THE QUARTERLY JOURNAL OF ECONOMICS - Harvard · PDF fileTHE QUARTERLY JOURNAL OF ECONOMICS ... Murphy, David Scharfstein, ... are presented in Hall and Liebman {1997}

THE

QUARTERLY JOURNALOF ECONOMICS

Vol CXIII Issue 3August 1998

ARE CEOS REALLY PAID LIKE BUREAUCRATS

BRIAN J HALL AND JEFFREY B LIEBMAN

A common view is that there is little correlation between rm performanceand CEO pay Using a new fteen-year panel data set of CEOs in the largestpublicly traded U S companies we document a strong relationship between rmperformance and CEO compensation This relationship is generated almostentirely by changes in the value of CEO holdings of stock and stock options Inaddition we show that both the level of CEO compensation and the sensitivity ofcompensation to rm performance have risen dramatically since 1980 largelybecause of increases in stock option grants

I INTRODUCTION

A common view of CEO compensation is that CEOs are paidlike bureaucrats There is said to be a weak link between theperformance of large public companies and the compensation oftheir CEOs For example Jensen and Murphy 1990a argue thatin lsquolsquomost publicly held companies the compensation of top execu-tives is virtually independent of performance on averagecorporate America pays its most important leaders like bureau-cratsrsquorsquo Jensen and Murphyrsquos 1990b argument is based on theirwidely cited nding that on average CEOs receive only $325 for

We thank George Baker Martin Feldstein Claudia Goldin Kevin HallockOliver Hart Lawrence Katz Daniel Leach Sendhil Mullainathan Kevin JMurphy David Scharfstein Andrei Shleifer Karen Wruck two anonymousreferees and seminar participants at the University of California at Berkeley theUniversity of Chicago Harvard University the University of Michigan Massachu-setts Institute of Technology Stanford University and the National Bureau ofEconomic Research for helpful discussions We thank Matthew Fleming JeffreyGell Alyssa Glass Thomas Gunderson Alan Leo Mark Paltrowitz and SeanPeirce for excellent data collection and research assistance This paper is part ofNBERrsquos project on Industrial Technology and Productivity sponsored by the SloanFoundation We are grateful to the NBER for nancial support and to DavidYermack and Andrei Shleifer for providing portions of the data

r 1998 by the President and Fellows of Harvard College and the Massachusetts Institute ofTechnologyThe Quarterly Journal of Economics August 1998

every $1000 increase in shareholder wealth Rosen 1992 surveysthe large empirical literature on CEO compensation and con-cludes that lsquolsquoevidence from several independent studies andsamples leaves us fairly secure that the effect of stock returns onlog compensation is in the 010ndash015 rangersquorsquo An elasticity of 010implies that a CEO whose work produced annual rates of return of20 percent would be paid only 1 percent more than a CEO whosework produced annual rates of return of 10 percent1

The design of performance incentives for managers in largecompanies is an enormously important issue Aligning the incen-tives of executives with those of owners is the most direct way tomitigate the agency problem If there is no meaningful link betweenCEO pay and company performance it is doubtful that the trillions ofdollars of assets in public corporations are being managed efficientlyAs Jensen and Murphy 1990a argue if CEOs are paid like bureau-crats lsquolsquois it any wonder then that so many CEOs act like bureaucratsrather than the value-maximizing entrepreneurs companies needto enhance their standing in world marketsrsquorsquo

In this paper we argue that CEOs are not paid like bureau-crats We use a new fteen-year panel data set of CEOs in thelargest publicly traded U S rms Because our data containdetailed information on CEO holdings of stock and stock optionswe are able to produce precise and comprehensive measures of therelationship betweenrm performanceand CEO pay and to documentthe large increase in CEO holdings of stock and stock options thatoccurred between 1980 and 1994 In measuring the responsive-ness of pay to performance we focus on a broad measure of compensa-tion which includes changes in the value of stock and stock options2We report a variety of measures of the relationship between payand performance and nd a strong link between the fortunes of CEOsand the fortunes of the companies they manage We nd thatvirtually all of the pay to performance sensitivity is attributableto changes in the value of CEO holdings of stock and stock options

Our main empirical nding is that CEO wealth often changesby millions of dollars for typical changes in rm value Forexample the median total compensation for CEOs is about $1million if their rmrsquos stock has a thirtieth percentile annual

1 The view that there is little correlation between rm performance and CEOpay is often echoed in the popular press and by CEO compensation critics such asCrystal 1992

2 Jensen and Murphy 1990b also use a broad measure of CEO compensa-tion We discuss why our conclusions differ from theirs shortly

QUARTERLY JOURNAL OF ECONOMICS654

return (2 70 percent) and is $5 million if the rmrsquos stock has aseventieth percentile annual return (205 percent) Thus there isa difference of about $4 million dollars in compensation forachieving a moderately above average performance relative to amoderately below average performance The difference in compen-sation between a tenth percentile rm performance and a nineti-eth percentile performance is more than $9 million3

In addition we show that both the level of CEO compensationand the responsiveness of CEO compensation to rm performancehave risen dramatically over the past fteen years Between 1980and 1994 the direct compensation (salary bonus and the value ofannual stock option grants) of CEOs increased by 136 percent atthe median and 209 percent at the mean in real terms Moreoverbecause most of this pay increase was in the form of stock optionsthe relationship between CEO pay and rm performance hasincreased substantially As one example the median elasticity ofCEO compensation with respect to rm market value more thantripled from 12 to 39 between 1980 and 1994 This totalcompensation elasticity for 1994 is about 30 times larger thanpreviously reported salary and bonus elasticities which ignoresensitivity generated by stock and stock option revaluation

It is worth stating from the outset why our results differ fromprevious ndings With regard to the large literature that indi-cates that salary and bonus elasticities are small our ndingsdiffer simply because previous estimates ignored changes in thevalue of stock and stock options which account for virtually all ofthe sensitivity Indeed for a given change in rm value we ndthat changes in CEO wealth due to stock and stock optionrevaluations are more than 50 times larger than wealth increasesdue to salary and bonus changes

Our conclusion differs from that of Jensen and Murphyrsquos fortwo reasons First Jensen and Murphyrsquos estimates of the relation-ship between pay and performance rely on data from a period(1969ndash1983) that predates the explosion in stock option issuancethat occurred during the 1980s and 1990s4 Indeed the increase in

3 Estimates using mean changes in compensation are many times largerBut as we will argue later these are misleading since they are heavily inuencedby outliers Thus throughout the paper we focus on medians

4 Although their data predate the explosion in stock options they nd thatthe vast majority of sensitivity is the result of CEO stock holdings Our 1980estimate of the total change in CEO wealth for a $1000 change in rm value is$311 (when we adjust our number in a few minor ways to make it comparable totheirs) which is very close to their estimate of $325

ARE CEOS PAID LIKE BUREAUCRATS 655

pay to performance sensitivity during the last fteen years isconsistent with the prescription called for by Jensen and Murphy

Second Jensen and Murphy focus exclusively on how CEOwealth varies relative to changes in rm value Although animportant measure the Jensen and Murphy statistic in isolationcan present a misleading picture of pay to performance relation-ships because the denominatormdashthe change in rm valuemdashis solarge A several million dollar change in CEO wealth appears verysmall when divided by the annual change in the market value of aFortune 500 company and rm size matters a lot in interpretingtheir measure of pay to performance sensitivity

The main goal of this paper is to provide a broader perspectiveon the relationship between CEO pay and rm performance Thus inaddition to the Jensen and Murphy statistic we report a variety ofother pay to performance measures We show that CEO pay varies bymillions of dollars in response to typical changes in rm performanceHowever we do not argue that current CEO contracts are efficientSuch a statement would require us to make strong assumptions aboutmany parameter values that are not easily measured Indeed ourndings suggest that there are some potentially serious aws in thecontracts of CEOs We do however believe that our results contradicthe claim that there is little or no link between rm performanceand CEO pay By extension our ndings also contradict the claimthat current contracts are necessarily inefficient simply becausepay to performance sensitivities are too low

II MOTIVATING CEOS

One of the key challenges of effective corporate governance issolving the agency problem Jensen and Meckling 1976 CEOshave goals that often conict with the interests of shareholdersThe most direct solution to this agency problem is to align theincentives of executives with the interests of shareholders by granting(orselling) stock and stock options to the CEOs For risk-neutralCEOsthe optimal contract is a one-to-one correspondence between rmvalue and CEO pay This contract essentiallysells the rm to the CEOWith a lsquolsquosharing ratersquorsquo of one CEOs have the correct incentives onevery margin including effort perquisites and project choice5

5 This argument applies to all workers in the rm To completely eliminatethe agency problem a rm must design compensation packages so that thecompensation of every worker with decision-making power varies dollar-for-dollarwith changes in rm value


While a one-to-one benchmark may be reasonable for smallrms it is not appropriate for the large publicly traded compa-nies we are studying There are two main reasons for this Firstmost CEOs simply do not have enough wealth to purchase all oreven a substantial fraction of the largest companies The mediansize of the companies in our sample for 1994 is $22 billion and themean is $46 billion Even if the typical CEO had $20 million inwealthmdashwhich is almost fourteen times annual total compensa-tion at the medianmdashthe CEO could purchase only about 09percent of the rm This represents a substantial lsquolsquonancingconstraintrsquorsquo For the largest public corporations a reasonableupper bound for the amount of stock that typical CEOs couldpurchase is 1 percent which implies a sharing rate that is twoorders of magnitude below the one-to-one relationship that issometimes used as a benchmark6

The second reason why the one-to-one benchmark is not reason-able for very large rms is CEO risk aversion Garen 1994 Haubrich1994 The optimal contract represents a trade-off between incentivesand risk-sharing Fama and Jensen 1983 If a very high sharing rateinduces large swings in CEO pay CEOs will need to be rewarded fortaking such risks Since typical changes in rm value are so large inthe largest publicly traded companiesmdashthe median standard devia-tion of annual changes in rm value in our sample is 32 percent orabout $700 million (many of the largest rms have annual standarddeviations in the billions)mdashpaying CEOs to accept such variations inpay would be prohibitively costly7 Perhaps more importantlyCEO risk aversion coupled with even moderately high sharingrates in large companies will cause CEOs to avoid some high-riskpositive NPV projects that are optimal from the perspective ofdiversied shareholders Because risk-averse CEOs will priceidiosyncratic risk high sharing rates coupled with large annualswings in rm value will substantially distort CEO incentives8

6 This nancing constraint implies an upper bound on the Jensen andMurphy statistic of a $10 increase in CEO wealth per $1000 increase in rm value

7 To further explore this issue we conducted simulations using a powerutility function and various estimates of risk aversion The analysis and resultsare presented in Hall and Liebman 1997 Under reasonable assumptionsregarding risk aversion putting nearly all of a CEOrsquos wealth in company stocksubstantially reduces the CEOrsquos utility

