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The Dependence of Pay-Performance Sensitivity on the Size of the Firm

Scott Schaefer
The Review of Economics and Statistics
Vol. 80, No. 3 (Aug., 1998), pp. 436-443
Published by: The MIT Press
Stable URL: http://www.jstor.org/stable/2646752
Page Count: 8
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The Dependence of Pay-Performance Sensitivity on the Size of the Firm
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Abstract

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

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