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Explain low pay-performance sensitivity

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Reference no: EM132852104

Jensen and Murphy (1990) found that for every $1,000 change in shareholder wealth, CEO wealth changes $3.25, taking into accounts salary, bonus, stock grants, options, and threat of dismissal. They conclude that such a pay-performance sensitivity is too low to motivate CEOs.

Required:

-Why do they expect the CEO's pay-performance sensitivity to be much higher?

-What are the reasons that result in a low pay-performance sensitivity?

-Is a low pay-performance sensitivity consistent with the predictions of agency theory? Under what conditions?

Reference no: EM132852104

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