8 As a simple example suppose that the CEO of a $10 billion company isdeciding on a project that will raise rm value in expectation by $500 millionProject success (increasing rm value by $15 billion)and failure (decreasing valueby $05 billion) are equally likely A risk-averse CEO with a sharing rate of onewould almost certainly reject such a project A much smaller sharing rate say 001would therefore improve incentives


This analysis suggests that measuring the sharing rate b inisolation gives an incomplete picture of the optimality of CEOincentive contracts The importance of nancing constraints andCEO risk aversion is directly related to dollar changes in CEOwealth which equal b D V where D V is dened to be the change inrm value

Small sharing rates (b) in very large companies are the resultof the infeasibility (due to nancing constraints) and nonoptimal-ity (because of risk aversion) of having CEO wealth vary one forone with changes in rm value However the resulting largeswings in CEO wealth (b D V ) for typical changes in rm value willoften lead CEOs to make correct decisions especially with regardto large discrete projects or major strategic goals For exampleconsider two projects with differing expected payoffs and privatebenets Project A has expected returns that are $350 millionmore than the expected returns of project B but project B yieldsprivate benets that the CEO values at $1 million In this casethe CEO needs to be paid only $1 million more (plus a dollar) forchoosing project A In this case even if the CEO receives only$325 per $1000 of added market value the CEO will choose thecorrect project

This is only one example For many other decisions a smallsharing rate will not be sufficient to induce value-maximizingdecisions with a sharing rate of 001 a CEO can purchase acorporate jet at a 99 percent discount (absent effective monitor-ing) But the example illustrates the importance of measuringdollar changes in CEO wealth that occur in response to typicalchanges in rm value It is these changes in wealth that need to becompared with the value of empire building and other privatebenets to determine whether compensation-based incentives aresufficient to produce value-maximizing behavior by the CEO Theexample also demonstrates that because changes in rm marketvalue are often extremely large even small sharing rates lead tovery large dollar rewards and punishments for CEOs

III DATA DESCRIPTION AND MEANS

Our data set covers the years from 1980 to 1994 andcombines CEO compensation information from corporate proxiesand 10-K lings with stock price and stock return informationfrom CRSP and with accounting data from Compustat In addi-


tion some compensation data from the 1970s were collected inorder to construct measures of the value of stock options held byCEOs in the rst years of the sample The data for the 1984 to1991 period were provided to us by David Yermack and these dataare described in Yermack 1995 We randomly selected half ofYermackrsquos 792 companies and extended his sample up to 1994 andback to 1980 Our data set consists of information on 478companies for the period 1980 to 19949

The Yermack rms are essentially the largest publicly tradedcompanies in the United States Each year Forbes creates fourlists of the largest U S companies ranked on the basis of salesprots assets and market value In order to be in the sample arm must be included in one of the four Forbes 500 lists at leastfour times between 1984 and 1991 In order to have a sample ofrms that is representative of large rms at the end of our samplewe added 50 percent of the rms that met the large-rm require-ment since 1991 (40 additional rms)10 If a rm qualies the rmis in the sample in all years during which it was publicly tradedeven if the rm did not make any of the lists for that year In somecases when the data from the proxy statements and 10-K formswere vague or incomplete data were collected from rmsrsquo AnnualReports Forbes magazinersquos annual CEO surveys press reports ordirect correspondence with the companies

Most of the CEO literature uses the compensation dataprovided by the Forbes survey The main problem with the Forbesdata set is that it has limited information on stock and stockoption awards The information reported on stock options includesonly the value of stock options exercised during the year whichreects past not current compensation In contrast our proxydata include detailed information on the amount of stock optionsgranted during the year as well as the exercise prices anddurations of the options Although there are a few exceptions we

9 Not all rms are present in every year and some rms split into more thanone rm After splits we treat the new rms as two additional rms in the data set

10 Because rms must have existed during four years in the 1984ndash1994period to be in our sample our sample does not include large rms from the early1980s that had shrunk or gone out of business by the mid-1980s The medianannual growth rate between 1980 and 1984 of rms in our sample was approxi-mately 20 percent about 4 percent a year greater than the growth rate of the SampP500 To the extent that this produces a bias it will understate the increases insensitivity between 1980 and 1994 to the extent that the poor-performing rmsthat are underrepresented in our sample are also low sensitivity rms


nd that the vast majority of options are issued at-the-money witha ten-year duration The options then become vested over timeFor example a typical option grant becomes vested 25 percent peryear over four years

We use the details about option grants and the Black-Scholesformula in order to value stock option grants and holdings Thedistinguishing feature of our data set is that with our panel ofyearly proxy data on option grants option gains and total optionsheld we are able to calculate the value of all stock options held bythe CEO at a given point of time More importantly since we havethe details about the stock options held (number exercise pricetime to maturity etc) we can precisely calculate the change in thevalue of a CEOrsquos stock option holdings for a given change in rmvalue The methodology for making these calculations is describedin Appendix 1

Some summary statistics for our data for scal year 1994 arepresented in Table I The median CEO in our sample is 58 yearsold has held the job of CEO for 6 years and has been employed by

TABLE IDATA SUMMARY STATISTICS (1994)

Variable Mean MedianStandarddeviation Minimum Maximum

Age of CEO 576 580 66 360 820Years as CEO 84 60 73 10 380Years employed

by company 220 220 133 10 590Founder of com-

pany(dummy) 009 0 029 0 1

Percent of rmstock ownedby CEO 215 014 665 0 53

Salary andbonus $1292290 $1050000 $1163920 $52000 $16000000

Value of optiongrants $1213180 $ 324989 $2874280 $ 0 $28849350

Value ofrestrictedstock grants $ 201736 $ 0 $ 757127 $ 0 $ 9737770

Other compen-sation $ 319014 $ 69000 $ 961007 $ 0 $11154000

n 5 368 Summary statistics are for the last year of 1980ndash1994 panel data set


the company for 22 years Nine percent of the CEOs in our samplefounded their companies The mean (median) CEO owned 22percent (014 percent) of the rmrsquos stock The mean (median) CEOreceived $13 million ($11 million) in salary and bonus stockoptions worth $12 million ($325000) restricted stock worth$202000 ($0) and other compensation totaling $319000 ($69000)

IV TRENDS IN CEO COMPENSATION

In this section we document how CEO compensation hasincreased over time and relative to the compensation of otherworkers11 Tables IIa and IIb report the means and medians of

11 The increase in CEO compensation and stock option grants in particularhas been widely reported in the business press in annual compensation surveysand by Crystal 1992 Murphy 1998 provides a comprehensive survey of trendsin CEO compensation

TABLE IIaMEAN CEO COMPENSATION (1994 DOLLARS)

YearMean salaryand bonus

Mean valueof stock

option grantsMean direct

compensationaMean total

wealth increaseb

1980 654935 155037 809973 54933121981 676912 211014 887926 20323431982 675441 235571 911011 44811891983 732029 266388 998417 103837671984 770878 258402 1029280 18523281985 830365 431333 1261698 81228151986 931056 375738 1306793 104399321987 960839 543886 1504725 39649991988 1057791 530653 1588444 37821511989 1062148 574162 1636309 133571331990 1005860 751477 1757336 9075671991 994470 780604 1775074 175461811992 1061370 959791 2021161 148528451993 1175870 891843 2067715 127745611994 1292290 1213180 2505469 9168990 Change

1980ndash1994 973 6825 2093 mdash

Annual sample sizes vary from 365 to 432a Direct compensation is salary and bonus plus value of stock option grantsb Total wealth increase is the increase in the value of the CEOrsquos holdings of rm stock and stock options

plus direct compensation The increase in the value of stock and stock option holdings is calculated using eachrmrsquos actual stock market returns during the rmrsquos scal year


CEO compensation from 1980 to 1994 in real 1994 dollars12

Column 1 of each table shows that mean salary and bonus hasrisen by 97 percent over the past fteen years from $655000 to$13 million and median salary and bonus has risen by 85percent The rise in the value of stock option grants has been evenmore dramatic Between 1980 and 1994 the mean value of stockoption grants rose by 683 percent from $155000 to $12 millionThe median value of stock option grants rose from $0 to $325000The sum of all direct compensation rose by 209 percent at themean and 136 percent at the median13

12 Throughout the paper we use the consumer price index to adjust forination Our choice of a deator does not matter much since the CPI and thepersonal consumption expenditure deator both grew at a annualized rate of 427percent from 1980 to 1994

13 Note that the direct compensation measure used in this table excludescomponents of compensation such as restricted stock grants and other compensa-tion for which it is impossible to construct consistent time seriesAs Table I showsthese other components are small relative to the included ones

TABLE IIbMEDIAN CEO COMPENSATION (1994 DOLLARS)

YearMedian salary

and bonus

Median valueof stock

option grantsMedian directcompensationa

Median totalwealth increaseb

1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash




The fourth column of each table shows the broader measure ofCEO compensation the total increase in wealth which includesall direct compensation plus changes in the value of stock andstock option holdings Changes in total wealth are quite volatilereecting the large variation in year-to-year returns in the stockmarket Nevertheless the same basic pattern emerges Changesin total wealth in the early 1980s are generally much smaller thanthose in the late 1980s and 1990s

The remarkable growth in stock option awards can be seen inFigure I The percentage of CEOs receiving stock option awardsduring the year increased from 30 percent in 1980 to nearly 70percent in 1994 Likewise the percentage of CEOs holding anystock options (including past grants) increased from 57 percent toabout 87 percent over the same period The increase in stockoption awards explains much of the increase in CEO pay over thepast fteen years and will be shown later to be the main factorresponsible for the large increase in pay to performance sensitivi-ties that we nd

Table III documents the real growth of CEO compensationover time relative to the growth of pay of other workers Between1982 and 1994 mean CEO pay increased by 175 percent or about88 percent per year The median growth rates are 120 percentand 68 percent respectively The third row shows the growth rateof total compensation for all wage and salary workers based onthe Employment Cost Index As is well-known average compensa-tion for all workers was almost at during this period rising by06 percent a year from $30400 to $32600 Our proxy forbureaucrats is state and local government workers excludingteachers Their total compensation has grown slowly as well at arate of 09 percent a year Professors have also seen little growthin their real compensation during this period

The sixth row of Table IV contains a measure of the increasein incomes of the very rich14 The incomes of individuals at the topone-half of 1 percent of the income distribution increased by about55 percent during the period far more than the growth rate ofaverage workers but only one-third as high as the mean CEOcompensation growth rate The next two rows include compensa-tion data on two groups of superstars Major League Baseball

