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Golf Tournaments And Ceo Pay—Unraveling The Mysteries Of Executive Compensation

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  • John Martin

Abstract

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.

Suggested Citation

  • John Martin, 2001. "Golf Tournaments And Ceo Pay—Unraveling The Mysteries Of Executive Compensation," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(3), pages 22-34, September.
  • Handle: RePEc:bla:jacrfn:v:14:y:2001:i:3:p:22-34
    DOI: 10.1111/j.1745-6622.2001.tb00435.x
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    Cited by:

    1. Heather Tarbert & Kaihong Tee & Robert Watson, 2008. "The Legitimacy of Pay and Performance Comparisons: An Analysis of UK University Vice Chancellors Pay Awards," British Journal of Industrial Relations, London School of Economics, vol. 46(4), pages 771-805, December.
    2. Cornell, Bradford, 2004. "Compensation and recruiting: private universities versus private corporations," Journal of Corporate Finance, Elsevier, vol. 10(1), pages 37-52, January.
    3. Thomas A. Rhoads, 2007. "Labor Supply on the PGA TOUR," Journal of Sports Economics, , vol. 8(1), pages 83-98, February.

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