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The effects of performance-based CEO compensation on company performance
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School of Business |
Bachelor's thesis
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en
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24 + 10
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This thesis examines the effects of performance-based CEO compensation on company performance through a literature review. While the use of performance-based compensation grew significantly in popularity in the 1990s, its effectiveness in improving company performance remains debated.
Key findings reveal that performance-based compensation often results in negative effects, particularly under weak corporate governance, as executives use compensation structures to extract higher pay rather than improve company performance. However, positive effects are found when pay-performance sensitivity is kept at moderate levels and tied to long-term metrics. These results align more closely with managerial power theory than agency theory predictions, suggesting boards should maintain lower pay-performance sensitivity levels and strengthen corporate governance mechanisms.