14 Specically this is the income level that excludes the top 05 percent ofadjusted gross income earners as reported on tax returns See Feenberg andPoterba 1993 who report this lsquolsquohigh income thresholdrsquorsquo up to 1990 We thankDaniel Feenberg for updating these numbers for us


FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)


(MLB) players and National Basketball Association (NBA) play-ers which have had remarkable compensation growth of 207percent and 379 percent respectively However these very highgrowth rates in sports leagues are distorted by complicatedchanges in rules governing free agency and salary caps

In the last two rows we show how the total wealth increase ofCEOs (including increases in the value of stock and stock optionholdings) has increased during this period Because the endpointvalues of this time series are driven by the overall market returnduring the particular years we have standardized the compensa-tion levels by assuming that all rms (in both years) had an

TABLE IIICOMPENSATION GROWTH CEOS RELATIVE TO OTHER WORKERS (1994 DOLLARS)a

Group 1982 1994 Change1982ndash1994

Annualized change

1982ndash1994

CEO direct compensation (meanvalues)b $ 911011 $2505469 1750 88

CEO direct compensation(median values)b $ 669588 $1472202 1199 68

All workersc $ 30400 $ 32600 72 06State and local government

(excluding education)c mdash mdash 119 09Professorsd $ 40700 $ 47900 177 14Top 05 of AGIe $ 180900 $ 281100 554 37MLB playersf $ 376300 $1154500 2068 98NBA playersf $ 325600 $1558000 3785 139CEO total wealth increase

assuming median perfor-mance (mean values)g $1904056 $7039669 2697 115

CEO total wealth increaseassuming median perfor-mance (median values)g $1030428 $2476637 1404 76

a Comparisons are between 1982 and 1994 because the employment cost index is not available before1982 The data are converted to real dollars using the CPI

b CEO direct compensation is salary and bonus plus the value of stock option grantsc All workers and state and local government are total compensation from the employment cost index

Bureau of Labor Statistics Compensation levels for all workers are calculated by dividing NIPA totalcompensation of all employees by the total number of employees in the economy

d Professors is total salary (Source ACADEME MarchndashApril 1996e Top 05 of AGI is the cutoff point for being in the top 05 of AGI (an updated version of the series in

Feenberg and Poterba 1993)f MLB and NBA Players are mean salaries and were provided to us by NBA and MLB Commissionerrsquos

Officesg CEO total wealth increase assuming median performance is the increase in wealth from holdings of

rm stock plus increase in wealth from holdings of stock options plus direct compensation assuming that everyrm in the sample had a 59 percent increase in market value


TABLE IVRESPONSIVENESS OF SALARY AND BONUS AND OPTION GRANTS

TO FIRM PERFORMANCE

Independentvariable

Dependent variable

ln (salary and bonus) ln (direct compensation)

1 2 3 4 5 6

Firm return in cur-rent year

01630(00116)

01887(00132)

02799(00224)

03230(00254)

Firm return in pre-vious year

00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)

SampP 500 return incurrent year

2 01884(00342)

2 03059(00710)

SampP 500 return inprevious year

00182(00341)

00413(00710)

Firm return in cur-rent year 3(80 year 86)

01214(00222)

02189(00342)


02278(00164)

03896(00363)

Firm return in pre-vious year 3(80 year 86)

00471(00166)

00271(00254)


00444(00144)

2 00790(00374)

SampP 500 return incurrentyear 3 (80 year 86)

2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)

SampP 500 return inpreviousyear 3 (80 year 86)

2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)

Number of obser-vations

5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005

The numbers in parentheses are Huber-White robust standard errors that allow for correlation in theerrors among observations for each CEO Rates of return are calculated as changes in rm market value overthe rmrsquos scal year SampP 500 returns also correspond to each rmrsquos scal year Direct compensation is salaryand bonus plus value of stock option grants but does not include revaluations


increase in rm value of 59 percent (the median annual change inmarket value of the largest 500 rms between 1970 and 1995)during the year Using this normalization the broad measure ofCEO compensation increased by 270 percent at the mean and 140percent at the median

In sum our data conrm the general impression that CEOshave enjoyed large gains in compensation both in absolute termsand relative to most other highly paid groups Periods of largeincreases in CEO pay relative to other workers have not beencommon historically Jensen and Murphy 1990b report that thelevel of CEO pay actually decreased in real terms between the1934ndash1938 and the 1974ndash1986 periods We are aware of only oneother period in history with increases in CEO wealth that weresimilar to those in the 1980s and 1990s Lewellen 1968 showsthat between 1945 and 1955 CEO wealth increased by 133percent while average earnings of production workers rose byonly 78 percent These wealth increases in the immediate postwarperiod were largely due to the introduction of stock option plans15

V MEASURES OF THE RELATIONSHIP BETWEEN CEO PAY

AND FIRM PERFORMANCE

In Section II we discussed how single measures of the pay toperformance relation can be misleading when taken in isolationIn this section we therefore present a variety of measures of therelationship between CEO compensation and rm performanceOur emphasis is on how the stock and stock option holdings ofCEOs affect this relationship since as we will show performance-related changes in the value of stock and stock option holdings aremuch larger than changes in components of direct pay

We report four basic measures of the relationship betweenCEO pay and rm performance The rst two show how CEOwealth changes for lsquolsquotypicalrsquorsquo changes in rm performance whichwe dene as moving from ftieth percentile performance toseventieth percentile performance We present dollar changes inCEO wealth from such performance improvements as well aspercent increases in CEO compensation in response to suchperformance Our third measure is an elasticitymdashthe percentage

15 Lewellenrsquos wealth measure smoothes ex post gains from stock optionholdings Lewellen shows that over the longer 1940 to 1963 period CEOcompensation actually fell by 25 percent while real earnings of production workersincreased by 62 percent


increase in CEO compensation for a 1 percent increase in rmvalue Since virtually all previous studies of the pay to perfor-mance relationship report salary and bonus elasticities we esti-mate the total compensation elasticity to highlight the fact thatincluding stock and stock option revaluations increases compensa-tion elasticities by a factor of about 30 Finally our fourthmeasure is the Jensen and Murphy statisticmdashthe dollar change inCEO wealth per $1000 change in rm market value

A Salary and Bonus Sensitivity

We begin by exploring the relationship between salary andbonus and rm performance A large number of authors havelimited their measure of CEO compensation to salary and bonusThese studies typically nd that the elasticity of CEO compensa-tion with respect to changes in rm value is quite small in therange of 010 to 01516 Although we nd that this elasticity hasapproximately doubled since the early 1980s we basically corrobo-rate earlier ndings that salary and bonus elasticities are small

In order to calculate salary and bonus elasticities the logdifference of salary and bonus is regressed on the percentagechange in rm value during the rmrsquos scal year17 The bonus partof pay is usually determined at the end of the scal year andtypically reects performance during the year In contrast sala-ries are typically set at the beginning of the scal year andtherefore respond to performance from the previous year Toaccount for both of these components of pay our regressionsinclude the rmrsquos rate of return during both the current scal yearand the previous scal year In addition following Gibbons andMurphy 1990 and Antle and Smith 1986 we investigatewhether there is a relative component of CEO pay Therefore weadd current and lagged values of the return to the SampP 500 as

16 A sampling of examples include Murphy 1985 1986 Coughlin andSchmidt 1985 Gibbons and Murphy 1990 Barro and Barro 1990 JoskowRose and Shepard 1993 and Kaplan 1994

17 We run OLS regressions to retain comparability with previous estimatesof these elasticities We have also run median regressions as well as robustregressions (using the STATA version 5 rreg command Hamilton 1991) Themedian regressions and robust regressions give results that are quite similar toeach other and produce elasticities that are generally 20 to 30 percent smaller(closer to zero) than the results presented in Table IV We have also investigatedspecications in which the change in salary and bonus is regressed on the changein rm market value These Jensen and Murphy statistic regressions are moresensitive to outliers We nd estimates of the increase in salary and bonus for a$1000 increase in rm market value that vary from 11 cents to 42 cents dependingon the regression technique used


independent variables We regress

(1) ln (SBti SBt2 1i) 5 b 1 g 1rti 1 g 2rt 2 1i 1 u 1rtiSP500

1 u 2rt2 1iSP500 1 e ti

where SBt and SBt-1 are the salary and bonus received by the CEOduring the current and previous scal years rt and rt-1 are thermrsquos rates of return during the current and previous scal yearand rt

SP 500 and rt2 1SP 500 are the SampP 500 rate of return during the

current and previous scal year of the rm The results are shownin the rst two columns of Table IV The rst column shows thatthe elasticity of salary and bonus with respect to changes in rmvalue is about 016 which is similar to previous estimates Thelagged value is smaller at about 006 suggesting that the salarycomponent of compensation has a weaker link to performancethan the bonus component

The second column shows that there is an operational relativepay component Salary and bonus responds negatively to changes inthe market as a whole as indicated by the coefficient of 2 019 on thecontemporaneous market return Although the overall evidence onlsquolsquoRelative Performance Evaluationrsquorsquo has been mixed our ndings areconsistent with those of Gibbons and Murphy 1990 who nd thatCEOs are paid in part on the basis of relative performance18

We also tested to see whether sensitivity has risen over timeby interacting each of these variables with time dummies for theearly 1980s (1980ndash1986) and the more recent period (1987ndash1994)The coefficients are larger for the later period suggesting thatsensitivity has increased since the early 1980s For example thesalary and bonus elasticity with respect to contemporaneousreturns has approximately doubled from 012 to 02319

This analysis is repeated in the next three columns withdirect compensation (salary and bonus plus stock option grantsbut not the revaluation of stock and stock option holdings)substituted for salary and bonus20 The estimates although a bit

18 Gibbons and Murphy 1990 nd evidence supporting relative perfor-mance evaluation Antle and Smith 1986 nd only weak evidence of RPE andBarro and Barro 1990 nd no evidence of RPE Rosen 1992 surveys thisliterature

19 Gibbons and Murphy 1992 and Joskow Rose and Shepard 1993 alsond an increase in the salary and bonus elasticity over time

20 Stock options grants are the dollar value of stock options given during theyear valued with the Black-Scholes formula This should not be confused with thechange in the value of the CEOrsquos existing stock option holdings which (along withchanges in the value of stock holdings) is the main source of the large elasticitiesestimated later in this paper


larger are similar The sensitivity comes mostly from contempora-neous performance suggesting that bonuses and end-of-yearstock option grants are the driving forces behind the pay toperformance relationship There is some evidence of relative payand again sensitivity seems to have risen since the early 1980s

The key implication of these results is that the pay toperformance sensitivity from direct compensation is tiny incomparison to the sensitivity generated by holdings of stock andstock options For example the 022 elasticity of salary and bonus(adding the coefficients on contemporaneous and lagged perfor-mance) implies that a 10 percent increase in rm performance willincrease salary and bonus by 22 percent or about $23400(evaluated at the median CEO salary and bonus in 1994) As wewill show this same 10 percent increase in rm value increasesthe value of the median CEOrsquos stock and stock options by about$125 million which is 53 times larger

