A trade-off between non-fundamental risk and incentives

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3 Citations (Scopus)

Abstract

This study conjectures that CEOs are rewarded more heavily for fundamental than for non-fundamental performance, and that the impact of non-fundamental risks is more negative than that of fundamental risks on pay-performance sensitivity. While the first conjecture stems from the controllability principle, the second conjecture is attributable to the interplay between the risk-incentive trade-off and delegation of responsibility to the agent. This study devised measures for fundamental and non-fundamental performance using an ARIMA-based unobserved-component approach. The two conjectures are strongly supported by this study's findings over a wide range of empirical specifications, indicating that the optimal level of pay-performance sensitivity depends not only on the degree, but also on the nature, of performance uncertainty.
Original languageEnglish
Pages (from-to)29-51
Number of pages23
JournalReview of Quantitative Finance and Accounting
Volume41
Issue number1
DOIs
Publication statusPublished - 1 Jul 2013

Keywords

  • CEO compensation
  • Fundamental risk
  • Non-fundamental risk
  • Performance decomposition

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

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