On the Role of Convex Pay for Performance in Executive Compensation

The paper investigates pay-performance sensitivity in CEO compensation contracts. It finds that pay-performance sensitivity is positively associated with managerial performance and that this association is less pronounced for CEOs with longer tenure. These findings are consistent with the implications of sorting under asymmetric information about managerial ability. The paper thereby finds evidence supporting the view that convex pay for performance in executive compensation can take a sorting role in addition to the provision of risk-taking incentives the literature has found.