B The Pay to Performance Relationship from Stockand Stock Option Revaluations

We now turn to estimating the relationship between totalCEO compensation and changes in rm value Our measure oftotal compensation includes salary and bonus stock option grantsrestricted stock grants other compensation changes in the valueof stock holdings and changes in the value of stock optionholdings In order to highlight the importance of stock and stockoption holdings we hold constant all of the other components ofcompensation and examine the change in CEO wealth that arethe result of changes in the value of stock and stock optionsholdings We ignore sensitivity based on changes in salary andbonus and the other components of direct compensation sincesuch changes are essentially in the rounding error of changes inthe value of stock and stock options While including changes inthe value of stock and stock options represents a broad measure ofcompensation it is the right measure in terms of monetaryincentives CEOs presumably care about changes in their wealthemanating from all sources not just salary and bonus Indeedincreasing the responsiveness of pay to performance is perhapsthe main reason why boards give CEOs stock and stock options


both of which typically have restrictions that force CEOs to holdthe stock and stock options21

Because our data contain detailed information on CEO stockand stock option holdings we are able to calculate the change ineach CEOrsquos wealth that occurs in response to various changes inhis rmrsquos market value We begin by creating a distribution ofannual stock returns for large rms by pooling the annual returnsfor the period 1970 to 1994 of the 500 rms in each year that hadthe largest market values at the end of the previous year22 Thenine decile cutoffs of annual rm returns are shown at the top ofTable V For example the return at the tenth percentile isnegative 276 percent the median return is 59 percent and theninetieth percentile return is 479 percent

From the proxy data we construct entire compensationpackages for each CEO in our sample for 1994 using the panel tobuild up the stock of stock options that the CEO holds at eachpoint in time Then we simulate nine levels of total compensationfor each CEO which correspond to the nine decile cutoffs of thedistribution of stock returns Thus the rst column of the top halfof the table shows the mean compensation of all CEOs under theassumption that each rm performed at the tenth percentile rateof return The rst four rows show the mean compensation fromsalary and bonus option grants other compensation and re-stricted stock grants These components of compensation areassumed to be invariant to rm performance and therefore haveidentical values across columns

The next two rows display the change in the value of stockoptions and stock holdings at the various rm performance levelsThese columns show dramatic changes in the level of compensa-tion For example assuming a tenth percentile performance theaverage CEO in our sample loses $24 million in the value of stockoption holdings and nearly $15 million in the value of their stockholdings These losses swamp the amount of direct compensation

21 CEOs often continue to hold stock and stock options even after therestrictions have lapsed because of both explicit and implicit restrictions on theselling of stock Many companies have explicit guidelines that indicate how muchstock CEOs must hold In many other companies implicit guidelines are in placesince boards and stockholders do not like CEOs to unload their stockholdings inpart because selling sends a bad signal to the market

22 These returns exclude dividends since option holders do not receivedividends But we do include the value of dividends received by the CEO in thecomponent of compensation that reects the increase in the value of stockholdings


gains to the CEO so that on net CEOs lose an average of about$14 million when their rms perform this poorly These lossescontrast with net gains of $76 million for a median performanceand an astounding $35 million gain for a ninetieth percentileperformance

This extreme variation of pay however is misleading becausethe large swings in the value of stock are driven by a few outliers

TABLE VCOMPOSITION OF 1994 CEO COMPENSATION ($1000S) ASSUMING STOCK PRICE

PERFORMANCE AT EACH DECILEa

Deciles 10 20 30 40 50 60 70 80 90

A Changein stockpriceb 2 276 2 153 2 70 2 01 59 128 205 305 479

B Mean com-pensation

salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292

option grants 1213 1213 1213 1213 1213 1213 1213 1213 1213other comp 325 325 325 325 325 325 325 325 325restricted

stock grant 204 204 204 204 204 204 204 204 204Increase in

value ofoptions (2448) (1414) (662) (1) 569 1251 2028 3054 4886stock (14659) (7812) (3183) 727 4009 7858 12147 17707 27422Total compen-

sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050



value ofoptions (1283) (772) (367) (05) 329 729 1191 1779 2854stocks (1037) (512) (155) 96 358 691 1023 1460 2233Total compen-

sationc (435) 441 1014 2196 3026 4042 5111 6385 8598

a Salary bonus option grants other compensation and restricted stock grants are all assumed to beinvariant to rm performance

b The stock price distribution comes from the annual returns (excluding dividends) for the 500 largestrms for each year between 1970 and 1995 In this table these annual returns are used to calculatecompensation under 1994 CEO compensation plans at different percentiles of rm performance

c This is the median of the sum which does not equal the sum of the medians


such as Bill Gates who owns about one-quarter of Microsoft oneof Americarsquos largest companies Thus in the bottom half of thetable the analysis is repeated for median rather than meancompensation While slightly less dramatic the results stillindicate very large changes in CEO wealth in response to changesin rm performance For example with a tenth percentile perfor-mance our median CEO loses about $435000 losses in the valueof stock and stock option holdings more than offset the amount ofdirect pay This contrasts with total compensation of about $3million for the typical CEO with a median stock performance and$86 million for a ninetieth percentile performance For themedian CEO in our sample there is a $9 million difference in CEOwealth in moving from a tenth percentile rm performance to aninetieth percentile performance23 It is hard to reconcile theseresults with the view that CEO compensation has little correla-tion with rm performance Holdings of stock and stock optionscreate a strong link between rm performance and changes inCEO wealth

C Distributions of Pay to Performance Measures

The separate roles of holdings of stock and stock options increating a relationship between pay and performance can be seenin Table VI where we show distributions of four measures of payto performance In all cases we assume that direct pay is heldconstant allowing only variation resulting from stock and stockoption revaluation

The entries in the rst row of this table indicate the dollaramount (in millions) by which CEO total compensation changes ifthe rmrsquos stock price increases from a median performance (59percent) to a seventieth percentile performance (205 percent)This 146 percent change in rm value represents a typical changein rm value since the median standard deviation of annualchanges in rm value is about 32 percent for our rms The meanchange is shown in the rst column and the next nine columnsindicate the decile cutoffs of percent changes ranked from the

23 When we repeat this analysis for a ve-year period the results are evenmore dramatic We again assume salary and bonus to be invariant to rmperformance and use overlapping ve-year periods from 1965 to 1994 to calculateand rank rm returns A tenth percentile ve-year performance represents anegative 455 percent total return A ninetieth percentile performance represents a1607 percent total return Under these assumptions the median CEO receivesabout $46 millionover ve years for a tenth percentile performance but nearly $34million for a ninetieth percentile performance


TABLE VIFOUR MEASURES OF THE PAY TO PERFORMANCE RELATIONSHIP FOR 1994 IF FIRM

MOVES FROM 50TH PERCENTILE TO 70TH PERCENTILE PERFORMANCE (FROM A 59RETURN TO A 205 RETURN)

DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90

One-year dollarchange incompensation Dollar change (millions)

mdash50th to 70thno stocka 146 000 005 030 054 085 109 143 195 306

mdash50th to 70thwith stockb 958 015 065 096 134 182 242 342 608 1324

One-year per-cent changein compensa-tion Percent change



Percent changein compensa-tion dividedby percentchange inmarket value Elasticity



Dollar changein compensa-tion for $1000change inmarket value Jensen and Murphy statistic



Compensation is calculated using actual 1994 compensation contracts and assuming 50th and 70thpercentile rates of return for all rms

a Assumes that CEOs hold no stock (but that they do hold stock options)b Allows for changes in the value of both stock and stock options


smallest to the largest The rst row indicates these changesunder the (counterfactual) assumption that CEOs have no stockholdings This row highlights the sensitivity created by holdingsof stock options

The table shows that moving rm performance from a medianperformance to a seventieth percentile performance increasesCEO wealth by a substantial $15 million at the mean and $085million at the median assuming no stock holdings The zerochange at the tenth percentile reects that fact that slightly morethan 10 percent of the CEOs hold no stock options at all At theninetieth percentile CEO wealth increases by about $3 million

The next row reports the same calculations including CEOholdings of stock in their rms The changes are as expectedmuch larger The mean change from moving from the ftiethpercentile performance to the seventieth percentile performanceis an increase in CEO pay of $96 million The median increase isabout $18 million Note that this implies that a ten percentagepoint increase in rm value increases CEO wealth by about $125million which is 53 times larger than our estimated $23400increase in salary and bonus for the same change in rm value

The second panel of the table repeats the analysis withpercent changes in compensation replacing dollar changes Forexample the median increase in CEO pay in moving from amedian to a seventieth percentile performance is 58 percent Thisnumber ranges from only 15 percent at the tenth percentile to 150percent at the ninetieth percentile Taken together the ndingsagain indicate that even modest changes in rm performanceincrease CEO compensation by a substantial amount and thatboth the holdings of stock and stock options contribute to thisrelationship

We also calculate the elasticity of total compensation Compen-sation is again dened to be the CEOrsquos annual change in wealthwhich includes all direct pay and stock and stock option revalua-tions Salary and bonus is again assumed to be invariant to rmperformance We then evaluate elasticities of total compensationat the median rm performance That is we mechanically calcu-late total compensation for each CEO at the ftieth percentileand at the seventieth percentile24 The elasticity is the percentagechange in total compensation divided by the percentage change in

24 Since annual compensation is sometimes negative it is not possible toestimate these elasticities econometrically which is why we evaluate them at aparticular point (compensation at the median rm performance)


rm value25 The mean elasticity and the distribution of elastici-ties from smallest to largest are shown in the third panel of thetable The rst row shows the distribution of elasticities (fromsmallest to largest) under the assumption that CEOs hold nostock The mean elasticity is 26 and the median elasticity is 23Adding in the impact of stock holdings raises the elasticitiessubstantially The distribution of elasticities has a mean of about49 and a median of 39 Moreover the tenth percentile of CEOelasticities is about one and the ninetieth percentile of elasticityis a strikingly large ten

Finally we show how much CEO wealth changes relative to$1000 changes in rm value We nd that a $1000 increase in rmvalue increases CEO wealth by about $25 at the mean and $529at the median26 Our $529 median estimate of the Jensen andMurphy statistic represents only sensitivity from stock and stockoption revaluation In order to make this estimate comparable tothe $325 estimate of Jensen and Murphy we need to make a fewadjustments reecting (current and future) changes in salary andbonus as well as sensitivity from the probability of being redAfter making these adjustments our median estimate of theJensen and Murphy statistic rises to $600 for 199427

