Agency Theory Revisited: CEO Returns and Shareholder Interest Alignment

Agency theory suggests that managerial mischief may occur when the interests of owners and managers diverge and that a solution to this agency problem is alignment of owner and agent interests through agent compensation and equity ownership. We develop the theoretical concept of CEO return and measure and estimate financial alignment as the relationship between CEO and shareholder returns. Our results, based on this new conceptualization and corresponding measurement, suggest stronger alignment than reported in previous work. The magnitude of this alignment is associated with subsequent firm performance, but in ways not clearly articulated or tested in prior research.

[1]  Anthony J. Nyberg,et al.  Retaining your high performers: moderators of the performance-job satisfaction-voluntary turnover relationship. , 2010, The Journal of applied psychology.

[2]  Ingrid Smithey Fulmer,et al.  6 Pay and Performance: Individuals, Groups, and Executives , 2009 .

[3]  Gerry McNamara,et al.  Moving Closer to the Action: Examining Compensation Design Effects on Strategic Risk , 2008, Organ. Sci..

[4]  Anthony J. Nyberg,et al.  Keeping Your Headcount When All About You Are Losing Theirs: Downsizing, Voluntary Turnover Rates, and The Moderating Role of HR Practices , 2008 .

[5]  Albert A. Cannella,et al.  Executive Compensation: A Multidisciplinary Review of Recent Developments , 2007 .

[6]  Catherine M. Dalton,et al.  1 The Fundamental Agency Problem and Its Mitigation: Independence, Equity, and the Market for Corporate Control , 2007 .

[7]  D. Hambrick,et al.  Swinging for the Fences: The Effects of Ceo Stock Options on Company Risk Taking and Performance , 2007 .

[8]  Jesper B. Sørensen,et al.  The interplay between theory and method , 2007 .

[9]  M. Alvesson,et al.  Constructing mystery: Empirical matters in theory development , 2007 .

[10]  M. Zollo,et al.  Interest alignment and competitive advantage , 2007 .

[11]  Cynthia E. Devers,et al.  The Effects of Endowment and Loss Aversion in Managerial Stock Option Valuation , 2007 .

[12]  Peer C. Fiss.  Social influence effects and managerial compensation evidence from Germany , 2006 .

[13]  Peter J. Lane,et al.  CEO incentives, innovation, and performance in technology‐intensive firms: a reconciliation of outcome and behavior‐based incentive schemes , 2006 .

[14]  Noam Wasserman,et al.  Stewards, Agents, and the Founder Discount: Executive Compensation in New Ventures , 2006 .

[15]  J. Porac,et al.  FORTHCOMING IN ACADEMY OF MANAGEMENT JOURNAL The Burden of Celebrity: The Impact of CEO Certification Contests on CEO Pay and Performance , 2006 .

[16]  Karen Pence.  The Role of Wealth Transformations: An Application to Estimating the Effect of Tax Incentives on Saving , 2006 .

[17]  M. Conyon.  Executive Compensation and Incentives , 2006 .

[18]  Joseph E. Coombs,et al.  Stakeholder management as a predictor of CEO compensation: main effects and interactions with financial performance , 2005 .

[19]  L. Bebchuk,et al.  Pay Without Performance: Overview of the Issues , 2005 .

[20]  W. Guay,et al.  Is U.S. CEO Compensation Inefficient Pay Without Performance? , 2005 .

[21]  Yaniv Grinstein,et al.  The Growth of Executive Pay , 2005 .

[22]  C. Halaby,et al.  Panel Models in Sociological Research: Theory into Practice , 2004 .

[23]  Albert A. Cannella,et al.  Giving Money to Get Money: How CEO Stock Options and CEO Equity Enhance IPO Valuations , 2003 .

[24]  Jeffrey M. Wooldridge,et al.  Solutions Manual and Supplementary Materials for Econometric Analysis of Cross Section and Panel Data , 2003 .

[25]  Barry Gerhart,et al.  Compensation: Theory, Evidence, and Strategic Implications , 2003 .

[26]  L. Gómez-Mejia,et al.  The Determinants of Executive Compensation in Family-Controlled Public Corporations , 2003 .

[27]  James G. Combs,et al.  Managerialist and Human Capital Explanations for Key Executive Pay Premiums: A Contingency Perspective , 2003 .

[28]  Dan R. Dalton,et al.  Meta-analyses of financial performance and equity: Fusion or confusion? , 2003 .

[29]  Timothy G. Pollock,et al.  The Role of Power and Politics in the Repricing of Executive Options , 2002 .

[30]  P. Boxall,et al.  Strategy and Human Resource Management , 2002 .

[31]  Luis R. Gomez-Mejia,et al.  The Fit Between CEO Compensation Design and Firm Risk , 2002 .

[32]  D. Kahneman,et al.  Heuristics and Biases: The Psychology of Intuitive Judgment , 2002 .

[33]  Mark Kroll,et al.  Acquisition Returns, Increase in Firm Size, and Chief Executive Officer Compensation: The Moderating Role of Monitoring , 2002 .

[34]  Mason A. Carpenter,et al.  Top management team compensation: The missing link between CEO pay and firm performance? , 2002 .

[35]  John E. Core,et al.  Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility , 2002 .

[36]  David F. Layton,et al.  Alternative Approaches for Modeling Concave Willingness to Pay Functions in Conjoint Valuation , 2001 .

[37]  Bruce R. Ellig,et al.  The Complete Guide to Executive Compensation , 2001 .

