incentive pay in aligning the risk preferences of executives and shareholders. Similar to goal alignment, the results of these studies are also mixed. For example,
whereas the results of some studies show that incentive pay, specifically stock options, leads to
greater risk taking, others report the opposite effect. Although on the surface these mixed findings are difficult to explain, a closer look reveals that the way scholars operationalize variables
has likely influenced the conclusions of these studies. For example, Carpenter (2000) suggested that although stock options that are extremely underwater may lead to excessive risk
taking, options that are deep in the money should lead to risk aversion. Devers et al. (in press)
added empirical support for this notion by demonstrating that in-the-money exercisable options
exhibit significant accumulated value, and that value constrains CEO risk taking. Furthermore,
researchers have begun to demonstrate that individual elements of pay (e.g., stock options,
restricted stock) impact executives risk preferences differently (Devers et al., in press).
Collectively, the studies reviewed here suggest that the individual elements of incentive pay
and changes in the accumulated value and vesting status of stock options can exhibit different
influences on executive risk preferences and actions. Thus, this work reveals that the unique
elements of executive pay exhibit more complex influences than commonly understood and
lend credence to recent criticisms that simplistic conceptualizations of executive risk preferences and individual pay elements are incomplete. Nevertheless, the majority of compensation
scholars continue to aggregate the individual incentive elements of CEO pay packages into a
single measure (i.e., pay mix) and/or operationalize the value of stock options with normative
1033
models such as the Black-Scholes pricing formula, which derive static theoretical option values on the day of award. Accordingly, we argue that scholars should move away from coarse
conceptualizations, such as pay mix, which may exacerbate measurement problems and recognize the possibility that executives perceive and respond differently to individual compensation
elements. We also suggest that scholars begin to consider the dynamic nature of these compensation elements by accounting for factors such as fluctuations in accumulated value and vesting status in their compensation models.
The Influence of Executive Actions and Other Factors on Pay

Although examinations of the effects of pay on behavior outpace work in all other areas,
scholars have also investigated behavioral influences on executive pay. However, this work
is extremely disparate. For example, Bernardo, Cai, and Luo (2001) developed an economic
model to disentangle whether the executive behaviors required by specific jobs determined
pay structure or whether pay structure determined executive behaviors. They concluded that
managers likely receive greater performance-based pay because they manage higher quality
projects rather than performance-based pay causing higher quality projects.
Bliss and Rosen (2001) examined pay related to acquisitions. They found that CEOs in
high-merger banks were rewarded for profitability (ROA), whereas CEOs in low-merger
banks were rewarded for growth. More interestingly, they found that although reductions in
stock price owing to bank acquisitions decreased the performance-related compensation of
acquiring banks CEOs, these losses were offset by the increased compensation that accompanied firm growth. Additionally, they documented a positive relationship between ROA and
both cash and total compensation and that growth through acquisitions increased CEO pay
significantly more than organic growth. Grinstein and Hribar (2004) recently confirmed this
pay-for-growth relationship, but further demonstrated that although CEOs in their sample
received bonuses from acquisitions, these bonuses were an increasing function of CEO
power, deal size, and effort. Barkema and Pennings (1998) also demonstrated the effect of
power on pay. Using a sample of Dutch executives they found that covert power (CEO tenure
and founder status) magnified the effect of overt power (the fractions of CEO and family
shareholdings) on compensation. These effects were most pronounced for CEO bonus size.
In addition to power, incentive pay is also affected by executive rank, wealth, and star
power. For example, Barron and Waddell (2003) found that the compensation of executives
has become more incentive-based over time. They further found that incentive pay became
more equity-based as executives moved to higher positions within the same firms; however,
the proportion of equity-based pay consisting of stock options decreased for the highest level
executives. Furthermore, Becker (2006) examined the effect of wealth on risk aversion. He
found a positive association between CEO wealth and the strength of CEO incentive pay
(stock and stock option holdings), indicating that wealthy CEOs were more likely to accept
riskier pay packages. In another recent study, Wade, Porac, Pollock, and Graffin (2006)
examined the effect of CEO star certification (CEO of the year award recipients) on performance and CEO pay. Their results showed positive abnormal stock returns immediately following the award; however these effects soon faded and quickly became negative. Their
1034
findings also indicated that star certification exhibited a positive influence on recipients pay,
in excess of that associated with performance differences. They further found that star certification positively impacted pay when ROE remained positive; however, when ROE turned
negative, star CEOs received less total pay for equivalent performance than those who had
never been star certified.
Lastly, Coombs and Gilley (2005) found that stakeholder-related initiatives appear to
threaten CEO wealth. Their results demonstrated that stakeholder management was negatively related to CEO salaries and, generally, unrelated to other compensation measures.
They also found that stakeholder management negatively moderated the positive relationship
between performance (market and accounting) and compensation.
Contextual influences. Some scholars have responded to Gomez-Mejia and Wisemans
(1997) call for a focus on contextual factors in compensation design. For example,
Finkelstein and Boyd (1998) examined the effect of managerial discretion on CEO pay.
Their results indicated a positive relationship between managerial discretion and CEO compensation. They further argued and found that this relationship is moderated by firm performance, such that the relationship between discretion and pay is stronger when performance
is high. In addition, Balkin, Markman, and Gomez-Mejia (2000) extended the resourcebased view (RBV) to argue that innovation will influence both long- and short-term CEO
compensation in high-technology firms. Specifically, they argued that in environments characterized by high uncertainty and high discretion, because innovation is more easily controlled by principals, CEOs will be rewarded more for innovation (e.g., research and
development [R&D] and patents) than for firm performance. Their results confirmed this
proposition. Furthermore, they found no link between pay and ROA. Finally, Miller,
Wiseman, and Gomez-Mejia (2002) examined the effects of market (systematic) and firmspecific (unsystematic) risk on CEO compensation. They argued that because contingent
compensation becomes less efficient as uncertainty increases, the instrumentality of contingent compensation is highest at moderate levels of risk. In support of this argument, their
evidence indicated a curvilinear relationship (inverted U) between firm-specific risk and
contingent pay, but no relationship between market risk and contingent pay.
Governance influences. Scholars have also examined the effects of governance-related
factors on executive pay. Although this limited evidence suggests that governance does
impact pay, its specific impact remains unclear. For example, Daily, Johnson, Ellstrand, and
Dalton (1998) found no support for the proposition that board compensation committee
composition influences CEO pay levels or the use of performance-contingent pay. However,
in a recent meta-analysis, Deutsch (2005) found that the proportion of outside directors was
generally negatively associated with the use of CEO performance contingent pay.
Examining the monitoring ability of boards, Wright, Kroll, and Elenkov (2002) showed
that, whereas postacquisition firm size drives CEO compensation in firms with lax monitoring, acquisition performance drives CEO compensation in vigilantly monitored firms.
Viewing monitoring in a more fine-grained way, David, Kochhar, and Levitas (1998) categorized institutional investors into pressure-sensitive (e.g., banks, insurance companies, nonbank trusts) and pressure-resistant (e.g., public pension funds, mutual funds, endowments,
1035
and foundations) groups. They predicted that pressure-resistant institutional investor ownership
would be negatively associated with CEO pay levels and positively associated with the use
of performance-contingent pay. Although they found support for their prediction about the
level of CEO pay, they found no support for the prediction about performance-contingent
pay. Last, combining these perspectives, Core, Holthausen, and Larcker (1999) concluded
that CEOs earn more under weak governance structures. Specifically, they found that CEO
pay decreased with the percentage of inside directors, but increased with board size, the percentage of outside directors appointed by the CEO, the percentage of gray outside directors
(if they or their employer received payments from the firm in excess of director pay), the percentage of outside directors over age 69, the percentage of outside directors who serve on
three or more boards, and CEO duality. They also found that CEO pay decreased with CEO
ownership stake and when a non-CEO internal board member or external blockholder owned
at least 5% of the firm.
Finally, in a cross-sectional study, Geletkanycz, Boyd, and Finkelstein (2001) investigated whether outside director service on other boards impacted CEO compensation. They
argued that because social capital is less a source of power than a source of valuable inputs
to the firm, when CEOs external ties are valuable to firms, that value will be reflected in
their pay. Results provided weak support for the hypothesis that CEO external directorate
networks were positively associated with CEO pay; however, they found strong support for
the prediction that diversification strengthened this association.
Human capital and social influences. Arguing for a different perspective on TMT pay,
Combs and Skill (2003) contrasted managerialist and human capital perspectives on executive
pay premiums. Managerialist theory suggests that high pay is a function of entrenchment,
whereas human capital theory suggests that pay is driven by unique abilities and skills. Combs
and Skill suggested that although managerialist theory predicts that the sudden death of a highly
paid executive would result in a positive shareholder response, human capital theory predicts the
opposite. They used a contingency perspective to develop and test two hypotheses: (1) as an
executives power increases, pay premiums will positively affect shareholders response to a key
executives sudden death and (2) as governance strength increases, pay premiums will negatively affect shareholder response to a key executives sudden death. Using data from 77 sudden
executive deaths, and measuring performance with a 2-day cumulative abnormal return (CAR),
they found weak support for the first hypothesis and strong support for the second.
In a more complex approach, Carpenter, Sanders, and Gregersen (2001) suggested that
because human capital is intangible and socially complex it provides higher benefits when
bundled with complementary resources. They combined RBV and dynamic capabilities perspectives to examine the implications of CEOs international experience (defined as a minimum of 1 year abroad) on CEO pay. Using data from MNCs operating in at least three
foreign countries, they found no association between international experience and CEO pay.
However, the interaction between CEO international experience and the breadth of the firms
global strategic posture exhibited a strong effect, such that CEOs in firms with broad global
strategic postures were paid more when they had international experience.
More recently, Carpenter and Wade (2002) examined how human capital and opportunity
structures of non-CEO executives influenced their compensation. They proposed positive
1036
associations between executives cash compensation and whether executives functional