This increase however substantially underestimates thesize-adjusted increase in sensitivity over time There is a dra-matic negative correlation between the Jensen and Murphymeasure and the size of the rm For example the largest rms inour sample (market value over $10 billion) have a median Jensenand Murphy statistic that is more than an order of magnitudesmaller than the smallest rms in our sample (market value lessthan $500 million) Since most of the rms in our sampleincreased their market value during the fteen-year period we arestudying there is a natural tendency for their Jensen-Murphystatistics to fall over time Using our data the size-adjustedJensen and Murphy sensitivities increased fourfold (rather than

25 The elasticity is the one-year percent change in compensation betweenthe ftieth and seventieth percentiles divided by 146 percent the differencebetween the rates of return at the two percentiles It is important to note that thisis not a CEO wealth elasticity since we do not know total CEO wealth

26 The means and medians are quite different because stock ownershippercentages and rm market values have highly skewed distributions

27 We add 11 cents per $1000 for current salary and bonus sensitivity basedon our Table IV regression estimates Because we do not have estimates ofsensitivity from future salary and bonus changes or from the possibility ofdismissal we also add 60 cents based on estimates from Jensen and Murphy1990b


the almost doubling from $325 to $600) between 1980 and199428

D Regression Estimates of the Pay to Performance Relationship

Most of our calculations so far have used our detailed data onthe 1994 compensation contracts of CEOs to simulate compensa-tion under different assumptions about rm performance Thismethod enables us to ask well-dened questions such as howmuch the median CEO gains if performance changes by a certainamount Nevertheless as a robustness check it is useful toestimate the pay to performance relationship with regressionanalysis

We run the simplest possible specication (given the con-straint that we cannot log total compensation since this number issometimes negative) We regress total compensation on the rmrsquoscontemporaneous return for that scal year Because the result-ing estimates are inuenced by outliers we run robust regres-sions which lower the weight on observations with largeresiduals29

The results are shown in Table VII The coefficient is 0043and is highly signicant30 This coefficient implies that a onepercentage point increase in the rmrsquos return increases the CEOrsquoswealth by $43000 The results of Table VI which show the pay toperformance relationship for 1994 indicate that this measure isless than half of the median measure reported there which isabout $125000 for every 1 percent increase in rm value ($182million divided by 146 percent)

However note that this is an average over the entire fteen-year period and is much less than the estimate for the last year inour sample 1994 Therefore in column (2) we interact returnswith each year to see how the pay to performance measurementhas changed over time As expected it rises steadily over timeThe measure in 1994 is almost nine times larger than that of

28 We calculated the size-adjusted increase by dividing our rms into vegroups based on size (market value) We then took a weighted average of thewithin-group increases in the Jensen and Murphy statistic

29 We use the STATA version 5 rreg command which uses Huber weightiterations followed by biweight iterations See Hamilton 1991 for details

30 Simple OLS regressions result in estimates that are almost ten timeshigher and less precisely estimated We have also run regressions to estimate theJensen and Murphy statistic (dollar change in CEO wealth on dollar change inrm wealth) OLS versions of this regression produce a Jensen and Murphystatistic of 54 dollars per thousand while robust regressions produce a Jensen andMurphy statistic of $16 per thousand However simple plots of the data suggestthat there is not a visible linear relationshipbetween the two variables


1980 The coefficient for 1994 is 0124 which implies that a onepercentage point increase in rm value leads to a $124000increase in CEO wealth This estimate is almost identical to the$125000 estimate based on our earlier results giving us con-dence in our earlier calculations We now turn to describing more

TABLE VIIPAY TO PERFORMANCE REGRESSIONS

Independent variable

Dependent variableTotal wealth CEO change (millions)

(1) (2)

Annual return (percent) 0043(0001)

Annual return p 1980 0014(0007)















Regressions are robust regressions and include a full set of year dummies Rates of return are calculatedas changes in rm market value over the rmrsquos scal year N 5 5672


precisely how the pay to performance relationship has changedover time

VI HOW HAS PAY TO PERFORMANCE CHANGED OVER TIME

The dramatic rise in CEO compensation has been driven to alarge extent by increases in annual stock option grants whichhave produced a large buildup in total CEO holdings of stockoptions Moreover although the holding of direct stock relative tototal rm value has remained constant or fallen a bit since theearly 1980s the dollar value of stock held by CEOs has risensharply since the early 1980s due to the stellar performance of thestock market The median value of stock holdings of CEOs rosefrom $12 million in 1980 to $44 million in 1994 (in 1994 dollars)Taken together these factors have dramatically increased therelationship between pay and performance during the last fteenyears31

In Table VIII we show how four measures of the pay toperformance relationship have changed over time The measuresare (1) the median elasticity (2) the median change in CEO wealthfor a $1000 change in rm value (3) the median dollar differencein CEO wealth from a dramatic improvementmdashmoving from atenth percentile performance to a ninetieth percentile perfor-mancemdashand (4) the median dollar difference in CEO wealth froma modest improvementmdashmoving from a ftieth percentile perfor-mance to a seventieth percentile performance Again we focusonly on that part of the pay to performance relationship thatresults from stock and stock option revaluations That is themeasures are calculated with the same assumptions we made tocreate Tables V and VI

The increase in the pay to performance relationship is evidentin all of the measures For example between 1980 and 1994 themedian elasticity more than tripled from 12 to 39 The medianwealth change per thousand dollar rm value change more thandoubled from $25 to $5332 And the CEO wealth change for adramatic rm performance change increased by a factor of almostsevenmdashfrom $14 million to more than $9 million The median

31 Since CEO holdings of rm stock are often the result of exercising stockoptions some of the increased sensitivity that shows up as due to stock holdingsactually originated in stock option grants

32 Recall from the previous section that the size-adjusted Jensen andMurphy statistic increased by a factor of four rather than two


wealth change for a modest improvement in rm performanceincreased from $281000 to $18 million The increase in these payto performance measures would be even larger although onlymodestly so if we allowed for the slight increase in direct paysensitivity which was documented in Table IV The key point isthat regardless of which measure is used there has been adramatic increase in responsiveness of CEO pay to rm perfor-mance during the last fteen years

VII DO CEOS EVER LOSE MONEY

An important issue in the pay to performance debate iswhether CEOs are punished sufficiently for poor performanceOur analysis suggests that CEOs can actually lose money sincethe losses in stock and stock option holdings can more than offset

TABLE VIIICHANGE IN FOUR PAY TO PERFORMANCE MEASURES OVER TIME MEASURES ARE

BASED ON CHANGES IN THE VALUE OF HOLDINGS OF STOCK

AND STOCK OPTIONS ONLY

Year

Medianelasticity

(1)

Median changein CEO wealth

per $1000 changein rm value

(2)

Median 10th to 90thdollar change

(millions of dollars)(3)



1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823

Columns (3) and (4) are in 1994 dollars Pay to performance measures are calculated using actual CEOcompensation arrangements for each year under various assumptions about rm performance The elasticityin column (1) is the percent change in CEO compensation divided by the percent change in market value frommoving between a 50th and a 70th percentile performance


gains from direct compensation However it is an empiricalquestion as to whether this actually happens and if so to whatdegree

In order to investigate this issue we calculated the percent-age of CEOs who actually suffered a loss in wealth during the lastyear (1994) of our sample the last two years (1993 to 1994) and soon up to the last ve years (1990 to 1994) For these calculationswe used the 200 CEOs in our sample who were CEO for all veyears from 1990 to 1994 The results are shown in Table IX Therst column shows the SampP 500 stock return for each of theperiods The next column shows the percent of CEOs in oursample who suffered an actual decline in wealth during theperiod The third column shows the median stock return for therms whose CEOs had their wealth decline during that year Thefourth and fth columns show the mean and median wealth lossesfor those CEOs who experience wealth declines

The numbers indicate that CEOs do in fact experience wealthdeclines and that the declines are both frequent and large Forexample in 1994 which was a at year for the stock marketabout 24 percent of the CEOs in our sample actually lost moneyduring the year Moreover the mean and median losses for thosewho experience wealth declines was $13 million and $3 millionrespectively Even over a three-year period 10 percent of CEOs

TABLE IXDO CEOS EVER LOSE MONEY

Years

SampP500

stockreturn

Percent ofCEO samplewith decline

in wealth

Medianstock

return forrms

with declinein wealth

Meanwealthloss of

CEOs witha declinein wealth

(millions ofdollars)

Medianwealth

loss of CEOswith a decline

in wealth(millions of

dollars)

1994 0020 240 2 0181 1282 3101993 through 1994 0126 150 2 0192 4775 4961992 through 1994 0226 100 2 0326 7430 14631991 through 1994 0564 35 2 0347 2383 27411990 through 1994 0551 50 2 0273 6427 2989

Sample consists of the 200 CEOs in our data set who were CEO for all ve years from 1990 to 1994 Thistable indicates the frequency and magnitude of actual CEO wealth declines over the periods indicated Awealth decline occurs if the sum of salary and bonus restricted stock grants option grants othercompensation and stock and stock option revaluations is negative during the period


lost an average (median) of $74 million ($15 million) For theve-year period 5 percent of the CEOs lost an average (median) of$64 million ($30 million)

These results are consistent with the general theme of thispaper which is that the relationship between pay and perfor-mance is much larger than has previously been recognized andthat this includes both gains and losses in CEO wealth33 Notealso that all of our pay to performance measures ignore thepossibility that CEOs may get red if their rm performs poorlyGilson and Vetsuypens 1993 Warner Watts and Wruck 1988Weisbach 1988 The prospect of being red clearly raises thesensitivity of CEO pay to performance especially since CEO stockand stock option grants sometimes contain provisions that nullifythe awards if a CEO is red before the restrictions elapseHowever given the existence of generous CEO buyouts (goldenparachutes) it is not clear how much CEOs lose on net when theyare red

VIII IMPLICATIONS

The results of this study have a number of importantimplications that make us think differently about the incentivesfacing CEOs and the direction of future research on CEOcompensation

A The Importance of Equity-Based Pay Relative to Salaryand Bonus

One important implication follows from the fact that changesin the value of stock and stock options completely swamp changesin salary and bonus The large literature that measures pay toperformance with salary and bonus elasticities should be inter-preted with the important caveat that for a given change in rmvalue the incentive effects of salary and bonus changes are 53times smaller than those from stock and stock option revaluations

Why do salary and bonus vary so little In principle bonusescould approximate the variability inherent in stock and stockoption revaluations However corporate board members are oftenreluctant to reduce CEO pay even in response to poor perfor-mance and bonuses the size of stock option gains are likely to

