YOU CAN PAY ME NOW AND YOU CAN PAY ME LATER - THE DYNAMIC-RESPONSE OF EXECUTIVE-COMPENSATION TO FIRM PERFORMANCE

Empirical studies estimating the impact of firm performance on executive pay have primarily concentrated on the short-run response, In this study, we present estimates of the complete dynamic response of CEO pay to firm performance. We find that (1) the cumulative response of pay to performance is roughly 10 times that of the contemporaneous response, (2) a onetime innovation in firm performance typically raises pay over the next 4-5 years, and (3) compensation arrangements have shifted toward greater performance sensitivity and longer-term pay arrangements over the 4 decades studied.