positions were (a) associated with those functions that received greater resource allocations
in their firms, (b) similar to the CEOs, and (c) integral to the firms management of strategic resource allocations. They used a 5-year panel data set that combined survey and archival
data on the four highest levels of senior executives in large U.S. firms, and reported broad
support for their predictions. However, taking a different perspective, Fiss (2006) proposed
that differences, rather than similarities, in human capital influence the relationship between
CEOs and boards of directors and, in turn, CEO pay. Data from large public firms in
Germany supported his thesis.
Finally, drawing on social comparison theory, Ezzamel and Watson (1998) argued that compensation committees resolve situations in which CEOs are under- or overpaid relative to the
labor market. Their results indicated that both under- and overpayment anomalies have important influences on CEO pay and that such comparisons contribute to an upward pay bias.
In sum, and not surprisingly, this work indicates that firm growth, executive power, and
rank each affect executive pay. However, of specific interest is the evidence that growth
through acquisition may increase managers compensation, irrespective of acquisition performance. This raises the question of whether a pay-for-growth strategy renders acquisition
investments more attractive to executives than objective assessments of acquisition performance would indicate, and provides a fertile avenue for future research.
Also interesting are the findings that contextual, human capital, and social influences
have important influences on executive pay. We believe that taken together, these results
indicate the value in recognizing that pay is not simply a function of size, but can be affected
by factors both endogenous and exogenous to the firm and we encourage research that continues to explore the influences of executive-specific characteristics, market forces, and
social comparisons on executive pay.
Last, the number of high-profile corporate scandals coupled with the passage of the
Sarbanes-Oxley Act (SOX) has led an increasing number scholars and practitioners to argue
for corporate board reform. However, the work reviewed here is somewhat equivocal regarding the effects of board composition on executive pay. Accordingly, we believe there is a
need for research that more thoroughly examines how different board configurations and
various governance contexts and situations influence executive pay. We also believe that
there is a need for research that fully investigates the costs of broad remedies to agency problems, such as those provided by SOX. Executives are clearly self-interestedwe need no
further evidence of that. Still, reductions in the costs of self-interested behavior should outweigh the costs of the measures that bring about those reductions. It is not clear that SOX
provides a cost-effective remedy.
Cross-Area Studies
Although our review found that the majority of compensation research falls into one of
the four categories examined here, some scholars have attempted to integrate across categories. For example, Bloom and Milkovich (1998) explored the influence of business context on the relationships between incentive pay, risk taking, and firm performance. Results
1037
indicated that firm risk was negatively related to incentive pay and positively related to base
pay. Additionally, incentives were negatively related to performance in high-risk firms. They
concluded that when business risk is too high, incentive pay is not appropriate and may push
managers to lower risk.
Guay examined how firms financing and investment decisions are affected by the convexity of the paywealth relationship (the change in the value of CEOs stock option and stock
holdings for a given change in stock-return volatility) or the sensitivity of managers wealth
to the volatility of equity value. (1999, p. 44). He found that although the convexity provided
by stock options was high, the convexity of stock was quite low. He further demonstrated that,
cross-sectionally, when controlling for the slope of the wealth-to-performance relation, this
sensitivity was positively related to firms investment opportunities. Specifically, opposite to
Bloom and Milkovichs (1998) findings, CEOs appeared to be more willing to invest in riskincreasing projects as convexity in the relation between wealth and stock price increased.
Similarly, Coles, Daniel, and Naveen (2006) also found that CEOs with higher sensitivity
of wealth to stock volatility implemented riskier investment and debt policy decisions. They
further concluded that riskier investments generally led to pay structures with higher stock
volatility sensitivity and lower payperformance sensitivity and that stock-return volatility
had positive effects on both sensitivity of wealth to stock volatility and payperformance
sensitivity.
Anderson, Banker, and Ravindran (2000) examined the simultaneous relationships
between performance and pay and pay and performance using data on information technology executives. Using a system of simultaneous equations, they concluded that the ratio of
cash bonus and stock option pay to total compensation increased with stock returns. They
further demonstrated that level of pay, and the degree to which stock options and cash
bonuses were used, positively influenced stock returns.
In a unique study, Hayes and Schaefer (1999) suggested that more information regarding
future performance is contained in compensation when executives are rewarded for unobservable performance indicators. Thus, they proposed that if executive compensation is
based on externally unobservable indicators that positively correlate with future performance, then variation in current compensation that is unexplained by observable measures
should predict future variation in observable performance. Findings demonstrated that unexplained pay predicts future performance and, further, that this relationship was stronger
when observable performance indicators provided less information (were more volatile). The
authors concluded that boards collect and use unobservable information, thus, they do fill an
important governance role.
More recently, Makri, Lane, and Gomez-Mejia (2006) examined the relationship between
CEO incentives, innovation, and firm performance in technology-intensive firms. They
showed that as technological intensity increased, CEO bonuses became more closely tied to
financial measures and CEOs total incentives were more associated with innovation behavior (invention resonance and science harvesting). They further found that as technological
intensity increased, aligning bonuses with financial results and aligning total incentives with
measures of innovation activities predicted firm performance (market-to-book value). Thus,
technology-intensive firms appear to utilize both outcome- and behavioral-based incentives.
1038
Datta et al. (2001) showed that stock option grants were positively related to 2-day CARs
surrounding acquisitions. They further found that acquiring firms that granted the TMT high
levels of stock option compensation relative to total compensation in the previous year paid
lower acquisition premiums, were more likely to invest in high growth targets, and invested
in riskier acquisitions. Furthermore, although Devers, Holcomb, Holmes, and Cannella
(2006) similarly found that TMT incentive pay increased acquisition behavior (risk), they
also found that the level of dispersion in TMT incentives attenuated this effect. Also, contrary to agency theory assumptions, their findings showed that risk behavior had a negative
effect on shareholder returns. Taking the opposite approach, Tuschke and Sanders (2003)
examined divestitures following the voluntary adoption of stock-based incentive plans in
German public firms. They predicted that the adoption of stock-based incentive plans would
positively influence divestitures and that, in turn, divestitures would mediate the positive
association between such incentives and subsequent performance. They found support for
their predictions; however, the mediation effect was weak.
In a different vein, Bitler, Moskowitz, and Vissing-Jorgensen (2005) explored the linkages
between equity pay, effort, and performance. Examining data from entrepreneurs who both
founded and retained an ownership stake in their firms, they found evidence that managerial
equity ownership was positively related to managerial effort. In turn, they found that effort
was positively related to firm performance. Additionally, they found that the personal wealth
of entrepreneurs predicted the extent to which equity dominated CEO compensation.
Finally, examining the importance of pay fairness, Wade et al. (2006) found that CEO
over- or underpayment cascades downward through managerial ranks. They also found that
powerful CEOs appeared to use their power to increase both their salaries and the salaries of
their subordinates. Last, the authors showed that when managers were underpaid relative to
their own CEOs they were more likely to leave their firms. Consequently, the fairness of
CEO pay setting and the sorting effect hold important implications for executive pay.
In sum, although these studies attempt to integrate across our four categories, the substantial differences across categories make their results difficult to compare or synthesize. We
discuss this and other methodological and conceptual issues below.
Methodological Issues and Future Directions

Our review suggests that although research is concurrently occurring within the four categories we identified, these categories remain almost completely disconnected. As a result,
we found a strong bias toward independence across and within the relationships under study
and the disciplines drawn on. With the exception of the few studies examined above, we
found scant attention focusing on integrating research findings across categories. Even less
work has attempted to integrate findings within categories. As discussed earlier, GomezMejia and Wiseman (1997) argued that many of the problems they noted in executive compensation research had resulted from a narrow focus that failed to incorporate other
theoretical perspectives and methodologies. In contrast, we found recent work so expansive
in its approaches that our ability to draw meaningful conclusions was severely limited.
1039
Our review also reveals that the majority of executive compensation research emanates
from the management and finance areas. However, although scholars in these disciplines
study similar constructs and relationships, they do so from very different perspectives (Lane,
Cannella, & Lubatkin, 1999). For example, developing, extending, and testing theoretical
logic is fundamental to management research. On the other hand, empirical regularity, rigor,
and sensitivity analyses are principal to finance research. Given these extremes, it is not surprising that cross-discipline integration is rare. Nevertheless, we believe common ground
exists in which these (and other) disciplines can inform one another. It is clear that there is
still much to be learned about executive compensation, thus, we believe that cross-discipline
integration holds the potential to significantly advance compensation research and practice.
Accordingly, we encourage compensation scholars to recognize and incorporate the contributions and insights from other disciplines in their work.
Furthermore, and perhaps more troubling, our review revealed that compensation research
broadly suffers from a number of conceptual and methodological issues. For example, we
found little consistency in the operationalization of many important constructs of interest.
Particularly troubling was the use of ambiguous or inconsistent measures of firm performance,
compensation, and risk (both action risk and perceptual risk). We also found the selection criteria for sample frames, time lags, covariates, and statistical methodologies to be wide ranging.
We believe that the broad, disconnected nature of the field, coupled with the conceptual and
methodological heterogeneity noted above, continues to constrain the advancement of executive compensation research. Nevertheless, it also presents a mixed blessing. Specifically, many
questions remain unanswered, limiting our understanding of the determinants and consequences of executive compensation. At the same time, the many unanswered questions offer
compensation scholars extremely fertile research opportunities. In this last section we evaluate
some of those opportunities and offer directions for advancing compensation research.
Performance
Given that firm performance is not only a function of managerial decisions but also factors outside managers control, Gomez-Mejia and Wiseman (1997) questioned the use of
firm performance as an indicator of interest alignment effectiveness. They further lamented
that although Tosi and Gomez-Mejia (1989) argued for a moratorium on archival-based
research testing the link between executive pay and firm performance, scholars had widely
ignored that advice. Unfortunately, a decade later, we arrive at a similar conclusion. For
example, agency-theoretic arguments strongly support the conclusion that shareholder
wealth maximization (e.g., market-based performance) should be the definitive criterion
for compensation research. However, our review shows that researchers commonly select
one or more performance measures from a variety of available alternatives, be they marketor accounting-based measures. We further found that within these coarse-grained categories,
scholars operationalized performance in a variety of ways, including, but not limited to,
ROA, ROE, market-to-book, buy-and-hold returns, shareholder returns, or short-term CARs.
Furthermore, other scholars used the variation (volatility), or year-over-year changes in these
measures to operationalize performance.
1040
Generally, scholars have argued that accounting-based measures are directly influenced
by executives actions, through changes in debt structure, inventory management procedures,
and accounting procedures (Murphy, 2000). However, market-based measures are noisy and
more difficult for executives to directly influence (Wiseman & Gomez-Mejia, 1998; Murphy,
1999). For example, Murphy (2000) recently found that firms tying executive pay to
accounting-based performance measures were more likely to show evidence of income
smoothing than those tying pay to market-based measures, supporting the view that executives can exert more influence over accounting-based measures of performance. Nevertheless,
many scholars consider accounting-based measures and market-based measures as
isomorphic.
Although it is logically appealing to expect positive accounting-based performance to
increase investors firm valuations, and thus market performance, we note that accountingbased measures reflect current (and recent past) performance, whereas market-based measures reflect investors perceptions of future value. Thus, anticipated earnings are typically
factored in to market valuations. As a result, when earnings are announced, investors may
expect regression to the mean, such that when earnings are high, investors anticipate downturns, and vice versa, and, thus, value firms accordingly (Keats & Hitt, 1988). Indeed, evidence on the relationship between earnings and market returns has been mixed (for recent
examples see Wade et al., 2006; Core & Larcker, 2002; Morgan & Poulsen, 2001). To this
end, we encourage work that more comprehensively develops and tests theory to guide
researchers selection of performance measures appropriate for their research questions.
Risk and Risk Perceptions