33 Hall 1997 analyzes the downside and upside sensitivity of CEO stockoption holdings in greater detail


generate unwanted media attention The result is that salary andbonus have a weak relationship with rm performance a resultthat seems to hold in the other major industrialized countries aswell Kaplan 1998 The fact that it is hard in practice to usesalary and bonus to reward and penalize CEOs has the importantimplication that equity-based pay may be the only feasible way tocreate high-powered incentives that align CEO pay with share-holder objectives

B The Lack of Relative Pay

A related and disturbing implication of our results is thatRelative Pay Evaluation (RPE) is not a signicant component ofCEO compensation packages Our results indicate that RPE viadirect pay is trivial relative to the sensitivity generated frommovements in the value of stock and stock option holdings whichdo not have a relative component One principle of efficientcompensation is that managers should be rewarded for outcomesover which they have control while being insulated from economy-wide or industrywide shocks34 This implies that CEOs should bepaid at least in part relative to some market or industry indexConsistent with Gibbons and Murphy 1990 we nd a statisti-cally signicant RPE component CEO salary and bonus changesare positively related to own rm returns and negatively relatedto market returns Likewise we also nd a relative pay compo-nent with regard to direct pay However our ndings suggest thatchanges in direct pay which do have a relative pay component aretiny when compared with changes in the value of stock and stockoption holdings which do not have a relative pay component

One way to introduce relative pay would be to issue optionswith an exercise price that moves with a market or industryindex35 Such an option contract would introduce relative paywhich is lacking in current contracts While more research isneeded we suspect that this would represent a substantialimprovement over current contracts

34 See Holmstrom 1979 There is an important caveat to this argumenthowever To the extent that managers can take actions to reduce their exposure toindustry or economywide shocks which is typically the case then completelyinsulating them from such shocks is not optimal Baker Jensen and Murphy1988 Nevertheless the near complete absence of relative pay seems to be apuzzle

35 According to CEO pay consultants whom we interviewed the mainreasons why such contracts are rarely used is that stock options with movingexercise prices have lsquolsquobad accountingrsquorsquo That is unlike at the money options with axed exercise price which do not reduce current earnings options with anunknown exercise price must be expensed against current earnings


C Why the Increasing Use of Stock Options

Why has the use of stock options (and therefore the relation-ship between pay and performance) increased so dramaticallyover the past fteen years There are at least two theories whichare not mutually exclusive First the increase in the use of stockoptions may reect a desire by boards to increase the relationshipbetween pay and performance Boards may have been inuencedby practitioners (eg LBO specialists such as Henry Kravis)36 andacademics (eg Jensen and Murphy) that pay to performance iscentral to inducing CEOs to raise shareholder value Boards ofdirectors (as well as increasingly powerful institutional investors)may not want their CEOs to be paid like bureaucrats and havetherefore responded with higher-powered incentive contracts

Our results are at least suggestive that this is the case Forexample our nding that salary and bonus sensitivity hasincreased over time is consistent with the view that boards areattempting to increase pay to performance While salary andbonus sensitivities are only the tip of the iceberg in terms ofoverall sensitivity they may reveal important information aboutthe iceberg

A second possible explanation for the increased use of stockoptions is that boards have wanted to increase CEO pay (either tocompete for executive talent or because the boards are beholden totheir CEOs) and option grants are a less visible vehicle for payingCEOs than salary and bonus is Finding a less visible way to payCEOs is important because public opposition to high pay levelsappears to have increased as levels of pay have risen37

Even if CEOs are receiving stock options in order to mask therise in the level of CEO pay the options still generate the benetsof high-powered pay to performance contracts In this case boardsmay have improved the incentive structures of CEO contracts forthe wrong reason Nevertheless a high priority for future re-search is understanding why CEO stock options grants havegrown so dramatically over the past fteen years

36 See a persuasive paper by Kaplan 1997 who argues that lsquolsquowe are allHenry Kravis nowrsquorsquo

37 Dial and Murphy 1995 p 285 report an interesting example of thisinvolving executives at General Dynamics There was a huge public outcry whenthey were given large bonuses for raising the companyrsquos stock price This outcrybasically ended when the bonus plan was replaced with a stock option plan lsquolsquoeventhough the payouts under the two plans were virtually identicalrsquorsquo Likewise weinterviewed compensation consultants at seven leading rms Many reported thatthere would be huge public resistance to giving bonuses that are as large as annualstock option gains


It is also worth noting that the dramatic increases in CEOpay over the past fteen years are not very large relative to themarket value of rms in our sample or to their number ofemployees38 If annual CEO direct compensation were reduced to42 percent of its current level (essentially back to 1980 levels) andthe annual savings were returned to shareholders shareholdersin the median rm in our sample would receive an extra 04percentage points of return on their shares If the savings werespread equally among the rmrsquos workers the median per workergain in our sample of rms would be $63 per year

IX SUMMARY AND CONCLUSION

Are CEOs paid like bureaucrats Our evidence suggests thatthe answer is no We use a new data set that enables us toprecisely measure how the value of CEO stock and stock optionschanges when a rmrsquos stock market value changes Taking intoaccount the revaluation of CEO stock and stock option holdingsCEO compensation is highly responsive to rm performance Themedian CEO in our sample loses $435000 for a tenth percentilerm performance and increases his wealth by about $86 millionfor a ninetieth percentile performance More typical changes inrm value increases CEO wealth by millions of dollars at themedian

The relationship between pay and performance is almostentirely driven by changes in the value of stock and stock optionsFor example we nd that stock and stock option revaluationsincrease median CEO wealth by about $125 million dollars inresponse to a 10 percent increase in rm value This is 53 timeslarger than our estimated $23400 increase in salary and bonusemanating from the same change in rm value suggesting thatstock and stock option revaluation account for about 98 percent ofthe relationship between pay and performance Moreover ourestimate of the CEO pay to performance elasticity is 39 which is30 times larger than previous estimates that rely on salary andbonus changes alone

We nd that both the level of CEO compensation and thesensitivity of CEO compensation to performance has increasedsharply over the past fteen years Mean (median) direct CEO

38 The median market value for rms in our sample is $22 billion Themedian number of employees is 14000


compensation increased by 209 percent (136 percent) in real termsduring the past fteen years and the large increase in stockoption awards and in the value of stock holdings during thisperiod has dramatically increased responsiveness of CEO pay torm performance For example the elasticity of CEO compensa-tion to rm market value more than tripled from 12 to 39between 1980 and 1994 During the same period the dollarchange from moving the rm from a median to a seventiethpercentile performance increased by a factor of seven from$280000 to $182 million

We do not claim the current relationship between CEO payand rm performance is sufficiently strong or that current con-tracts are efficient Indeed our ndings point to some potentiallyserious deciencies in current CEO compensation packagesHowever we believe that our ndings do contradict the claim thatCEO contracts are wildly inefficient because there is little correla-tion between performance and pay The fortunes of CEOs arestrongly related to the fortunes of the companies they manage

APPENDIX 1 MEASURING AND VALUING TOTAL STOCK

OPTION HOLDINGS

We measure value stock options based on the Black-Scholesformula for valuing European call options as modied by Merton197339 The value of options is

(2) Voptions 5 NPe2 dT F (Z) 2 Ee 2 rT F (Z 2 s Icirc T)

where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T

N 5 number of sharesP 5 price of underlying stockE 5 exercise price of the optionT 5 time to expirationr 5 risk-free interest rate (bond rate)d 5 expected dividend rates 5 expected standard deviation of stock returnF 5 cumulative probability function for normal distribution

39 See Carpenter 1998 for a more elaborate model of executive stock optionvaluation


To construct a measure of the total stock option holdings ofeach CEO at a given point in time we use proxy data on stockoption grants gains from exercising stock options and the totalnumber of stock options held by the CEO

Annual proxies contain information on options granted dur-ing the preceding scal year including the number duration andexercise price of the options In order to construct a CEOrsquos totalholdings of stock options we go back to the rst year in which theCEO was the CEO and use the annual data on option grants tobuild up the stock of stock options held by the CEO including theexercise price and remaining duration of each option40 Each yearwe reduce the remaining duration of options granted in theprevious year add the options granted in that year and subtractoptions sold

There are three characteristics of the data that complicatethis procedure First CEOs often hold options that they receivedbefore they became CEO Second the exercise price is sometimesmissing Third the proxies report option gains as a dollar valueso it is impossible to determine exactly which options were sold ina given year We are helped however by the fact that proxiessometimes contain information on the total number of optionsheld by the CEO (or alternatively the total number of vestedoptions held by the CEO) This information on total options allowsus to test the accuracy of our algorithm for building up the stock ofstock options holdings and to adjust for cases in which ouralgorithm produces an inaccurate count of stock options

Initial Conditions

CEOs often hold options that they were granted before theybecame CEO In many cases we can obtain a measure of the totalnumber of these previous options from the proxy for the yearbefore the CEO became CEO (proxies contain information onoption holdings of other top executives) When this measure is notavailable we use the maximum of the total number of vestedoptions held by the CEO before becoming CEO and a variable thatwe call backcount Backcount is a measure of the total options held

40 In constructing the stock of stock options for 1980 the rst year in ourdata set we go back only to 1971 Since most stock options have a duration of tenyears and since only 32 CEOs in our sample both were CEOs in 1970 and heldstock options in 1971 we are losing little information by not going back furtherMoreover in those few cases we use our regular procedure for handling initialconditions (see below) in order to calculate the number of stock options held at theend of 1970


by the CEO that is constructed by taking the earliest year of datafor which total options held by the CEO is available in the proxyand then going backward in time subtracting the number ofoptions granted and adding the number of options sold Weassume that these initial options have a remaining duration ofseven and that the exercise price is the median price from threeyears before None of our results are sensitive to reasonablechanges in these values

Missing Exercise Prices

The exercise price is missing for 37 percent of options grantsin our 1980ndash1994 sample It is missing in 206 percent of the casesin the 1970 data used to construct the 1980 stock of stock optionsSince nearly all options are granted at the money we assume thatthe exercise price is the end-of-year stock price for the scal yearin cases in which it is missing41

Accounting for Gains from Selling Stock Options

Annual proxy statements report the dollar value of gainsfrom options sold during the scal year This is not sufficientinformation to tell how many options were sold or exactly whichoptions were sold In order to subtract options sold we make twoassumptions First we assume that the options were sold at themedian stock price during the year Second we assume that CEOssell their oldest options rst This is a reasonable assumptionsince basic option theory tells us that CEOs should not exerciseoptions early (ignoring dividend issues) and because some rmshave rules that require CEOs to exercise the earliest options rstMost importantly in a rising stock market the earliest options willbe the most in the money Therefore our assumption that CEOssold these options is a conservative one in that it minimizes ourestimates of the pay to performance sensitivity In a very smallnumber of cases the median price during the year in which theoptions were sold is less than the exercise price of the option In

