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Top Management Incentives and Corporate Performance

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  • Stephen O'Byrne
  • David Young

Abstract

There is little agreement about either the effect of executive compensation on corporate performance or the best way to measure the strength of executive incentives. With little guidance from academic research, managers and directors continue to rely heavily on the percentage of pay “at risk” as a proxy for incentive strength. Starting with the premise that managers, like investors, are motivated by prospective changes in their wealth, this article presents a measure of incentive strength called “wealth leverage” that reflects the sensitivity of an executive's company‐related wealth—total stock and option holdings plus the present value of expected future compensation, including future salary, bonus and stock compensation—to changes in shareholder wealth. After estimating top management's wealth leverage at 702 companies, the authors conclude that: 1) the median company has significant wealth leverage; 2) almost all corporate wealth leverage comes from their accumulated stock and option holdings, not from current compensation; and 3) companies with higher wealth leverage significantly outperform their industry competitors.

Suggested Citation

  • Stephen O'Byrne & David Young, 2005. "Top Management Incentives and Corporate Performance," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(4), pages 105-114, September.
    • Handle: RePEc:bla:jacrfn:v:17:y:2005:i:4:p:105-114
    DOI: 10.1111/j.1745-6622.2005.00064.x
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    Cited by:

    1. Shanshan Lyu & Mingzeng Yang & Qincheng Zhang, 2024. "Top Management Team Heterogeneity, Top Management Incentives, and ESG Performance: Evidence from Chinese Listed Companies," Sustainability, MDPI, vol. 16(18), pages 1-32, September.
    2. Michel Magnan, 2006. "Les options sur actions:création de richesse pour les actionnaires ou enrichissement des dirigeants au détriment des actionnaires?," Revue Finance Contrôle Stratégie, revues.org, vol. 9(3), pages 221-235, September.

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