The risk preference alignment argument suggests that alignment is achieved by motivating
executive risk neutralitya focus on the expected value of choices, irrespective of their risk
(Milgrom & Roberts, 1992). However, we surmise that because risk neutrality is difficult to
operationalize (much less achieve in a corporate setting), the risk-preference alignment argument is commonly interpreted as suggesting that incentives must be structured to promote
executive risk taking (Datta et al., 2001; Tosi, Katz, & Gomez-Mejia, 1997). However,
although risk taking holds a prominent place in compensation research, it is commonly conceptualized in very simplistic and often conflicting ways (Palmer & Wiseman, 1999). For
example, because a link is presumed to exist between managers risk-taking behavior and their
organizations risk profiles, we found that researchers often used organizational-level risk measures (e.g., volatility) as proxies for managerial risk taking. Nevertheless, scholars have cautioned that these measures might not actually reflect executives perceptions of risk
(McNamara & Bromiley, 1999; Ruefli, Collins, & Lacugna, 1999). In support, Palmer and
Wiseman (1999) found that managerial risk and organizational risk are distinct constructs and
argued that considering both constructs can help increase the explanatory power of extant managerial risk models. However, our review indicates little progress in this area.
We further found that because obtaining primary data from executives is difficult,
researchers most often turn to complicated theoretical and mathematical models that are
incapable of accounting for human perceptions and biases (Hall & Murphy, 2002) or
1041
ambiguous proxies to impute executive risk preferences. Thus, using archival data to determine whether certain compensation structures lead to risk-increasing or risk-reducing
actions is perhaps more guesswork than science. Accordingly, the influence of executive
compensation on risk taking remains an open question. In response, we suggest that compensation researchers would benefit by shifting at least some attention away from the exclusive reliance on secondary data, and toward primary data capable of specifically capturing
executives perceptions of both compensation and risk. Although we note the difficulties
inherent in collecting this type of data, we believe that it could play an essential role in
advancing the state of compensation research.
Other Methodological Issues

Although space limitations prevent a more complete evaluation of methodological issues,
we feel compelled to briefly summarize some that we believe are more central to the advance
of compensation research. First, the role of time presents an important methodological concern. For example, our review indicates that time may exhibit a confounding influence on
research findings. Specifically, Hall and Liebman (1998) suggested that their sample timeframe may have contributed to the differences between their payperformance sensitivity
results and those reported by Jensen and Murphy (1990) from an earlier time period.
Although several studies reviewed here included time lags for independent and dependent
variables, others examining the same relationships and variables did not. Indeed, although
some scholars examined pay in time t based on performance in time t (or vice versa) others
lagged variables anywhere from one to eight periods. Similarly, pay components are often
awarded at different times. For instance, although stock option grants are often unscheduled,
some are scheduled in advance. For this reason, options awarded in time t may have actually
been announced and mentally accounted for by executives in time t-1. A better understanding of the role of time in compensation research appears important, yet we found little
acknowledgement of this issue.
Second, we found that samples and sample selection techniques differed considerably
across the studies we reviewed. Although we expect that samples and their selection methods affect the results of compensation models, again we found very little consistency in these
methods and virtually no theoretical discussion to guide these choices. Furthermore, we
found that compensation research is moving away from an emphasis on cross-sectional
research and toward longitudinal and dynamic panel research. Therefore, we also found
increasing complexity and wide variation in the statistical tools and analytical methods
researchers employed. More concerning were the differential influences these choices
seemed to have on results. Thus, although we applaud efforts to introduce more powerful and
complex statistical tools, we simultaneously question doing so in the absence of complete
theoretical and empirical understanding and validation. Indeed, the perpetuation of a multitude of analytic tools that are not fully understood or justified, and their corresponding disparate results, presents a slippery slope that we strongly caution against.
Finally, the variables included in compensation models clearly exhibit important influences on outcomes. Indeed, the different covariates, moderators, mediators, and controls used
1042
by compensation researchers number so large that they warrant a review all their own.
Thus, although examining the role of other influences on the determinants and consequences
compensation is promising, we suggest more continuity would surely benefit the field.
Conclusion
Although our review guided our evaluation of these issues, we note that they are quite
consistent with others raised by compensation scholars in the past two decades (see Lubatkin
& Shrieves, 1986; Gomez-Mejia & Wiseman, 1997). Therefore, we suggest that the failure
to conceptually develop these factors and their roles in compensation research has likely contributed to the mixed findings that pervade the field. As a result, we expect criticisms regarding the efficacy of executive pay to achieve interest alignment to continue to plague
compensation research and design until scholars more rigorously consider these issues in
theoretical and empirical work. Accordingly, we challenge future compensation scholars to
develop more complete theoretical and empirical support and validation capable of guiding
researchers choice of performance measures, timeframes, samples, methods, and variables.
Appendix
Year
Study
Sample
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
Key Findings
The influence of performance on pay
1999a
Aggarwal &
Samwick
1999b
Aggarwal &
Samwick
2003
Aggarwal &
Samwick
More than
1,100 chief
executive
officers
(CEOs) and
more than
3,900 other
executives
from Execu
Comp
1,519 CEOs
and 6,305
other
executives
from
ExecuComp
1993-1996
Total pay (level and

change) and total
pay plus change in
the market value of
equity and stock
option holdings
Percentage and dollar

returns to shareholders
Increasing variation in the firm's

performance leads to decreasing pay-performance sensitivity (PPS) median (mean) CEO
PPS was $14.52 ($69.41) per
$1,000 change in shareholder
wealth.
1992-1995
Short-term, long-term,
and total pay
Dollar returns to
shareholders at
beginning of period
13,109
executives
from
ExecuComp
1993-1997
Short-term, long-term,
and total pay plus
change in the value
of shares and stock
options held
Returns to
shareholders
Returns predict total pay; the

ratio of own PPS to rival PPS
is lower in industries with
more competition. There was
evidence of relative performance evaluation in shortterm pay.
Position in the top management
team (TMT) and level of
responsibility predict
incentive pay. The median
(mean) CEO PPS was $13.78
($41.22) per $1,000 change in
shareholder wealth.
(continued)
1043
1044
Appendix (continued)
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
1992-1993
Percentage changes in
cash salary and
bonus, cash bonus
alone, stock-based
pay, and total pay
Raw stock returns

(as a proxy for
unexpected returns)
and unexpected
earnings per share
CEOs of 30
firms in
existence
from 1959 to
1995
1959-1995
Cash and total pay
Highest paid
director of 94
of the top 100
publicly traded
U.K. firms
CEOs of 478
large
corporations
1991-1994
Cash pay
Return on assets
(ROA) and annual
rate of shareholder
return; Unexpected
performance based
on residuals of
regression
Total shareholder
return
1980-1994
Total pay, changes in

market value of
stock and stock
options, and change
in wealth
Year
Study
Sample
1998
Baber, Kang, &

Kumar
CEOs of 713
firms from
CompUSA
2003
Boschen, Duru,
Gordon, &
Smith
1998
Conyon & Peck
1998
Hall & Liebman
Years
Studied
Firm returns
Key Findings
Unexpected earnings and stock
returns predict changes in
cash and total pay. Earnings
persistence positively moderates the earnings relationship
and negatively moderates the
returns relationship.
Unexpectedly good accounting
performance provides a net
benefit to CEO pay of 0 over
10 years. Unexpectedly good
stock price performance produces positive net benefits in
the short and long run.
Performance predicts pay, but
the coefficient is larger when
more nonexecutives are on the
remuneration committee and
board.
CEO pay and wealth are related
to firm performance and the
relationship is stronger than previously found. CEO PPS has
been increasing over time
because of larger options grants.
2003
Hartzell &
Starks
Executives of
1,914 firms
from
ExecuComp
1992-1997
1999
Ke, Petroni, &

Safieddine
63 CEOs in
the property
liability
insurance
industry
1994-1996
The influence of performance on pay

1999
Kraft &
Executive board
Niederprum
of 170
German firms
Performance sensitivity
of options granted,
salary, change in
cash pay, and total
pay (level and
change)
Cash pay (level
and change)
Change in
shareholder wealth
and Tobin's Q
Change in shareholder wealth

predicts change in total pay.
Institutional ownership is
positively related to PPS and
negatively related to total pay.
ROA and change in

ROA
There is no significant
relationship between ROA
and pay for private insurers
but there is a positive relationship for public insurers.
1987-1996
Average pay (salary)

of the executive
board
Return on equity
(ROE) and ROE
variance
ROE is related to pay, but the

PPS drops as profit variance
increases. There is a negative
relationship between ownership concentration and
pay/PPS.
Change in cash pay is positively
related to returns and change
in ROA (change in equity pay
is not). The relationship is
twice as strong for negative
stock returns as for positive
stock returns.
Forty percent of the variance in
pay is explained by firm size,
whereas less than 5% is
explained by performance.
The correlation between pay
and performance is 0.212.
2006
Leone, Wu, &

Zimmerman
2,751 CEOs
from
ExecuComp
1992-2003
Changes in cash and

equity-based pay
(option and
restricted stock
grants)
Compounded
monthly returns,
change in ROA,
and a bad news
indicator
2000
Tosi, Werner,
Katz, &
Gomez-Meija
137 articles
Meta-Analysis
Pay measure used in

the source study
Absolute financial
performance levels;
changes in financial
performance, ROEshort term, and
ROA
(continued)
1045
1046
Year
Study
2006
Balachandran
1999
Bloom
2002
Sample
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
Key Findings
147 residual
income
adopting firms
with matched
pairs
1,644 Major
League
Baseball
players on
29 teams
1986-1998
Plan adoption
indicator
Change in delivered
residual income
Residual income increases

once it is included in the
pay criteria.
1985-1993
Player salaries used

to create multiple
measures of
dispersion and
pay rank
Pay dispersion produces lower

organizational and individual
performance. The individual
performance relationship is
moderated by the individual's
pay rank.
Carpenter &
Sanders
Executives of
199 Standard
& Poors
(S&P) 500
firms
1993-1995
Total pay and ratio of

long-term pay to
total
Individual level:
three stats per
player; team
level: winning
percentage, gate
receipts, and
financial
performance
Average ROA
2004
Carpenter &
Sanders
Executives of
224 U.S.
multinational
corporations
(MNCs) from
the S&P 500
1992-1993
Total pay, long-term

pay level and
structure
(long-term/total),
and CEO/TMT
pay gap
Market-to-book value
(controlled for prior
value to capture the
change)
2003
Certo, Daily,
Cannella, &
Dalton
CEOs of 193
initial public
offering (IPO)
firms
1996-1997
Indicator of options
granted, value of
options granted.
and percentage
equity
Percentage price
premium
Alignment of TMT pay is

