January 3, 2017
Pay-for-Performance: Better to Be Lucky than Good?
– John Jenkins
This study reports the results of a survey suggesting that a lot of the payoff on options & other performance-based comp is based on a roll of the dice:
We empirically estimate that approximately 90% of option-based compensation constitutes pay for luck. This value is very robust, and stems from the inherent fact that chance plays a dominant role in determining firm performance. The impact of a manager on her expected compensation via the improvement of firm performance is low, hence, in contrast to common wisdom, standard option-based compensation does not constitute a strong motivating force for rational managers.