CEO Incentives And Firm Productivity

This paper investigates the relation between firm productivity and CEO performance incentives. It is first found that CEO equity ownership enhances firm productivity and that firm productivity enhances corporate financial performance. Then it is found that the relation between CEO performance incentives and productivity is quite complex. There is an inverse U-shaped relation between productivity and the sensitivity of CEO wealth to share value (delta), which suggests that the high CEO portfolio risk associated with high delta discourages CEOs from undertaking risky positive-NPV projects. It is also found that greater sensitivity of CEO wealth to stock return volatility (vega) generally increases firm productivity.