positively correlated with
performance. CEO pay
structure is related to firm
performance through TMT
pay structure.
CEO pay does not predict MNC
performance, but TMT total
and long-term pay do.
The CEO-TMT pay gap is
negatively related to MNC performance, and the degree of
internationalization is a moderator of all the relationships.
CEO option pay is positively
related to IPO valuation &
CEO equity ownership
positively moderates the
relationship.
The influence of pay on performance
2001
Conyon, Peck,
& Sadler
532 executive
directors of
100 of the
U.K.s largest
public
companies
Over 170 firms
that adopted
mandatory
stock
ownership
programs
1997-1998
Cash, incentive, and

total pay
ROA and annual total

shareholder returns
2002
Core & Larcker
1991-1997
Plan adoption
indicator and
increase in
ownership
(regression
residuals)
Graffin, Wade,
Porac, &
McNamee
264 S&P 500

firms
1992-1996
2003
Hanlon,
Rajgopal, &
Shevlin
1992-2000
2001
Henderson &
Fredrickson
Executives of
1,069 firms
found in
ExecuComp
Executives of
129 firms in
four industries
Total direct
compensation
(TDC1 in
ExecuComp)
Value of stock options
granted
ROA (2 years) and

buy-and-hold
excess returns
(immediate and 6,
12, and 24 months)
compared to
matched control
firms
Total shareholder
return and ROE
In press
1985-1990
Cash, long-term,
and total pay
dispersiondifference between
CEO pay and
average TMT pay
Ratio of annual
operating income to
sales
ROA, ROE, also
checked stock price
with similar results
Pay dispersion does not predict

firm performance. The gap
between levels increases as
the level increases and cash
pay is higher when there are
more contestants.
Target ownership programs lead
to higher firm performance
(ROA over 2 years and returns
at 6 months) and greater managerial ownership.
TMT pay levels and dispersion

are affected by CEO status.
One dollar of option grant value

is associated with $3.71 of
future operating income. The
relationship is concave.
The effects of the long-term pay
gap on firm performance are
moderated by the nature of
the coordination needs. There
is a positive relationship when
there are more vice presidents
and greater related
diversification and a negative
relationship when there are
more businesses and
higher-capital investments.
1047
(continued)
1048
Year
Study
Sample
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
Key Findings
2005
Hogan & Lewis
108 firms
that adopted
economic
profit plans
(EPP) and
matched
nonadopters
1983-1996
Plan adoption
indicator
2005
Kato, Lemmon,
Luo, &
Schallheim
1997-2001
Plan adoption indicator and fraction of

shares outstanding
2001
Morgan &
Poulson
1992-1997
Plan recommendation
indicator
2002
Shaw, Gupta, &

Delery
344 Japanese
firms that
adopted stock
option plans
(562
adoptions)
S&P 500 firms
that proposed
a pay-for-performance
plan (958
proposals)
379 trucking
firms and 141
concrete pipe
firms
1994-1995
Measures of pay
dispersion and
a measure of
individual incentives
for drivers
Economic profit,
operating income
before depreciation,
profit margin, ROA,
market-to-book
ratio, measures
of turnover, and
investment
decisions
Cumulative abnormal
returns (CARs) and
ROA
Firms that possess characteristics that make it likely they

would adopt EPP, and which
then do adopt EPP, outperform nonadopters who were
expected to adopt.
CARs, buy-and-hold
returns,
earnings/assets,
sales/assets, asset
growth, and sales
growth
Truckingaccidents,
out of service, and
driver performance;
concrete pipe
labor hours, lost
time accidents,
and employee
performance
Firms that adopt pay for

performance plans demonstrate better pre- and postannouncement performance.
Adoption of option-based pay is

associated with positive CARs
(5-day window), increased
ROA, and higher levels of
managerial ownership.
Pay dispersion predicts higher

levels of performance in
the presence of individual
incentives and independent
work and lower levels of
performance when work is
more interdependent and there
are no individual incentives.

2005
Siegel &
Hambrick
1998
Wallace
Top
management
groups
(top three
hierarchical
levels) in 67
firms
40 firms that
adopted residual income
plans with
matched pairs
1991-1992
Short- and long-term

pay and vertical,
horizontal, and
overall pay disparity
Mainly
1988-1997
Plan adoption
indicator
Pay contextfirms
with regularly scheduled award dates; pay
amountabnormal
returns
Switch to incentive
pay
2-year average
market-to-book
and total
shareholder returns
adjusted for
industry
performance
Residual income and
shareholder wealth
Pay disparity is negatively

related to performance in
high-tech firms.
Earnings announcement date relative

to option award
date
CEOs of firms with scheduled

awards make voluntary
disclosures of information
to maximize the value of
their grants.
They predict and find evidence
to support the idea that performance improvements after
implementation of an incentive pay plan come from
selection and increased effort.
Residual income-based plans

affect investment decisions
and predict increases in
residual income but not
shareholder wealth.
The influence of pay on executive actions

2000
Aboody &
Kasnick
2,039 option
awards from
572 firms
1992-1996
2001
Banker, Lee,
Potter, &
Srinivasan
3,776
employees in
a large retailer
1987
Selection by higher
performers/turnover
by low performers
(continued)
1049
1050
Year
Study
Sample

N/A
2004
Bebchuk &
Fried
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
N/A
N/A
N/A
Per employee option

grantsnonexecutive
grants divided
by number of
employees
Proportion of incentive
paydelta
Employee sentiment
option value
2005
Bergman &
Jenter
Large-,
mid-, and
small-cap
firms
1992-2003
2006
Bergstresser &
Philippon
4,000 large
firms
1996
2005
Bettis, Bizjak,
& Lemmon
141,120 option
exercises at
3,966 firms
1997-2002
2000
Bryan, Hwang,
& Lilien
1,788 large-,
mid-, and
small-cap
firms
1992-1997
Value of options at
exercise, ratio of
stock price to
strike price when
exercised
CEO stock options
and restricted stock
Key Findings
Shareholder outrage at the costs

of pay gives boards incentive
to camouflage pay. Benefits
such as deferred pay tax benefits, retirement pensions, post
retirement perks, and consulting contracts are ways that
pay is hidden.
Stock option valuation is too
complex for executives to
master.
Earnings
managementlevel
of earnings restated
as a percentage of
assets
Timing and
characteristics of
options exercised
More incentivized CEOs lead

firms with more earnings
management.
Investment in risky
positive net present
value projects
High-growth firms are more

likely to reward executives
with stock options than
restricted stock. Although
stock options are efficient
incentives, restricted stock
increases CEO unwillingness
to take on risky, yet positive
value, projects.
Found that stock price volatility

increased early option
exercise (prior to expiration),
indicating risk aversion.
Year
Study
Sample

2006
Burns & Kedia
Firms from
large-,
mid-, and
small-cap
S&P
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
1995-2001
Sensitivity of option
payoption change
given 1% change in
stock price and
options held
Misreporting
restatements
2004
Cadenillas,
Cvitanic, &
Zapatero
Economic
modelno
data
N/A
Riskiness of stock
given in a pay
package; degree of
leverage in stock
granted to managers
Manager risk taking
2004
Callaghan, Saly,
&
Subramaniam
235 repricing
events
1992-1997
Value of options via

changes in stock
price at the date of
repricing
2000
Carpenter
Economic
modelno
data
N/A
In-the-money status of
options
The date of the

earnings
announcement
relative to the
repricing date
Risk taking
Key Findings
CEOs with option portfolios

that are more sensitive to
changes in stock price are
more likely to misreport.
There was no relationship
with other forms of pay.
Levered stock incents good
managers to take greater risk
because they know they can
use their higher ability to correct a bad state through more
effort. Low-type managers
won't take the extra risk
because they are not confident
in their ability.
They find that executives
announce earnings either
before or after option
repricing to maximize their
own option value.
Option concavity can have nonintuitive effects on risk.
Extremely out-of-the-money
options can cause excessive
risk taking. Very valuable
options, or issuing more
options, can lead to decreased
risk.
1051
(continued)
1052
Year
Study
Sample
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures

2004
Carter & Lynch
Matched sample
1998
Pay policy
measuredoes the
firm reprice or not?
Turnover
2001
Chauvin &
Shenoy
783 grants
given to
CEOs at 209
firms
1991-1994
Options
Abnormal returns
measured as an
indicator of
executive actions
2006
Cho &
Hambrick
30 publicly
traded airlines
1976-1986
Performancedependent
paybase/total pay
Attention on entrepreneurial activities

and issues using a
text analysis-based
measure using
annual letters
2006
Coles, Hertzel,
& Kalpathy
1999-2002
Structure of option
reissue dates
Earnings
management
2006
Desai &
Dharmapala
80 firms that
repriced
options
661 firms found
in Compustat
1993-2001
Tax avoidance based

on regression
residuals
In press
Devers,
McNamara,
Wiseman, &
Arrfelt
500
manufacturing
firms
1992-1999
Degree of incentive
pay-options/total,
restricted stock/total,
both/total
The spread value of
exercisable options,
unexercisable
options, and
restricted stock
Strategic risk taking

actions: R&D
spending, capital
expenditures, and
long-term debt
Key Findings
There was little evidence that

repricing affects executive
turnover and some suggestion
that repricing helps prevent
turnover because of
underwater options.
There were negative abnormal
returns prior to CEO stock
option grants. Abnormal
returns were more negative
for scheduled awards than for
the total sample.
Greater increases in performancebased pay lead to greater
shifts in attention
and the effect of TMT
composition and pay on
strategic change is fully
mediated by attention.
Executives try to manage
earnings near option reissues.
In this case, it did not work.
Higher incentives lead to lower
tax sheltering except in very
well-governed firms.
Value of CEO-restricted stock
exhibits a negative effect on
strategic risk.

