Purpose: The purpose of this paper is to examine how executive pay schemes influence managerial efficiency, which the authors measure as the risk-adjusted firm performance. Design/methodology/approach: The authors utilized hierarchical regression to test the hypotheses. Findings: The authors find that as options constitute a higher percentage of total compensation packages, subsequent firm risk-adjusted performance declines. The authors also find an inverse relationship between TMT stock ownership and risk-adjusted performance. Research limitations/implications: The findings suggest that the firm stakeholders should reconsider the likely influence of option-based incentives and equity holdings on the risk-adjusted performance. Originality/value: Most executive compensation research focuses on either the pay-to-performance or pay-to-risk links. However, in this paper, the authors combine both the performance and risk dimensions simultaneously.
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