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To What Extend Does Executive Pay Influence Company Performance

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To what extend does executive pay influence company performance

Whether the executive pay influences the company performance or not? Or, can this high pay affect the decision of investors, motivate their employees and attract the brightest individuals to join? There is no universal answer towards this problem in the past few years. Some experts hold the opinion that the financial incentive is consistent with business performance, while some may argue that there is no relationship between them. This paper will discuss this problem and give some evidence below.

There is a prediction raised by Principle-agent theory that directors are more motivated while the performance-pay sensitivity increases (Kubo, 2005). However, after testing this prediction, the results do not support the hypothesis. Conversely, the study suggests that it is hard to improve performance in firms with high financial incentive measures. Moreover, it also points out that executives cannot be motivated by directors’ pay. Overall the results indicate that there is no consistence between financial incentive and business performance.

The connections between incentive pay and future stock performance can also reflect this problem, where incentive pay refers to restricted stock, options and other forms of long-term compensation. Cooper, Gulan and Rau (2009) examined whether the long-term performance of a company could be better if incentive pay is in such forms. The study shows that performance of the companies in the highest compensation decile worsens significantly over time. Overall, it is concluded that incentive compensation and stock performance documented in the research is inconsistent. Moreover, the results suggest that compensation components could not create higher future returns for shareholders.

But on the other side, some experts argue that high executive pay could help improve…...

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