2007
Devers,
94 managers
Wiseman, &
Holmes
N/A
Objective valuation of
stock options
Executive valuation
of stock options
2005
Dow & Raposo
Economic
modelno
data
N/A
N/A
N/A
2005
Dunford,
Boudreau, &
Boswell
610 executives
2000
Percentage of options
under water
Job search actions

using Blaus job
search scale
2001
Fenn & Liang
ExecuComp
data
1993-1997
Management
shares/shares
outstanding
Share
repurchases/total
payout
Owing to endowment,
executives valuations of
awarded stock options
surpass subjective valuations
of options not yet awarded.
Also, loss aversion leads
executives to value options
based on performance trend.
Performance-related pay can
create an incentive to look for
ambitious strategies that are
hard to implement.
There is a positive relationship
between the percentage of
underwater options and job
search activity. This relationship is moderated by beliefs
about the adequacy of their
pay and employment
alternatives.
There is a strong negative
relationship between options
and dividends but a positive
relationship between
repurchases and options.
(continued)
1053
1054
Year
Study
Sample

1999
Guidry, Leone,
Managers in
& Rock
one large
conglomerate
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
1993-1995
Presence of
earnings-based
bonus plan
Earnings
management
discretionary
accruals
2002
Hall & Murphy
3,765 S&P 500

CEO-years
1992-1999
CEO total pay

including cash,
long-term incentive
plan (LTIP), and
options
Value to executive of
options holdings
1999
Heath, Huddart,
& Lang
Employees in
seven firms,
160 option
grants
1985-1994
Employees' option
exercising behavior
2007
Heron & Lie
6,104 grants
2002-2004
Value of options
Market pricestrike
price/Barone-Adesi
and Whaley option
value
Options grants
2002
Knopf, Nam, &

Thornton
Part of S&P
500
1996
Sensitivity of stocks
and options
Firm hedging activity
Abnormal returns
near options awards
measured as an
indicator of
backdating
Key Findings
Managers manipulate earnings

to maximize short-term earnings. They extend literature by
looking at managers within a
single firm, which minimizes
aggregation effects and
removes confounding effects
of stock-based pay plans.
The cost of options to firms is
higher than their value to
executives because of the
restriction placed on trading
them. This divergence
explains many things
about how options are used
and valued.
Early option exercise is related
to stock price appreciation.
The abnormal returns

pattern found in Lie (2005)
disappeared after the 2-day
reporting rule became
effective, which provides
support for backdating.
Sensitivity of stock and options
to stock prices is positively
related to firm hedging. As
managers bear more risk, they
hedge more.

Larraza108 CEOs of
In press
Kintana,
IPO firms
Wiseman,
Gomez-Mejia,
& Welbourne
1993-1995
Stock options and

variability of
essential pay
which is pay that is
reliably received
Risk takinga 9-item

survey measure
that incorporates
six strategic
dimensions of risk
2005
Lie
5,977 grants
1992-2002
Options grants
Abnormal returns
near options awards
1998
Mehran, Nogler,
& Schwartz
30 liquidations
and 30
matching
firms
1975-1986
Sensitivity of option
compensation to
stock price, percentage of shares owned
by CEO
Probability that the

firm will voluntarily
liquidate
2003
Nagar, Nanda,
& Wysocki
1,109 firms
1995-1997
Ratio of stock-based
to total pay and
average value of
shareholdings
Frequency of
earnings forecasts
& survey items
about quality of
disclosures
Employment risk and

cash-based pay variability
create potential loss
situations, which positively
influence strategic risk taking.
Perceived downside risk to
cash-based pay and the value
of in-the-money stock options
create potential gain contexts,
which negatively influence
strategic risk taking.
Evidence was found consistent
with backdating of stock
option awards.
Liquidation increases shareholder value and is positively
related to percentage of shares
owned by CEO, sensitivity of
option pay to stock price,
number of outside directors,
smaller book-to-market ratios,
and outside attempts to
control the firm.
Stock price-based pay
encourages disclosure of
information.
(continued)
1055
1056
Year
Study
Sample

2006
O'Connor,
65 matched
Priem,
pairs
Coombs, &
Gilley
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
1996-2004
Average annual value

of options granted to
the CEO and to the
board
Whether a firm
restated their
financial results
downward under
regulatory pressure
Volatility of project
asset value relative
to volatility of firm
asset value
Risk taking by
executives
2005
Parrino,
Poteshman, &
Weisbach
15 firms
in three
industries
N/A
Options and restricted

stock
2002
Rajgopal &
Shevlin
Oil and gas

firms
1992-1998
2005
Rynes, Gerhart,
& Parks
Review
N/A
Presence of an
employee stock
option plan
magnitude of risk
incentives of CEO
N/A
2001
Sanders
250 S&P 500

firms
1991-1995
CEO shares owned

and options granted
Risk taking behavior
2003
Sanders &
Carpenter
250 S&P 500

firms
1992-1995
Proportion of pay in
form of options
Dollar value of
repurchase
programs
announced
N/A
Key Findings
Large option grants to CEOs

were associated with less or
more fraudulent reporting
depending on governance
characteristics (duality and
directors holding stock
options).
Restricted shares differ from
stock options in that they
force managers to bear both
upside and downside risk.
Executive stock options encourage risk-taking by CEOs.
Pay influences motivation and

performance through both
incentive and sorting effects.
Stock options and stock ownership do not have congruent
effects on risk behaviors
(acquisitions). Because of
downside risk in stock, it is
negatively related to acquisition activity, whereas stock
options are positively related
to acquisition activity.
The idea that high levels of
stock option pay are associated with stock repurchase
programs is supported.

1998
Schrand & Unal
134 savings and
loans that
converted
from mutual
to stock
charters
1997
Yermack
620 stock
option awards
to Fortune
500 CEOs
1984-1988
Pay sensitivity
Changes in credit risk

and interest-rate
risk post conversion
1992-1994
Options
Abnormal returns
measured as an
indicator of executive actions
Cash pay and value of

stock options
granted
Sum of the z-scores

of research and
development
(R&D) spending
and number of
patents
Pay structure predicts nature of

the risk adopted by firms.
Managers who purchase more
than the median number of
shares at conversion reduce
total return volatility post
conversion. Managers granted
options at conversion achieve
greater total return volatility.
Concluded that CEOs
opportunistically schedule
awards prior to anticipated
stock price increases.
The influence of executive actions and other factors on pay

2000
Balkin,
Markman, &
Gomez-Meija
CEOs of 90
high-tech and
74 low-tech
firms
1992-1994
The level of innovation predicts

both cash and stock option
pay in high-tech firms but not
in low-tech firms.
(continued)
1057
1058
Year
Study
Sample
Years
Studied
Pay Measures
1998
Barkema &
Pennings
Dutch
executives
from Hay
group
1985
Salary is base pay;

bonus is cash bonus
only
2003
Barron &
Waddell
15,000
firm-year
observations
of large-,
mid-, and
small-cap
firms
1992-2000
Top five executives

pay ranking and
total pay to the
total pay of the
highest-paid
executive
2006
Becker
80 companies
on the
Stockholm
Stock
Exchange
1993-1999
Value of stocks and

options and shares
plus options/total
shares
Performance or
Executive Actions
Constructs &
Measures
Overt power
measured by fraction of shareholdings and fraction of
family shareholdings to total; covert
power measured by
tenure and status as
a founder
Importance of the decisions made by individual executives
executives level,
how big the firm is,
how hard it is to
measure effort,
R&D intensity
Risk taking
measured by
incentive strength
of the contract;
power measured by
CEO wealth; they
also checked
whether lagged
wealth
proxied for skill
Key Findings
Results show overt power to
have a curvilinear relationship
with executive pay. Proxies of
covert power include tenure,
being (one of) the founder(s),
and firm diversification. These
variables magnify or moderate
the effect of equity holdings
on pay.
They identify several predictors
of the proportion of incentive
pay including executive level,
firm value, firm size, and
ownership level. They see
these as proxies for level of
executive effort.
Risk tolerance in executives is
positively related to incentive
pay levels (wealth is seen as a
proxy for risk tolerance).
2001
Bernardo, Cai,
& Luo
Economic
modelfocus
on division
managers
N/A
N/A
N/A
2001
Bliss & Rosen
32 banks, 298
bank-years
1986-1995
Level of stock
ownershipchange
in ownership and
change in paycash
plus value of newly
granted shares
Merger decisions
2001
Carpenter,
Sanders, &
Gregerson
245 multinational firms
1993-1996
CEO payall forms

of pay
CEO international
experienceyears
2002
Carpenter &
Wade
17,135
executive-year
observations
from 90 large
firms
1981-1985
Cash pay
Executives' functional
positions
Managers may receive greater

performance-based
pay because they manage
higher-quality projects rather
than performance-based pay
causing higher quality project
and therefore firm
performance.
For high-merger CEOs, boards
reward them for profitability,
whereas low-merger CEOs are
rewarded for size increases.
Lower level of stock ownership results in fewer acquisitions as CEOs pay more
attention to profitability.
CEO international experience
earns higher pay, but only
when the multinational firm
has a broad global strategic
posture.
Found a positive association
between pay and a position
made visible by resource allocation decisions, a functional
background similar to that of
the CEO, and a position that
helps the firm manage
strategic resource allocations.
(continued)
1059
1060
Year
Study
Years
Studied
Sample
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
Key Findings
2003
Combs & Skill
77 firms with
sudden death
of executive
1978-1994
Cash pay
2005
Coombs &
Gilley
CEOs of 406
Fortune 1000
firms
1995-2001
Salary, bonus, value

of options granted,
and total pay
1999
Core,
Holthausen, &
Larcker
1982-1984
Total pay, cash pay,

and salary
1998
Daily, Johnson,
Elstrand, &
Dalton
495 observations for 205

public U.S.
firms
Random sample
of 194 firms
from Fortune
500
1992
Total, contingent, and

noncontingent pay
1998
David, Kochhar,
& Levitas
125 large U.S.

firms
1992-1994
CEO pay level and

pay mix
2005
Deutsch
38 articles
N/A
CEO incentive pay
Board tenure, founder

status, board
independence, and
nominating
committee presence
ROA, shareholder
returns, and
stakeholder
management
Numerous measures
of board
composition and
ownership structure
Proportion of CEOs,
affiliated directors,
and interdependent
directors on
compensation
committee
Degree to which the
firm's institutional
investors are
resistant to pressure
from managers
Percentage of outside
directors
Finds a novel way to show

that CEO power yields
overpayment and board
power yields underpayment
of CEOs.
Stakeholder management
weakens the positive
relationship between firm
performance and pay and is,
itself, negatively related to
CEO salary.
Board and ownership structure
explain CEO pay.
No support for the proposition

that board compensation committee composition influences
CEO pay levels or the use of
performance-contingent pay.
Firms with pressure-resistant
institutional owners pay less
but pressure-resistance does
not affect pay mix.
Proportion of outside directors
was negatively associated
with the use of CEO performance contingent pay.
1998
Ezzamael &
Watson
199 large U.K.

firms
1992-1995
Salary and salary

plus bonus
Reactions to
under- or overpayment (relative to the
market) of CEOs
by compensation
committee
members
Market growth,
R&D, advertising,
capital intensity,
concentration, and
regulation
Relative tenure
difference between
board and executive
1998
Finkelstein &
Boyd
CEOs of 600
Fortune 1000
firms
1987
Cash and long-term

pay
2006
Fiss
108 large
German firms
1990-2000
Executive pay-CEO
and TMT pay
measure the same
construct (high
correlation)
2001
Geletkanycz,
Boyd, &
Finkelstein
460 domestic
firms in both
manufacturing
and service
sectors
1987
Latent constructcash
and long-term pay
Board membership
and networks (ties,
network size, profit
of network firms,
betweenness,
closeness, and
degree)
2004
Grinstein &
Hribar
327 mergers
and acquisitions (M&As)
1993-1999
M&A bonus
Effort, skill, and

power
Both over- and underpayment

anomalies have important
influences on CEO pay.
Alignment of discretion and pay

is higher in better-performing
firms.
There are differences rather

than similarities in human
capital influence the
relationship between CEOs
and boards of directors and,
in turn, CEO pay.
There is weak support for the
prediction that CEO external
directorate networks will be
positively associated with
CEO pay and strong support
for the prediction that diversification will strengthen the
association.
CEOs bonuses from
acquisitions are an increasing
function of CEO power, deal
size, and effort.
1061
(continued)
1062
Year
Study
Years
Studied
Sample
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
Key Findings

