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To What Extent Do You Think Executive Payment Influence Company's Performance

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To what extent does executive pay influence company performance?

Whether there is a relationship between the level of executive pay and company performance is a topic of great interest. The forms of executive pay can be both equity-based compensation which is based on the price of company’s stocks, like stocks and options, and non-equity-based compensation, such as cash compensation- including salary and bonus (Bebchuk & Fried, 2006 ). A company’s performance can be measured by its economic return, in other words, the accounting performance on financial statement (Gulen & Rau, 2009). This essay supports that executive pay may have no significant influence on company performance, because there are some ways that managers can decouple their payments from performance, and this essay will investigate these possible underlying reasons.

There are studies examine the relationship between the pay policy and performance, and the results do not support the hypothesis that there is significant link between payment and performance. Kubo (2005) examined this link by investigate a group of Japanese companies and the result showed that companies with high pay-performance sensitivity did not get better performance. Gulen and Rau’s (2009) study on incentive pay also suggested that managerial compensation components such as restricted stock, options and long-term incentive payouts, that are meant to align managerial interests with shareholder value, do not necessarily translate into higher future performance.

The reasons for this weak link may be quite complex and here are some possible explanations. By reaching contractual agreements, managers can completely decouple their payments from performance. A CEO may can use his reputation or influence to get higher payment through contract with the firm. In this way, the CEO’s payment is guaranteed, then, to some extent,…...

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