Examining shareholder value creation over CEO tenure: A new approach to testing effectiveness of executive compensation

The executive compensation literature has explored the executive pay-forperformance relation in various contexts and reported mixed findings. As a result, the question of whether executive incentives, and particularly stock options, are effective continues to pose a puzzle to researchers. Gong (2011) uses a long window to examine effectiveness of executive compensation. This note discusses several broad aspects of pay-for-performance studies and their potential manifestation in this line of research and in Gong's study. Specifically, I elaborate on measurement issues and on each of the following aspects: (1) the underlying paradigm: arm's-length contracting versus managerial power; (2) the distinction between the pay-for-performance relationship and CEO overpay; (3) market efficiency; and (4) the settling-up problem.