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GOLF TOURNAMENTS AND CEO PAY—UNRAVELING THE MYSTERIES OF EXECUTIVE COMPENSATION
Author(s) -
Martin John
Publication year - 2001
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2001.tb00435.x
Subject(s) - executive compensation , shareholder , stock options , compensation (psychology) , tournament , accounting , stock (firearms) , business , corporate title , corporate governance , economics , financial economics , finance , mechanical engineering , psychology , mathematics , combinatorics , psychoanalysis , engineering
Leading financial economists and activist institutional investors have long argued that the proper alignment of manager and shareholder interests requires the use of performance based compensation. Partly in response to these pressures, and in combination with a change in the tax code that encourages performance‐based pay, corporate boards have dramatically increased their use of stock grants and executive stock options. Combine this development with the longest bull market in U.S. financial history, and the result is unprecedented levels of CEO pay at the close of the 20th century. This review of executive compensation reveals that the economic theory of tournaments may provide a rationale for the pattern, if not the level, of executive pay. Specifically it finds that the total compensation of the five highestpaid executives in a cross‐section of new and old‐economy firms is very similar to the pattern of payouts to players in a golf tournament. The author also reports that recent studies show a significant increase in the pay‐for‐performance correlation throughout the 1990s. But whether that correlation is as high as it should be, and whether current levels of CEO pay are socially “optimal,” are questions that remain unanswered.