Growth Options, Incentives, and Pay-for-Performance: Theory and Evidence
Pay-performance sensitivity is a common proxy for the strength of incentives. We show that growth options create a wedge between expected-pay-effort sensitivity, which determines actual incentives, and pay-performance sensitivity, which is the ratio of expected-pay-effort to performance-effort sensitivity. An increase in growth option intensity can increase performance-effort sensitivity more than expected-pay-effort sensitivity so that as incentives increase, pay-performance sensitivity decreases. We document empirical evidence consistent with this finding. Pay-performance sensitivity, measured by dollar changes in manager wealth over dollar changes in firm value, decreases with proxies for growth option intensity and increases with proxies for growth option exercise.
|Keywords||Dynamic Contracting, Real Options, Pay-Performance Sensitivity.|
|JEL||Economics of Contract Law (jel D86), Intertemporal Firm Choice and Growth, Investment, or Financing (jel D92), Capital Budgeting; Investment Policy (jel G31), Financing Policy; Capital and Ownership Structure (jel G32), Personnel Management (jel M12)|
Gryglewicz, S, Hartman-Glaser, B., & Zheng, G. (2017). Growth Options, Incentives, and Pay-for-Performance: Theory and Evidence. Management Science, Accepted. Retrieved from http://hdl.handle.net/1765/116405