41 Repricing of existing options appears to be a minor problem Yermack1995 found that only 15 percent of rms changed the terms of previouslyawarded stock options in a given year This is consistent with a U S SEC report1993 that also found a very low incidence of repricings in a survey of 1000companies In addition Chance Kumar and Todd 1997 look at a sample of about4000 publicly traded rms over ten years and found 73 repricing events from 40rms Moreover we randomly checked 50 of our proxy statements and found noinstances in which past options were repriced


this case we assume that the exercise price was incorrect andarbitrarily reduce it by 50 percent

Adjusting the Option Stock to be Consistent with the TotalNumber of Options Held by the CEO

In years in which the proxies contain a measure of the totalnumber of options held by the CEO we can compare the optionholdings produced by our algorithm with the proxy total Thesimple correlation between the two measures is 79 A regressionof our total option measure on the proxy measure has a coefficientof 1003 suggesting that our measure is unbiased The ratio of theerror variance to the true variance is 64 It is important to notethat since we rely mostly on medians in our estimation ourresults are not very sensitive to this (apparently white noise)measurement error

For observations for which the proxy measure of total optionsis available we rescale our options holdings to coincide with theproxy measure When the proxy measure of options is below ourmeasure we subtract the oldest options from our stock of stockoptions until the two measures coincide When the proxy measureof total options (or vested options) is above our measure we rstassume that we sold too many options in accounting for theprevious yearrsquos gains and add back in the options until we reachthe correct number of total options If this number is still too lowwe rescale option holdings to coincide with the proxy total

Data on total stock options held are available for most rmsfrom 1980ndash1983 and from 1993ndash1995 so our measures of stockoptions holdings are likely to be more accurate in those yearsFortunately this period contains the beginning and end of oursample period and is therefore the focus of our attention

Adjusting for Stock Splits

Finally in building up the stock of stock options held by aCEO it is necessary to adjust the number and exercise price ofstock options to account for stock splits We obtain information onstock splits from CRSP First we take all stock splits identied inthe CRSP event le We identify additional stock splits bycomparing daily stock returns with daily price changes42 Toadjust the stock options we needed to determine whether option

42 If the stock price changed by more than 20 percent and the daily returnwas substantially smaller we assumed that a split had occurred


grants in a given year occurred before or after the stock split Incases in which the exercise price was known it was usuallyobvious whether the options were granted before or after the splitIn cases in which the exercise price was not given we assume thatthey were granted after the split because in 96 percent of the casesin which the exercise price was known the options were grantedafter the split

HARVARD UNIVERSITY AND NATIONAL BUREAU OF ECONOMIC RESEARCH

REFERENCES

Antle Rick and Abbie Smith lsquolsquoAn Empirical Investigation of the RelativePerformance Evaluation of Corporate Executivesrsquorsquo Journal of AccountingResearch XXIV (1986) 1ndash39

Baker George P Michael C Jensen and Kevin J Murphy lsquolsquoCompensation andIncentives Practice and Theoryrsquorsquo Journal of Finance XLIII (1988) 593ndash616

Barro Robert and Jason Barro lsquolsquoPay Performance and Turnover of Bank CEOsrsquorsquoJournal of Labor Economics VIII (1990) 448ndash481

Carpenter Jennifer N lsquolsquoThe Exercise and Valuation of Executive Stock OptionsrsquorsquoJournal of Financial Economics (1998) forthcoming

Chance Don M Raman Kumar and Rebecca B Todd lsquolsquoThe Repricing of ExecutiveStock Optionsrsquorsquo draft March 1997

Coughlan Anne T and Ronald M Schmidt lsquolsquoExecutive Compensation Manage-ment Turnover and Firm Performancersquorsquo Journal of Accounting and Econom-ics VII (1985) 43ndash66

Crystal Graef S In Search of Excess The Overcompensation of AmericanExecutives (New York WW Norton and Company Inc 1992)

Dial Jay and Kevin J Murphy lsquolsquoIncentives Downsizing and Value Creation atGeneral Dynamicsrsquorsquo Journal of Financial Economics XXXVII (1995) 261ndash314

Fama Eugene F and Michael C Jensen lsquolsquoAgency Problems and Residual ClaimsrsquorsquoJournal of Law and Economics XXVI (1983) 327ndash349

Feenberg Daniel R and James M Poterba lsquolsquoIncome Inequality and the Incomesof Very High Income Taxpayers Evidence from Tax Returnsrsquorsquo Tax Policy andthe Economy volume 7 in James M Poterba ed (Cambridge MA MIT Press1993)

Garen John E lsquolsquoExecutive Compensationand Principal-Agent Theoryrsquorsquo Journal ofPolitical Economy CII (1994) 3ndash28

Gibbons Robert and Kevin J Murphy lsquolsquoRelative Performance Evaluation forChief Executive Officersrsquorsquo Industrial and Labor Relations Review XLIII(1990) 30ndash51

Gibbons Robert and Kevin J Murphy lsquolsquoOptimal Incentive Contracts in thePresence of Career Concerns Theory and Evidencersquorsquo Journal of PoliticalEconomy C (1992) 468ndash505

Gilson Stuart C and Michael R Vetsuypens lsquolsquoCEO Compensation in FinanciallyDistressed Firms An Empirical Analysisrsquorsquo Journal of Finance XLVIII (1993)425ndash458

Hall Brian J lsquolsquoThe Pay to Performance Incentives of Executive Stock Optionsrsquorsquodraft 1997

Hall Brian J and Jeffrey B Liebman lsquolsquoAre CEOs Really Paid Like BureacratsrsquorsquoNBER Working Paper No 6213 October 1997

Hamilton L C lsquolsquoHow Robust is Robust Regressionrsquorsquo Stata Technical Bulletin 2(1991)

Haubrich Joseph G lsquolsquoRisk Aversion Performance Pay and the Principal-AgentProblemrsquorsquo Journal of Political Economy CII (1994) 258ndash276

Holmstrom Bengt lsquolsquoMoral Hazard and Observabilityrsquorsquo Bell Journal of EconomicsX (1979) 74ndash91


Jensen Michael C and William M Meckling lsquolsquoTheory of the Firm ManagerialBehavior Agency Costs and Ownership Structurersquorsquo Journal of FinancialEconomics III (1976) 305ndash360

Jensen Michael C and Kevin J Murphy lsquolsquoCEO IncentivesmdashItrsquos Not How MuchYou Pay But Howrsquorsquo Harvard Business Review (May-June (1990a) 138ndash153

Jensen Michael C and Kevin J Murphy lsquolsquoPerformance Pay and Top-Manage-ment Incentivesrsquorsquo Journal of Political Economy XCVIII (1990b) 225ndash264

Joskow Paul Nancy L Rose and Andrea Shepard lsquolsquoRegulatory Constraints onCEO Compensationrsquorsquo Brookings Papers on Economic ActivitymdashMicroeconom-ics 1 (1993) 1ndash58

Kaplan Steven N lsquolsquoTop Executive Rewards and Firm PerformanceA Comparisonof Japan and the United Statesrsquorsquo Journal of Political Economy CII (1994)510ndash546 lsquolsquoThe Evolution of U S Corporate Governance We Are All Henry KravisNowrsquorsquo Journal of Private Equity I (1997) 7ndash14 lsquolsquoTop Executive Incentives in Germany Japan and the U S A ComparisonrsquorsquoExecutive Compensation and Shareholder Value Jennifer Carpenter andDavid Yermack eds 1998 forthcoming

Lewellen Wilbur G Executive Compensation in Large Industrial CorporationsNational Bureau of Economic Research (Chicago University of Chicago Press1968)

Merton Robert C lsquolsquoTheory of Rational Option Pricingrsquorsquo Bell Journal of Economicsand Management Science IV (1973) 141ndash183

Murphy Kevin J lsquolsquoCorporate Performance and Managerial Remuneration AnEmpirical Analysisrsquorsquo Journal of Accounting and Economics VII (1985) 11ndash42 lsquolsquoIncentives Learning and Compensation A Theoretical and EmpiricalInvestigation of Managerial Labor Contractsrsquorsquo Rand Journal of EconomicsXVII (1986) 59ndash76 lsquolsquoExecutive Compensationrsquorsquo forthcoming in O Ashenfelter and D Card edsHandbook of Labor Economics (Amsterdam North-Holland 1998) forthcom-ing

Rosen Sherwin lsquolsquoContracts and the Market for Executivesrsquorsquo in Contract Econom-ics Lars Werin and Hans Wijkander eds (Cambridge MA Blackwell 1992)pp 181ndash211

U S Securities and Exchange Commission 1993 Release No 33-7009 (August 6)(SEC 1993)

Warner Jerold Ross Watts and Karen Wruck lsquolsquoStock Prices and Top ManagementChangesrsquorsquo Journal of Financial Economics XX (1988) 461ndash492

Weisbach Michael lsquolsquoOutside Directors and CEO Turnoverrsquorsquo Journal of FinancialEconomics XX (1988) 431ndash460

Yermack David lsquolsquoDo CorporationsAward CEO Stock Options Effectivelyrsquorsquo Journalof Financial Economics XXXIX (1995) 237ndash269


every $1000 increase in shareholder wealth Rosen 1992 surveysthe large empirical literature on CEO compensation and con-cludes that lsquolsquoevidence from several independent studies andsamples leaves us fairly secure that the effect of stock returns onlog compensation is in the 010ndash015 rangersquorsquo An elasticity of 010implies that a CEO whose work produced annual rates of return of20 percent would be paid only 1 percent more than a CEO whosework produced annual rates of return of 10 percent1

The design of performance incentives for managers in largecompanies is an enormously important issue Aligning the incen-tives of executives with those of owners is the most direct way tomitigate the agency problem If there is no meaningful link betweenCEO pay and company performance it is doubtful that the trillions ofdollars of assets in public corporations are being managed efficientlyAs Jensen and Murphy 1990a argue if CEOs are paid like bureau-crats lsquolsquois it any wonder then that so many CEOs act like bureaucratsrather than the value-maximizing entrepreneurs companies needto enhance their standing in world marketsrsquorsquo

In this paper we argue that CEOs are not paid like bureau-crats We use a new fteen-year panel data set of CEOs in thelargest publicly traded U S rms Because our data containdetailed information on CEO holdings of stock and stock optionswe are able to produce precise and comprehensive measures of therelationship betweenrm performanceand CEO pay and to documentthe large increase in CEO holdings of stock and stock options thatoccurred between 1980 and 1994 In measuring the responsive-ness of pay to performance we focus on a broad measure of compensa-tion which includes changes in the value of stock and stock options2We report a variety of measures of the relationship between payand performance and nd a strong link between the fortunes of CEOsand the fortunes of the companies they manage We nd thatvirtually all of the pay to performance sensitivity is attributableto changes in the value of CEO holdings of stock and stock options

