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Organization capital and executive performance incentives

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  • Gao, Mingze
  • Leung, Henry
  • Qiu, Buhui

Abstract

We conjecture that a firm's organization capital (OC) has a substitution effect on its executive pay-for-performance sensitivity (PPS) and empirically document a robust and significant substitution effect of OC on executive PPS. We use state-level unemployment insurance benefits as an instrumental variable for OC and show that the documented OC-PPS substitution effect is likely causal. Results are also robust to a stacked difference-in-differences estimation approach based on a quasi-natural experiment of exogenous CEO turnovers due to health-related issues. Our findings strongly suggest that greater OC substitutes for costly executive incentive compensation to sustain firm productivity and increase shareholder wealth.

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  • Gao, Mingze & Leung, Henry & Qiu, Buhui, 2021. "Organization capital and executive performance incentives," Journal of Banking & Finance, Elsevier, vol. 123(C).
    • Handle: RePEc:eee:jbfina:v:123:y:2021:i:c:s0378426620302788
    DOI: 10.1016/j.jbankfin.2020.106017
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    More about this item

    Keywords

    Organization capital; Executive pay-for-performance sensitivity;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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