What is the relationship between executive pay and performance? This important question is posed and studied from a variety of perspectives and methods.
Many authors have questioned whether the pay–performance sensitivity is as strong as it should be.
If a strong correlation exists, then seemingly high levels of executive compensation may be justifiable.
Two central issues in the literature involve: ( 1) How to measure performance?
( 2) How to identify levels of performance that are acceptable?
Not surprisingly, empirical evidence on the correlation between executive pay and firm performance is generally mixed and inconclusive.
5 Researchers have pointed to the strong economy of the past decade which has further complicated management performance evaluation.
CEOs face diverse job tasks in unique business environments. The many challenges they encounter differ across industries and organizations.
Performance measurement is very difficult and it is not feasible to set a single standard. Yet questions about executive performance and how it is measured remain central in the debate.
Rappaport has suggested that there can often be “huge gains from options for below‐average performers.”6 Rappaport questions whether stock option compensation sets the “right level” of performance for managers.
7 He suggests that in many cases, boards of directors may not be setting the right levels of acceptable performance for executives. Another challenging question is whether or not a company’s stock price alone appropriately measures the performance of an individual business unit.
8 The question then arises how the link between pay and performance of managers of individual business units is measured and whether or not these executives are appropriately compensated.
