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Pay for Performance? Relationship between CEO incentive compensation and future stock price performance in DAX and MDAX companies.

  • The objective of this study is to examine the relationship between the level of Chief Executive Officers’ incentive compensation and subsequent share price performance for the 80 biggest stock listed German companies between 2005 and 2014. The performance proxies are geometric monthly returns, as well as risk-adjusted geometric returns using the Sharpe Ratio. Additionally t-statistics for quintile portfolio returns have been calculated. The results are mixed, indicating that there might in fact not be a relationship between incentive compensation and share price performance at all for this sample. Consequently this study finds that average monthly returns for firms with incentive pay-outs are strongly correlated to the returns for firms without incentive payouts and that the samples do not differ significantly . A relationship between the level of incentive compensation and the level of future share price performance can also not be determined with absolute certainty. However there are indications that would support a negative relationship between the two, as average monthly returns decrease over longer time horizons. The Sharpe Ratio analysis finds mixed evidence on this question while the t-statistics indicate that there are no significant differences between 94% of the formed quintile portfolios.

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Author:Sebastian Müller
Advisor:Uwe Hack
Document Type:Bachelor Thesis
Year of Completion:2015
Year of first Publication:2015
Release Date:2015/11/26
Tag:Executive Compensation; Incentives; Pay Performance
Degree Program:IBM - International Business Management
Functional area:Finance & Accounting