Our main empirical nding is that CEO wealth often changesby millions of dollars for typical changes in rm value Forexample the median total compensation for CEOs is about $1million if their rmrsquos stock has a thirtieth percentile annual

1 The view that there is little correlation between rm performance and CEOpay is often echoed in the popular press and by CEO compensation critics such asCrystal 1992

2 Jensen and Murphy 1990b also use a broad measure of CEO compensa-tion We discuss why our conclusions differ from theirs shortly












II MOTIVATING CEOS





























pany(dummy) 009 0 029 0 1


Salary andbonus $1292290 $1050000 $1163920 $52000 $16000000












Mean valueof stock



wealth increaseb

1980 654935 155037 809973 54933121981 676912 211014 887926 20323431982 675441 235571 911011 44811891983 732029 266388 998417 103837671984 770878 258402 1029280 18523281985 830365 431333 1261698 81228151986 931056 375738 1306793 104399321987 960839 543886 1504725 39649991988 1057791 530653 1588444 37821511989 1062148 574162 1636309 133571331990 1005860 751477 1757336 9075671991 994470 780604 1775074 175461811992 1061370 959791 2021161 148528451993 1175870 891843 2067715 127745611994 1292290 1213180 2505469 9168990 Change

1980ndash1994 973 6825 2093 mdash









YearMedian salary

and bonus




1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash










FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES













































II MOTIVATING CEOS





























pany(dummy) 009 0 029 0 1


Salary andbonus $1292290 $1050000 $1163920 $52000 $16000000












Mean valueof stock



wealth increaseb

1980 654935 155037 809973 54933121981 676912 211014 887926 20323431982 675441 235571 911011 44811891983 732029 266388 998417 103837671984 770878 258402 1029280 18523281985 830365 431333 1261698 81228151986 931056 375738 1306793 104399321987 960839 543886 1504725 39649991988 1057791 530653 1588444 37821511989 1062148 574162 1636309 133571331990 1005860 751477 1757336 9075671991 994470 780604 1775074 175461811992 1061370 959791 2021161 148528451993 1175870 891843 2067715 127745611994 1292290 1213180 2505469 9168990 Change

1980ndash1994 973 6825 2093 mdash









YearMedian salary

and bonus




1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash










FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES






































II MOTIVATING CEOS





























pany(dummy) 009 0 029 0 1


Salary andbonus $1292290 $1050000 $1163920 $52000 $16000000












Mean valueof stock



wealth increaseb

1980 654935 155037 809973 54933121981 676912 211014 887926 20323431982 675441 235571 911011 44811891983 732029 266388 998417 103837671984 770878 258402 1029280 18523281985 830365 431333 1261698 81228151986 931056 375738 1306793 104399321987 960839 543886 1504725 39649991988 1057791 530653 1588444 37821511989 1062148 574162 1636309 133571331990 1005860 751477 1757336 9075671991 994470 780604 1775074 175461811992 1061370 959791 2021161 148528451993 1175870 891843 2067715 127745611994 1292290 1213180 2505469 9168990 Change

1980ndash1994 973 6825 2093 mdash









YearMedian salary

and bonus




1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash










FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES




























































pany(dummy) 009 0 029 0 1


Salary andbonus $1292290 $1050000 $1163920 $52000 $16000000












Mean valueof stock



wealth increaseb

1980 654935 155037 809973 54933121981 676912 211014 887926 20323431982 675441 235571 911011 44811891983 732029 266388 998417 103837671984 770878 258402 1029280 18523281985 830365 431333 1261698 81228151986 931056 375738 1306793 104399321987 960839 543886 1504725 39649991988 1057791 530653 1588444 37821511989 1062148 574162 1636309 133571331990 1005860 751477 1757336 9075671991 994470 780604 1775074 175461811992 1061370 959791 2021161 148528451993 1175870 891843 2067715 127745611994 1292290 1213180 2505469 9168990 Change

1980ndash1994 973 6825 2093 mdash









YearMedian salary

and bonus




1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash










FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES






















































pany(dummy) 009 0 029 0 1


Salary andbonus $1292290 $1050000 $1163920 $52000 $16000000












Mean valueof stock



wealth increaseb

1980 654935 155037 809973 54933121981 676912 211014 887926 20323431982 675441 235571 911011 44811891983 732029 266388 998417 103837671984 770878 258402 1029280 18523281985 830365 431333 1261698 81228151986 931056 375738 1306793 104399321987 960839 543886 1504725 39649991988 1057791 530653 1588444 37821511989 1062148 574162 1636309 133571331990 1005860 751477 1757336 9075671991 994470 780604 1775074 175461811992 1061370 959791 2021161 148528451993 1175870 891843 2067715 127745611994 1292290 1213180 2505469 9168990 Change

1980ndash1994 973 6825 2093 mdash









YearMedian salary

and bonus




1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash










FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES
















































pany(dummy) 009 0 029 0 1


Salary andbonus $1292290 $1050000 $1163920 $52000 $16000000












Mean valueof stock



wealth increaseb

1980 654935 155037 809973 54933121981 676912 211014 887926 20323431982 675441 235571 911011 44811891983 732029 266388 998417 103837671984 770878 258402 1029280 18523281985 830365 431333 1261698 81228151986 931056 375738 1306793 104399321987 960839 543886 1504725 39649991988 1057791 530653 1588444 37821511989 1062148 574162 1636309 133571331990 1005860 751477 1757336 9075671991 994470 780604 1775074 175461811992 1061370 959791 2021161 148528451993 1175870 891843 2067715 127745611994 1292290 1213180 2505469 9168990 Change

1980ndash1994 973 6825 2093 mdash









YearMedian salary

and bonus




1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash










FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES










































pany(dummy) 009 0 029 0 1


Salary andbonus $1292290 $1050000 $1163920 $52000 $16000000












Mean valueof stock



wealth increaseb

1980 654935 155037 809973 54933121981 676912 211014 887926 20323431982 675441 235571 911011 44811891983 732029 266388 998417 103837671984 770878 258402 1029280 18523281985 830365 431333 1261698 81228151986 931056 375738 1306793 104399321987 960839 543886 1504725 39649991988 1057791 530653 1588444 37821511989 1062148 574162 1636309 133571331990 1005860 751477 1757336 9075671991 994470 780604 1775074 175461811992 1061370 959791 2021161 148528451993 1175870 891843 2067715 127745611994 1292290 1213180 2505469 9168990 Change

1980ndash1994 973 6825 2093 mdash









YearMedian salary

and bonus




1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash










FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES









































Mean valueof stock



wealth increaseb

1980 654935 155037 809973 54933121981 676912 211014 887926 20323431982 675441 235571 911011 44811891983 732029 266388 998417 103837671984 770878 258402 1029280 18523281985 830365 431333 1261698 81228151986 931056 375738 1306793 104399321987 960839 543886 1504725 39649991988 1057791 530653 1588444 37821511989 1062148 574162 1636309 133571331990 1005860 751477 1757336 9075671991 994470 780604 1775074 175461811992 1061370 959791 2021161 148528451993 1175870 891843 2067715 127745611994 1292290 1213180 2505469 9168990 Change

1980ndash1994 973 6825 2093 mdash









YearMedian salary

and bonus




1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash










FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES








































YearMedian salary

and bonus




1980 566541 0 622777 10253421981 604050 0 650515 8184551982 572067 0 669588 11192511983 641307 0 760926 18422171984 677527 0 784504 9154211985 705190 6257 853985 20447761986 809962 64274 964111 15866801987 846671 89190 1083832 9648061988 929539 44651 1120047 15696901989 938202 42410 1152117 23582511990 857791 71646 1098947 4837991991 857427 141852 1179344 30339611992 860891 236296 1250785 23183491993 945608 271091 1309698 20025011994 1050000 324989 1472202 1046897 Change

1980ndash1994 853 NA 1364 mdash










FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES









































FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES



































FIG

UR

EI

CE

OC

ompe

nsa

tion

wit

hS

tock

Opt

ions

(198

0ndash19

94)






Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES







































Annualized change

1982ndash1994
















TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES




































TO FIRM PERFORMANCE

Independentvariable

Dependent variable


1 2 3 4 5 6


01630(00116)

01887(00132)

02799(00224)

03230(00254)


00596(00105)

00487(00110)

2 00156(00236)

2 00348(00253)


2 01884(00342)

2 03059(00710)


00182(00341)

00413(00710)


01214(00222)

02189(00342)


02278(00164)

03896(00363)


00471(00166)

00271(00254)


00444(00144)

2 00790(00374)


2 00814(00415)

2 01126(00817)


2 02555(00419)

2 04548(00888)


2 00067(00418)

2 00977(00781)


00512(00405)

01667(00867)


5773 5773 5773 5680 5680 5680

R2 006 007 007 005 005 005




















1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES




















































1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES












































1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES





































1 u 2rt2 1iSP500 1 e ti



























Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES



















































Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES














































Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES







































Deciles 10 20 30 40 50 60 70 80 90



salary andbonus 1292 1292 1292 1292 1292 1292 1292 1292 1292




sation (14073) (6193) (811) 3760 7611 12143 17209 23794 35342C Median

compensa-tion

salary andbonus 1050 1050 1050 1050 1050 1050 1050 1050 1050




sationc (435) 441 1014 2196 3026 4042 5111 6385 8598













DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES











































DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES





































DecilesMean

change

Smallestchange

30 40 50 60 70

Largestchange

10 20 80 90












































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES































































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES
























































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES

















































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES







































(1) (2)

































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES

















































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES









































Year

Medianelasticity

(1)



(2)





1980 117 251 1396 02811981 140 270 1631 03231982 150 286 1676 03341983 171 335 2097 04151984 202 321 2671 05231985 191 346 2881 05691986 226 384 3318 06541987 242 397 3885 07611988 233 363 3931 07701989 281 411 4517 08871990 310 364 5297 10341991 268 422 4424 08731992 361 463 6773 13331993 399 530 7929 15601994 394 529 9237 1823







Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES







































Years

SampP500

stockreturn


in wealth

Medianstock

return forrms


Meanwealthloss of



Medianwealth



dollars)






VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES





































VIII IMPLICATIONS
































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES




























































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES





















































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES













































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES






































OPTION HOLDINGS



where

(3) Z 5ln (PE) 1 T (r 2 d 1 s 22)

s Icirc T







Initial Conditions






















REFERENCES






































Initial Conditions






















REFERENCES





















































REFERENCES














































REFERENCES





































REFERENCES

















































Documents

THE QUARTERLY JOURNAL OF ECONOMICS - Harvard · PDF fileTHE QUARTERLY JOURNAL OF ECONOMICS ... Murphy, David Scharfstein, ... are presented in Hall and Liebman {1997}