2002
Miller,
Wiseman, &
Gomez-Mejia
423 S&P 500

firms
1994-1998
Total paysalary,
bonus, LTIP, and
options
Systematic and
unsystematic
market and income
risk
2006
Wade, Porac,
Pollock, &
Graffin
264 firms that

were S&P
500 members
in 1992
1992-1996
ExecuComp's total
direct pay 1 (TDC1)
Financial World
Magazines CEO of
the Year awards
2002
Wright, Kroll,
& Elenkov
CEOs of 77
vigilant and
94 lax firms
that made
acquisitions
1993-1998
Percentage change
(before and after
acquisition) in
salary, bonus, and
value of option
holdings
Degree of activist
institutional ownership, number of
analysts following
the firm, and board
independence
Firm risk predicts level of performance contingent pay. The

relationship is stronger for
firm specific risk than for
market risk.
Non-CEO top management
team members received higher
pay when they worked for a
high-status CEO; however,
star CEOs retain most pay
benefits.
In firms with vigilant external
monitoring, increases in CEO
pay post-acquisition are
related to shareholder returns.
In weakly monitored firms,
pay increases are related to
increases in firm size.
Cross-area studies
2000
Anderson,
Banker, &
Ravindran
Executives
from 3,258
firms (605
information
technology)
found in
ExecuComp
1992-1996
Salary, bonus, options

and restricted stock
granted, LTIP
payouts, percentage
options and stock
held; pay averaged
over the TMT
Firm performance
stock returns
2005
Bitler,
Moskowitz, &
VissingJorgensen
Sample of
entrepreneurs
who started
the business
and are
owners
1989, 1992,
1995, 1998,
2001
Equity ownership
percentage
ownership of firm;
entrepreneur
wealthnet worth
Manager effort
hours worked; firm
performancesales
and profits; firm
riskresiduals of
profit-to-equity
ratios regression
Bloom &
Milkovich
An average of
46 randomly
selected
managers
from each of
over 500
firms
1981-1988
Incentive paybonus
pay over base pay,
both individual and
averaged for the
firm
Business risk
systematic and
unsystematic
variation in ROA
and stock price;
firm performance
total shareholder
return
1998
Returns are positively related to

bonus and options, both as a
percentage of total pay. Pay
and percentage value of stock
and options held are positively
related to returns. Options
held have a greater effect on
performance than options
granted.
Managerial equity ownership is
positively related to managerial effort (hours worked),
which is positively related to
firm performance.
Entrepreneur wealth is
positively related and firm
risk is negatively related to
equity ownership.
Firm risk is positively related to
base pay and negatively
related to incentive pay.
Incentives are negatively
related to performance when
there is more business risk.
(continued)
1063
1064
Year
Study
Sample
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
Key Findings
Cross-area studies
2006
Coles, Daniel,
& Naveen
ExecuComp
data
1992-2002
Incentive payvega
(CEO wealth
sensitivity to stock
volatility) and delta
(CEO PPS)
Riskiness of policy
choicesR&D
spending; property,
plant, and equipment investment;
leverage; and focus
of firm activities
Vega and delta are predicted by

stock return volatility. Higher
vega results in riskier policy
choices, which would result in
higher vega and lower delta.
2001
Datta, IskandarDatta, &

Raman
Top five
executives in
771 firms that
made 1,719
acquisitions
1993-1998
Equity-based pay
(EBC)value of
options granted
over total pay
Higher EBC firms have better

post-acquisition stock price
performance, pay lower
premiums, acquire firms with
more growth opportunities, and
have greater post-acquisition
firm risk.
2006
Devers,
Holcomb,
Holmes, &
Cannella
Guay
S&P 500; 1,589

firm-year
observations
1997-2001
TMT long-term
incentive pay
Post-acquisition
performance
2-day CARs and
3-year buy-andhold returns; firm
riskstock
return standard
deviation; growth
opportunities
market-to-book ratio
Risk behavior
acquisitions
278 CEOs from

large firms
found in
Compustat
1993
Convexitysensitivity
of the value of
CEOs' option and
stock holdings to
changes in stock
return volatility
1999
Investment
opportunitiesbookto-market ratio,
R&D expenditures,
and investment
expenditures; stock
return volatility
annualized
standard deviation
of returns
The aggregate level of the

long-term incentives held by
the TMT is positively related
to acquisition behavior.
Most convexity of the wealth
stock price relationship is
attributable to stock options.
There are positive
relationships between
investment opportunities and
convexity as well as convexity
and stock return volatility.
Cross-area studies
1999
Hayes &
Schaefer
CEOs from
Forbes
executive pay
surveys
1974-1995
Salary and bonus
Firm performance
ROE, sales, and
market returns.
2006
Makri, Lane, &

Gomez-Meija
CEOs of 206
firms
1992-1995
CEO incentives
bonus, stock options
granted, and total
incentives (bonus
plus options)
Technology
intensityR&D
expenditures over
sales; innovation
resonance
citations of firms
patents; science
harvestingfirms
citations of scientific articles;
firm performance
market-to-book
ratio; financial
resultsROE
There is a positive relationship

between unexplained variation
in pay and future performance
(ROE), which is stronger
when observable measures are
not as useful.
As technology intensity
increases, CEO bonuses are
more strongly linked to
financial results and total
incentives are more strongly
linked to innovation resonance
and science harvesting. As
technology intensity
increases, pay alignment is
more important for firm
performance.
(continued)
1065
1066
Year
Study
Sample
Years
Studied
Pay Measures
Performance or
Executive Actions
Constructs &
Measures
Key Findings
Cross-area studies
Tuschke &
Sanders
76 German
firms in the
Deutscher
Aktien Index
100
1996-1999
Governance
reformsindicator
for adoption of
stock-based pay plan
2006
Wade, OReilly,
& Pollock
Executives in
the top five
hierarchical
levels of 122
publicly
owned firms
1981-1985
Salary and bonus

over- or underpaymentresiduals
from an equation
predicting wages
2003
Governance
reformsindicator
for accounting
conventions; divestituresnumber of
divestitures in a
year; firm
performance
ROS, market
capitalization, and
market-to-book
ratio; ownership
concentration
percentage of
shares held in
blocks of at
least 5%
CEO power
indicator for
CEO/chair
duality
There is an inverse u-shaped

relationship between ownership concentration and adoption of governance reforms.
Adoption of stock-based plans
predicts greater divestiture
activity. Adoption of stockbased plans and accounting
conventions are generally
associated with better firm
performance.
CEO over- and underpayment

