We examine the distribution of incentives across executives with explicit divisional responsibilities, those with broad oversight authority over the firm, and CEOs. Oversight executives have pay-performance incentives that are $1.22 per thousand dollar increase in shareholder wealth higher than those of divisional executives. For CEOs, incentives are $5.65 per thousand higher than for executives with divisional responsibility. The aggregate pay-firm performance sensitivity of the top management team is substantial, at $32.32 per thousand for the median firm. CEO incentives are 42 to 58 percent of the aggregate incentives to the top management team. We match a subset of our divisional executives to the divisions they manage. We document a positive pay-divisional performance sensitivity and show that it is increasing in the precision of the divisional performance measure. The pay-firm performance sensitivity for divisional executives is decreasing in the precision of their divisional performance measure. These results are consistent with a principal-agent model with multiple signals of managerial effort.

Much of the research on management compensation focuses on the level and structure of executives ’ pay. In this study, we examine a compensation element that has not received so far considerable research attention—the dispersion of compensation across managers—and its impact on firm performance. We examine the implications of two theoretical models dealing with pay dispersion—tournament vs. equity fairness. Tournament theory stipulates that a large pay dispersion provides strong incentives to highly qualified managers, leading to higher efforts and improved enterprise performance, while arguments for equity fairness suggest that greater pay dispersion increases envy and dysfunctional behaviour among team members, adversely affecting performance. Consistent with tournament theory, we find that firm performance, measured by either Tobin’s Q or stock performance, is positively associated with the dispersion of management compensation. We also document that the positive association between firm performance and pay dispersion is stronger in firms with high agency costs related to managerial discretion. Furthermore, effective corporate governance, especially high board independence, strengthens the positive association between firm performance and pay dispersion. Our findings thus add to the compensation literature a potentially important dimension: managerial pay dispersion.

University – Chicago. We are indebted to Lu Hong for many helpful discussions. We thank Sam Tian and seminar participants at the University of Pittsburgh and the University of Michigan for comments and suggestions. Our research has also benefited from comments by discussants and participants at the following

This is a new study which examines whether the determinants and the forms of compensation in new versus old economy US firms are the same over time and if the structure of compensation for executives in both groups changes after the NASDAQ crash and the enactment of the Sarbanes-Oxley act. The results reveal that the new economy executives receive, on average, much more than the executives from the old economy, primarily due to stock options, but in the last few years the difference in compensation between the executives of both groups is decreasing. We find that the NASDAQ crash and the Sarbanes-Oxley act had a significant impact upon the structure of the components of executive compensation in both new and old economy firms. Firms in both groups have reduced the use of stock options and have instead increased the use of bonuses and restricted stocks. We also find that the factors that explain executive compensation in new and old economy firms are generally different, and in the case of the variables that are the same, like firm size component, the intensity of the factors is different.

This research intends to explore the factor determining the positive relation between executive stock options and managerial risk taking. I firstly investigate the relation between the risk increase of investment project (referred to the risk relative) and a measure of incentive effects of stock options (referred to as the incentive ratio). The evidence shows a positive relation between the risk relative and the incentive ratio, implying that executives undertake more risky projects when their compensation contain a higher proportion of stock options. The causal link between higher option compensation leading to higher risk increase is further examined in terms of firm-specific factors, including firm size, investment opportunity, and managerial discretions (eg., internal liquidity and borrowing capability). The evidence from statistical tests and regression models (OLS and separate-slopes) supports the hypothesis that the relation between option compensation and capital investment risk is determined by firm-specific factors. The results support the hypotheses that the relation of higher option compensation and lagged impact on capital investment risk is constrained by firm-specific factors. 1

We test for information structure in executive compensation. The optimal compensation contract in the principal agent model implies that incentives increase with the level of managerial talent only if information about managerial talent is asymmetric in that executives have better information than shareholders. We find positive relations between the payperformance sensitivity and the level of managerial talent, which reject the case of symmetric information. Furthermore, our empirical results reject the case of no information in which neither executives nor shareholders have the information. Thus, our findings support the existence of information asymmetry of managerial talent between executives and Agency problems due to the separation of ownership and control have been a central theme in corporate governance. The principal agent model has suggested proper use of incentives as a remedy for agency problems. Since Jensen and Murphy (1990), this remedy has been tested in executive compensation. The empirical literature has shown that the provision of