[38]  Brian K. Boyd,et al.  The strategic value of CEO external directorate networks: implications for CEO compensation , 2001 .

[39]  Simon Peck,et al.  Corporate tournaments and executive compensation: Evidence from the U.K , 2001 .

[40]  Mason A. Carpenter,et al.  Bundling Human Capital with Organizational Context: The Impact of International Assignment Experience on Multinational Firm Performance and CEO Pay , 2001 .

[41]  W. G. Sanders,et al.  Behavioral Responses of CEOs to Stock Ownership and Stock Option Pay , 2001 .

[42]  Andrew D. Henderson,et al.  Top Management Team Coordination Needs and the CEO Pay Gap: A Competitive Test of Economic and Behavioral Views , 2001 .

[43]  L. Gómez-Mejia,et al.  IS CEO PAY IN HIGH-TECHNOLOGY FIRMS RELATED TO INNOVATION? , 2000 .

[44]  Barry M. Staw,et al.  What Bandwagons Bring: Effects of Popular Management Techniques on Corporate Performance, Reputation, and CEO Pay , 2000 .

[45]  Henry L. Tosi,et al.  How Much Does Performance Matter? A Meta-Analysis of CEO Pay Studies , 2000 .

[46]  C. Carroll,et al.  Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets , 1999, Review of Economics and Statistics.

[47]  James D. Westphal.  Board Games: How CEOs Adapt to Increases in Structural Board Independence from Management , 1998 .

[48]  G. Milkovich,et al.  Relationships Among Risk, Incentive Pay, and Organizational Performance , 1998 .

[49]  Mason A. Carpenter,et al.  Internationalization and Firm Governance: The Roles of CEO Compensation, Top Team Composition, and Board Structure , 1998 .

[50]  Jeffrey B. Liebman,et al.  Are CEOS Really Paid Like Bureaucrats? , 1997 .

[51]  John E. Garen,et al.  Executive Compensation and Principal-Agent Theory , 1994, Journal of Political Economy.

[52]  Edward J. Zajac,et al.  The Costs and Benefits of Managerial Incentives and Monitoring in Large U.S. Corporations: When is More not Better? , 1994 .

[53]  Patricia M. Dechow.  Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals , 1994 .

[54]  Edward J. Zajac,et al.  Managerial Incentives, Monitoring, and Risk Bearing: A Study of Executive Compensation, Ownership, and Board Structure in Initial Public Offerings , 1994 .

[55]  James A. Ohlson,et al.  Aggregate accounting earnings can explain most of security returns: The case of long return intervals☆ , 1992 .

[56]  D. Schwab,et al.  Contextual Variables in Employee Performance-Turnover Relationships , 1991 .

[57]  James G. MacKinnon,et al.  Transforming the Dependent Variable in Regression Models , 1990 .

[58]  B. Wernerfelt,et al.  DETERMINANTS OF FIRM PERFORMANCE: THE RELATIVE IMPORTANCE OF ECONOMIC AND ORGANIZATIONAL FACTORS , 1989 .

[59]  David M. Fetterman,et al.  Ethnography: Step-by-Step , 1989 .

[60]  A. Leslie Robb,et al.  Alternative Transformations to Handle Extreme Values of the Dependent Variable , 1988 .

[61]  Kevin J. Murphy,et al.  Corporate performance and managerial remuneration: An empirical analysis , 1985 .

[62]  E. Fama,et al.  Agency Problems and Residual Claims , 1983, The Journal of Law and Economics.

[63]  E. Fama,et al.  Separation of Ownership and Control , 1983, The Journal of Law and Economics.

[64]  J. Hausman.  Specification tests in econometrics , 1978 .

[65]  S. Kerr.  On the folly of rewarding A, while hoping for B. , 1975 .

[66]  A. Tversky,et al.  Judgment under Uncertainty: Heuristics and Biases , 1974, Science.

[67]  F. Black,et al.  The Pricing of Options and Corporate Liabilities , 1973, Journal of Political Economy.

[68]  V. Vroom.  Work and motivation , 1964 .

[69]  T. Kuhn,et al.  The Structure of Scientific Revolutions. , 1964 .

[70]  Shorey Peterson,et al.  The Modern Corporation and Private Property. , 1933 .

[71]  M. C. Jensen,et al.  The economic nature of the firm: Theory of the firm: managerial behavior, agency costs, and ownership structure , 2009 .

[72]  Jeffrey M. Wooldridge,et al.  Introductory Econometrics: A Modern Approach , 1999 .

[73]  E. Fama.  The economic nature of the firm: Agency problems and the theory of the firm , 2009 .

[74]  Mark Kroll,et al.  Influences of top management team incentives on firm risk taking , 2007 .

[75]  M. Stabile.  Payroll Taxes and the Decision to be Self-Employed , 2004 .

[76]  Mason A. Carpenter,et al.  Micro-Level Opportunity Structures as Determinants of Non-Ceo Executive Pay , 2001 .

[77]  Kevin J. Murphy.  Chapter 38 Executive compensation , 1999 .

[78]  L. Gómez-Mejia,et al.  Reframing executive compensation: An assessment and outlook , 1997 .

[79]  Kevin J. Murphy,et al.  Performance Pay and Top Management Incentives , 1990 .

[80]  M. Bazerman.  Judgment in Managerial Decision Making , 1990 .

[81]  K. Eisenhardt.  Agency Theory: An Assessment and Review , 1989 .

[82]  Bengt Holmstrom,et al.  Moral Hazard and Observability , 1979 .