trickle down through the
managerial ranks with
diminishing strength. CEO
power is associated with
higher CEO pay and higher
subordinate pay that also
diminishes in the lower ranks.
1067
Notes
1. Virtually all normative option valuation models assume that the option holder is risk-neutral, which
Holmstrom (1979) concluded was not the case.
2. Endowment occurs when individuals perceive an increase in the value of an asset, once gaining ownership over
that asset (Kahneman, Knetsch, & Thaler, 1991; Thaler & Johnson, 1990). Thus, the reduction in wealth associated
with relinquishing that asset exceeds the perceived increase in wealth associated with acquiring an identical asset.
3. Although both stock options and restricted stock must vest before sale, restricted stock generally carries no
exercise price (Milkovich & Newman, 2002).
References
Aboody, D., & Kasznik, R. (2000). CEO stock option awards and the timing of corporate voluntary disclosures.
Journal of Accounting & Economics, 29(1), 73-100.
Adams, J. S. (1965). Inequity in social exchange. In L. Berkowitz (Ed.), Advances in experimental social psychology. New York: Academic Press.
Aggarwal, R. K., & Samwick, A. A. (1999a) Executive compensation, strategic competition, and relative performance evaluation: Theory and evidence. Journal of Finance, 54(6), 1999-2043.
Aggarwal, R. K., & Samwick, A. A. (1999b). The other side of the trade-off: The impact of risk on executive compensation. Journal of Political Economy, 107(1), 65-105.
Aggarwal, R. K., & Samwick, A. A. (2003). Performance incentives within firms: The effect of managerial responsibility. Journal of Finance, 58(4), 1613-1649.
Anderson, M. C., Banker, R. D., & Ravindran, S. (2000). Executive compensation in the information technology
industry. Management Science, 46(4), 530-547.
Baber, W. R., Kang, S. H., & Kumar, K. R. (1998). Accounting earnings and executive compensation: The role of
earnings persistence. Journal of Accounting & Economics, 25(2), 169-193.
Balachandran, S. V. (2006). How does residual income affect investment? The role of prior performance measures.
Management Science, 52(3), 383-394.
Balkin, D. B., Markman, G. D., & Gomez-Mejia, L. R. (2000). Is CEO pay in high-technology firms related to innovation? Academy of Management Journal, 43(6), 1118-1129.
Banker, R. D., Lee, S. Y., Potter, G., & Srinivasan, D. (2001). An empirical analysis of continuing improvements
following the implementation of a performance-based compensation plan. Journal of Accounting and
Economics, 30(3), 315-350.
Barkema, H. G., & Pennings, J. M. (1998). Top management pay: Impact of overt and covert power. Organization
Studies, 19(6), 975.
Barron, J. M., & Waddell, G. R. (2003). Executive rank, pay and project selection. Journal of Financial Economics,
67(2), 305-349.
Bebchuk, L. A., & Fried, J. M. (2004). Stealth compensation via retirement benefits. Berkley Business Law Journal,
1(2), 291-326.
Becker, B. (2006). Wealth and executive compensation. Journal of Finance, 61(1), 379-397.
Bergman, N., & Jenter, D. C. (2005). Employee sentiment and stock option compensation. Working paper no. 450404, Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts.
Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management. Journal of Financial
Economics, 80(3), 511-529.
Bernardo, A. E., Cai, H. B., & Luo, J. (2001). Capital budgeting and compensation with asymmetric information
and moral hazard. Journal of Financial Economics, 61(3), 311-344.
Bettis, J. C., Bizjak, J. M., & Lemmon, M. L. (2005). Exercise behavior, valuation, and the incentive effects of
employee stock options. Journal of Financial Economics, 76(2), 445-470.
Bitler, M. P., Moskowitz, T. J., & Vissing-Jorgensen, A. (2005). Testing agency theory with entrepreneur effort and
wealth. Journal of Finance, 60(2), 539-576.
1068
Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy,
81(3), 637-654.
Bliss, R. T., & Rosen, R. J. (2001). CEO compensation and bank mergers. Journal of Financial Economics, 61(1),
107-138.
Bloom, M. (1999). The performance effects of pay dispersion on individuals and organizations. Academy of
Management Journal, 42(1), 25-40.
Bloom, M., & Milkovich, G. T. (1998). Relationships among risk, incentive pay, and organizational performance.
Academy of Management Journal, 41(3), 283-297.
Boschen, J. F., Duru, A., Gordon, L. A., & Smith, K. J. (2003). Accounting and stock price performance in dynamic
CEO compensation arrangements. The Accounting Review, 78(1), 143-168.
Bryan, S., Hwang, L. S., & Lilien, S. (2000). CEO stock-based compensation: An empirical analysis of incentiveintensity, relative mix, and economic determinants. Journal of Business and Society, 73(4), 661-693.
Brush, T. H., Bromiley, P., & Hendrickx, M. (1999). The relative influence of industry and corporation on business
segment performance: An alternative estimate. Strategic Management Journal, 20(6), 519-547.
Burns, N., & Kedia, S. (2006). The impact of performance-based compensation on misreporting. Journal of
Financial Economics, 79(1), 35-67.
Cadenillas, A., Cvitanic, J., & Zapatero, F. (2004). Leverage decision and manager compensation with choice of
effort and volatility. Journal of Financial Economics, 73(1), 71-92.
Callaghan, S. R., Saly, R. J., & Subramaniam, C. (2004). The timing of option repricing. Journal of Finance, 59(4),
1651-1676.
Canella, A. A., Jr., & Holcomb, T. R. (2005). A multi-level analysis of the upper echelons model. In F. Dansereau
and F. J. Yammarino (Eds.), Research in multi-level issues: Multi-level issues in strategy and methods. Oxford:
JAI-Elsevier Science.
Carpenter, J. N. (2000). Does option compensation increase managerial risk appetite? Journal of Finance, 55(5),
2311-2331.
Carpenter, M. A., & Sanders, W. G. (2002). Top management team compensation: The missing link between CEO
pay and firm performance? Strategic Management Journal, 23(4), 367-375.
Carpenter, M. A., & Sanders, W. G. (2004). The effects of top management team pay and firm internationalization
on MNC performance. Journal of Management, 30(4), 509-528.
Carpenter, M. A., Sanders, W. G., & Gregersen, H. B. (2001). Bundling human capital with organizational context:
The impact of international assignment experience on multinational firm performance and CEO pay. Academy
of Management Journal, 44(3), 493-511.
Carpenter, M. A., & Wade, J. B. (2002). Microlevel opportunity structures as determinants of non-CEO executive
pay. Academy of Management Journal, 45(6), 1085-1103.
Carter, M. E., & Lynch, L. J. (2004). The effect of stock option repricing on employee turnover. Journal of
Accounting and Economics, 37(1), 91-112.
Certo, S. T., Daily, C. M., Cannella, A. A., Jr., & Dalton, D. R. (2003). Giving money to get money: How CEO stock
options and CEO equity enhance IPO valuations. Academy of Management Journal, 46(5), 643-653.
Chauvin, K. W., & Shenoy, C. (2001). Stock price decreases prior to executive stock option grants. Journal of
Corporate Finance, 7(1), 53-76.
Cho, T. S., & Hambrick, D. C. (2006). Attention as the mediator between top management team characteristics and
strategic change: The case of airline deregulation. Organization Science, 17(4), 453-469.
Coffee, J. C., Jr. (1988). Shareholders versus managers: The strain in the corporate web. In J. C. Coffee, Jr.,
L. Lowenstein and S. Rose-Ackerman (Eds.), Knights, raiders, and targets: The impact of the hostile take-over
(pp. 77-134). New York: Oxford University Press.
Coles, J. L., Daniel, N. D., & Naveen, L. (2006). Managerial incentives and risk-taking. Journal of Financial
Economics, 79(2), 431-468.
Coles, J. L., Hertzel, M., & Kalpathy, S. (2006). Earnings management around employee stock option reissues.
Journal of Accounting & Economics, 41(1-2), 173-200.
Combs, J. G., & Skill, M. S. (2003). Managerialist and human capital explanations for key executive pay premiums: A contingency perspective. Academy of Management Journal, 46(1), 63-73.
Conyon, M. J., & Peck, S. I. (1998). Board control, remuneration committees, and top management compensation.
Academy of Management Journal, 41(2), 146-157.
1069
Conyon, M. J., Peck, S. I., & Sadler, G. V. (2001). Corporate tournaments and executive compensation: Evidence
from the UK. Strategic Management Journal, 22(8), 805-815.
Coombs, J. E., & Gilley, K. M. (2005). Stakeholder management as a predictor of CEO compensation: Main effects
and interactions with financial performance. Strategic Management Journal, 26(9), 827.
Core, J. E., Holthausen, R. W., & Larcker, D. F. (1999). Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics, 51(3), 371-407.
Core, J. E., & Larcker, D. F. (2002). Performance consequences of mandatory increases in executive stock ownership. Journal of Financial Economics, 64(3), 317-340.
Daily, C. M., Johnson, J. L., Ellstrand, A. E., & Dalton, D. R. (1998). Compensation committee composition as a
determinant of CEO compensation. Academy of Management Journal, 41(2), 209-220.
Datta, S., Iskandar-Datta, M., & Raman, K. (2001). Executive compensation and corporate acquisition decisions.
Journal of Finance, 56(6), 2299-2336.
David, P., Kochhar, R., & Levitas, E. (1998). The effect of institutional investors on the level and mix of CEO compensation. Academy of Management Journal, 41(2), 200-208.
Desai, M. A., & Dharmapala, D. (2006). Corporate tax avoidance and high-powered incentives. Journal of Financial
Economics, 79(1), 145-179.
Deutsch, Y. (2005). The impact of board composition on firms critical decisions: A meta-analytic review. Journal
of Management, 31(3), 424-444.
Devers, C. E., Holcomb, T. R., Holmes, R. M., Jr., & Cannella, A. A., Jr. (2006). Inside the black box: The contrasting effects of TMT long-term incentives on interest alignment. In K. M. Weaver (Ed.), Academy of management
annual meeting proceedings. Atlanta, GA: Academy of Management.
Devers, C. E., McNamara, G., Wiseman, R. M., & Arrfelt, M. (In press). Moving closer to the action: Examining
compensation design effects on firm risk. Organization Science.
Devers, C., Wiseman, R., & Holmes, R. (2007). The effects of endowment and loss aversion in managerial stock
option valuation. Academy of Management Journal, 50(1), 191-208.
Dow, J., & Raposo, C. C. (2005). CEO compensation, change, and corporate strategy. Journal of Finance, 60(6),
2701-2727.
Dunford, B., Boudreau, J., & Boswell, W. (2005). Out-of-the-money: The impact of underwater stock options on
executive job search. Personnel Psychology, 59(1), 67-102.
Ezzamel, M., & Watson, R. (1998). Market comparison earnings and the bidding-up of executive cash compensation: Evidence from the United Kingdom. Academy of Management Journal, 41(2), 221-231.
Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2), 288-307.
Fenn, G. W., & Liang, N. (2001). Corporate payout policy and managerial stock incentives. Journal of Financial
Economics, 60(1), 45-72.
Festinger, L. (1954). A theory of social comparison processes. Human Relations, 7, 117-140.
Finkelstein, S., & Boyd, B. K. (1998). How much does the CEO matter? The role of managerial discretion in the
setting of CEO compensation. Academy of Management Journal, 41(2), 179-199.
Finkelstein, S., & Hambrick, D. C. (1996). Top executives and their effects on organizations. St. Paul, MN: West
Publishing Company.
Fiss, P. C. (2006). Social influence effects and managerial compensation evidence from Germany. Strategic
Geletkanycz, M. A., Boyd, B. K., & Finkelstein, S. (2001). The strategic value of CEO external directorate networks: Implications for CEO compensation. Strategic Management Journal, 22(9), 889-898.
Gerhart, B., & Milkovich, G. T. (1992). Employee compensation: Research and theory. In M. D. Dunnette and
L. M. Hough (Eds.), Handbook of industrial and organizational psychology (pp. 481-569). Palo Alto, CA:
Consulting Psychologists Press.
Gomez-Mejia, L. R., & Wiseman, R. M. (1997). Reframing executive compensation: An assessment and outlook.
Journal of Management, 23(3), 291-374.
Graffin, S., J. Wade, J. Porac, J, & McNamee, R. (In press). The impact of CEO status diffusion on the economic
outcomes of other senior managers. Organization Science.
Grinstein, Y., & Hribar, P. (2004). CEO compensation and incentives: Evidence from M&A bonuses. Journal of
Financial Economics, 73(1), 119-143.
1070
Guay, W. R. (1999). The sensitivity of CEO wealth to equity risk: An analysis of the magnitude and determinants.
Journal of Financial Economics, 53, 43-71.
Guidry, F., Leone, A. J., & Rock, S. (1999). Earnings-based bonus plans and earnings management by business-unit
managers. Journal of Accounting & Economics, 26(1-3), 113-142.
Hall, B. J., & Liebman, J. B. (1998). Are CEOs really paid like bureaucrats? Quarterly Journal of Economics,
