Data

Scaled Wealth-Performance Sensitivity

This is the dollar change in CEO wealth for a 100 percentage point change in firm value, divided by annual flow compensation. The key advantage of this incentive measure is that, empirically, it is independent of firm size, and thus comparable across firms and over time. Theoretically, it is generated by a model where effort has a multiplicative effort on both firm value and CEO utility.

For further details, please see Edmans, Alex, Xavier Gabaix and Augustin Landier (2009): A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium (Review of Financial Studies, forthcoming)

• Section 1 shows how such a measure is theoretically generated by a multiplicative model of CEO effort. Equation (15) defines the measure.
• Section 2 and Table 2 shows that, empirically, the measure is independent of firm size
• Appendix B describes the variable construction in detail. Our estimation of the deltas of previously-granted options is based on the methodology in Core, John and Wayne Guay (2002): Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility (Journal of Accounting Research, 40, 613-630), plus a few minor modifications / additional assumptions.

Home   |  Research  |  Data  |  Teaching  |  CV