113(3), 653-691.
Hall, B. J., & Murphy, K. J. (2002). Stock options for undiversified executives. Journal of Accounting & Economics,
33(1), 3-42.
Hambrick, D. C., Finkelstein, S., & Mooney, A. C. (2005). Executive job demands: New insights for explaining
strategic decisions and leader behaviors. Academy of Management Review, 30(3), 472-491.
Hanlon, M., Rajgopal, S., & Shevlin, T. (2003). Are executive stock options associated with future earnings?
Journal of Accounting & Economics, 36(1-3), 3-43.
Hartzell, J. C., & Starks, L. T. (2003). Institutional investors and executive compensation. Journal of Finance, 58(6),
2351-2374.
Hayes, R. M., & Schaefer, S. (1999). How much are differences in managerial ability worth? Journal of Accounting
& Economics, 27(2), 125-148.
Heath, C., Huddart, S., & Lang, M. (1999). Psychological factors and stock option exercise. Quarterly Journal of
Economics, 114(2), 601-627.
Henderson, A. D., & Fredrickson, J. W. (2001). Top management team coordination needs and the CEO pay gap:
A competitive test of economic and behavioral views. Academy of Management Journal, 44(1), 96-117.
Heron, R. A., & Lie, E. (2007). Does backdating explain the stock price pattern around executive stock option
grants? Journal of Financial Economics, 83, 271-295.
Hitt, M. A., & Tyler, B. B. (1991). Strategic decision models: Integrating different perspectives. Strategic
Hogan, C. E., & Lewis, C. M. (2005). Long-run investment decisions, operating performance, and shareholder value
creation of firms adopting compensation plans based on economic profits. Journal of Financial and Quantitative
Analysis, 40(4), 721-745.
Holmstrom, B. (1979). Moral hazard and observability. Bell Journal of Economics, 10(1), 74-91.
Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3, 305-360.
Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political
Economy, 98(2), 225-264.
Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1991). Anomalies: The endowment effect, loss aversion, and statusquo bias. Journal of Economic Perspectives, 5(1), 193-206.
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2),
263-291.
Kato, H. K., Lemmon, M., Luo, M., & Schallheim, J. (2005). An empirical examination of the costs and benefits of
executive stock options: Evidence from Japan. Journal of Financial Economics, 78(2), 435-461.
Ke, B., Petroni, K., & Safieddine, A. (1999). Ownership concentration and sensitivity of executive pay to accounting performance measures: Evidence from publicly and privately-held insurance companies. Journal of
Accounting & Economics, 28(2), 185-209.
Keats, B. W., & Hitt, M. A. (1988). A causal model of linkages among environmental dimensions, macro organizational characteristics, and performance. Academy of Management Journal, 31(3), 570-598.
Knopf, J. D., Nam, J., & Thornton, J. H. (2002). The volatility and price sensitivities of managerial stock option
portfolios and corporate hedging. Journal of Finance, 57(2), 801-813.
Kraft, K., & Niederprum, A. (1999). Determinants of management compensation with risk-averse agents and dispersed ownership of the firm. Journal of Economic Behavior & Organization, 40(1), 17-27.
Lane, P. J., Cannella, A. A., Jr., & Lubatkin, M. H. (1999). Ownership structure and corporate strategy: One question viewed from two different worlds. Strategic Management Journal, 20(11), 1077-1086.
Larraza-Kintana, M., Wiseman, R. M., Gomez-Mejia, L. R., & Welbourne, T. M. (In press). Disentangling compensation and employment risks using the behavioral agency model. Strategic Management Journal.
Lazear, E. P. (1986). Salaries and piece rates. Journal of Business, 59(3), 405-431.
1071
Lazear, E. P., & Rosen, S. (1981). Rank-order tournaments as optimum labor contracts. The Journal of Political
Economy, 89(5), 841-864.
Leone, A. J., Wu, J. S., & Zimmerman, J. L. (2006). Asymmetric sensitivity of CEO cash compensation to stock
returns. Journal of Accounting & Economics, 42(1-2), 167-192.
Lie, E. (2005). On the timing of CEO stock option awards. Management Science, 51(5), 802-812.
Lubatkin, M., & Shrieves, R. E. (1986). Towards reconciliation of market performance-measures to strategic management research. Academy of Management Review, 11(3), 497-512.
Main, B., OReilly, C. A., & Wade, J. (1993). Top executive pay: Tournament or teamwork? Journal of Labor
Economics, 11(4), 607-628.
Makri, M., Lane, P. J., & Gomez-Mejia, L. R. (2006). CEO incentives, innovation, and performance in technologyintensive firms: A reconciliation of outcome and behavior-based incentive schemes. Strategic Management
Journal, 27(11), 1057-1080.
McGahan, A. M., & Porter, M. E. (1997). How much does industry matter, really? Strategic Management Journal,
18(S1), 15-30.
McNamara, G., & Bromiley, P. (1999). Risk and return in organizational decision making. Academy of Management
Journal, 42(3), 330-339.
Mehran, H., Nogler, G. E., & Schwartz, K. B. (1998). CEO incentive plans and corporate liquidation policy. Journal
of Financial Economics, 50(3), 319-349.
Milgrom, P., & Roberts, J. (1992). Economics, Organization and Management. London: Prentice-Hall.
Milkovich, G. T. & Newman, J. M. (2002). Compensation (7th ed.). Boston: Irwin/McGraw Hill.
Miller, J. S., Wiseman, R. M., & Gomez-Mejia, L. R. (2002). The fit between CEO compensation design and firm
risk. Academy of Management Journal, 45(4), 745-756.
Morgan, A. G., & Poulsen, A. B. (2001). Linking pay to performance: Compensation proposals in the S&P 500.
Journal of Financial Economics, 62(3), 489-523.
Murphy, K. J. (1999). Executive compensation. In O. Ashenfelter & D. Cards (Eds.), Handbook of Labor
Economics: 24852563. New York: North Holland.
Murphy, K. J. (2000). Performance standards in incentive contracts. Journal of Accounting & Economics, 30(3),
245-278.
Nagar, V., Nanda, D., & Wysocki, P. (2003). Discretionary disclosure and stock-based incentives. Journal of
Accounting & Economics, 34(1-3), 283-309.
OConnor, J. P., Priem, R. L., Coombs, J. E., & Gilley, K. M. (2006). Do CEO stock options prevent or promote
fraudulent financial reporting? Academy of Management Journal, 49(3), 483-500.
Palmer, T. B., & Wiseman, R. M. (1999). Decoupling risk taking from income stream uncertainty: A holistic model
of risk. Strategic Management Journal, 20(11), 1037-1062.
Parrino, R., Poteshman, A. M., & Weisbach, M. S. (2005). Measuring investment distortions when risk-averse managers decide whether to undertake risky projects. Financial Management, Spring, 21-60.
Pfeffer, J., & Langton, N. (1993). The effect of wage dispersion on satisfaction, productivity, and working collaboratively: Evidence from college and university faculty. Administrative Science Quarterly, 38(3), 382-407.
Rajgopal, S., & Shevlin, T. (2002). Empirical evidence on the relation between stock option compensation and risk
taking. Journal of Accounting & Economics, 33(2), 145-171.
Ruefli, T. W., Collins, J. M., & Lacugna, J. R. (1999). Risk measures in strategic management research: Auld lang
syne? Strategic Management Journal, 20(2), 167-194.
Rynes, S. L., Gerhart, B., & Parks, L. (2005). Personnel psychology: Performance evaluation and pay for performance. Annual Review of Psychology, 56, 571-600.
Sanders, W. G. (2001). Behavioral responses of CEOs to stock ownership and stock option pay. Academy of
Sanders, W. G., & Carpenter, M. A. (2003). Strategic satisficing? A behavioral-agency theory perspective on stock
repurchase program announcements. Academy of Management Journal, 46(2), 160-178.
Schrand, C., & Unal, H. (1998). Hedging and coordinated risk management: Evidence from thrift conversions.
Journal of Finance, 53(3), 979-1013.
Sharpe, W. F. (1970). Portfolio Theory and Capital Markets. New York: McGraw-Hill.
Shaw, J. D., Gupta, N., & Delery, J. E. (2002). Pay dispersion and workforce performance: Moderating effects of
incentives and interdependence. Strategic Management Journal, 23(6), 491.
1072
Siegel, P. A., & Hambrick, D. C. (2005). Pay disparities within top management groups: Evidence of harmful effects
on performance of high-technology firms. Organization Science, 16(3), 259-274.
Thaler, R. H., & Johnson, E. J. (1990). Gambling with the house money and trying to break even: The effects of
prior outcomes on risky choice. Management Science, 36(6), 643-660.
Tosi, H. L., & Gomez-Mejia, L. R. (1989). The decoupling of CEO pay and performance: An agency theory perspective. Administrative Science Quarterly, 34(2), 169-189.
Tosi, H. L., Katz, K. P., & Gomez-Mejia, L. R. (1997). Disaggregating the agency contract: Effects of monitoring,
incentive alignment, and term in office on agent decision making. Academy of Management Journal, 40(3),
584-602.
Tosi, H. L., Werner, S., Katz, J. P., & Gomez-Mejia, L. R. (2000). The determinants of CEO compensation: A metaanalysis of firm size and performance. Journal of Management, 26(2), 301-339.
Tuschke, A., & Sanders, W. G. (2003). Antecedents and consequences of corporate governance reform: The case of
Germany. Strategic Management Journal, 24(7), 631.
Wade, J. B., OReilly, C. A., & Pollock, T. G. (2006). Overpaid CEOs and underpaid managers: Fairness and executive compensation. Organization Science, 17(5), 527-544.
Wade, J. B., Porac, J. F., Pollock, T. G., & Graffin, S. D. (2006). The burden of celebrity: The impact of CEO certification contests on CEO pay and performance. Academy of Management Journal, 49(4), 643-660.
Wallace, J. S. (1998). Adopting residual income-based compensation plans: Do you get what you pay for? Journal
of Accounting & Economics, 24(3), 275-300.
Wiseman, R. M., & Gomez-Mejia, L. R. (1998). A behavioral agency model of managerial risk taking. Academy of
Management Review, 23(1), 133-153.
Wright, P., Kroll, M., & Elenkov, D. (2002). Acquisition returns, increase in firm size, and chief executive compensation: The moderating effect of monitoring. Academy of Management Journal, 45(3), 599-608.
Yermack, D. (1997). Good timing: CEO stock option awards and company news announcements. Journal of
Finance, 52(2), 449-476.
Biographical Notes
Cynthia E. Devers is an assistant professor in the school of business at the University of Wisconsin-Madison. She
received her PhD from Michigan State University in 2003. Her research interests include the effects of executive and
top management team compensation, corporate governance, decision-making biases, and risk on strategic choice.
Albert A. Cannella, Jr. is the Koerner Chair in strategy and entrepreneurship at Tulane University and has held
positions at Arizona State University and Texas A&M University. He received his PhD from Columbia University
in 1991. His research interests focus on executives, entrepreneurship, knowledge, and competitive dynamics.
Gregory P. Reilly earned his PhD at the University of Wisconsin. He is an assistant professor of management at the
University of Connecticut. His current research interests include executive compensation and top management teams.
Michele E. Yoder is a PhD candidate at the University of WisconsinMadison. Her research interests include executive compensation and boards of directors.

Review Executive Compensation-Devers 2007

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Review Executive Compensation-Devers 2007

Uploaded by

Copyright:

Available Formats

Journal of Management

Executive Compensation: A Multidisciplinary Review of Recent Developments

Southern Management Association

Downloaded from http://jom.sagepub.com by on April 16, 2009

Executive Compensation: A Multidisciplinary

Albert A. Cannella, Jr.

Devers et al. / Executive Compensation

Relationships between pay and performance

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

5. Risk preference alignment

Relationships Between Pay and Performance

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

the mix of compensation provided to executives through providing favorable or unfavorable

The Influence of Pay on Performance

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

Relationships Among Pay and Behaviors

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

The Influence of Executive Actions and Other Factors on Pay

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

associations between executives cash compensation and whether executives functional

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Methodological Issues and Future Directions

Downloaded from http://jom.sagepub.com by on April 16, 2009

Devers et al. / Executive Compensation

Downloaded from http://jom.sagepub.com by on April 16, 2009

Journal of Management / December 2007

Risk and Risk Perceptions

Downloaded from http://jom.sagepub.com by on April 16, 2009