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Article

What Investors Need to Know about Executive Pay

Stephen F O’Byrne and S. David Young
The Journal of Investing Spring 2010, 19 (1) 36-44; DOI: https://doi.org/10.3905/JOI.2010.19.1.036
Stephen F O’Byrne
is the president of Shareholder Value Advisors in Larchmont, NY.
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  • For correspondence: sobyrne@valueadvisors.com
S. David Young
is a professor of accounting and control at INSEAD in Fontainebleau, France.
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  • For correspondence: david.young@insead.edu
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Abstract

Public company disclosures give analysts a comprehensive measure of top management’s total compensation but do not provide a comprehensive measure of management’s incentive to increase shareholder value. This article presents comprehensive measures of management’s value and growth incentives. The authors’ incentive measures (“value wealth leverage” and “revenue wealth leverage”) show the sensitivity of management wealth to changes in shareholder wealth and revenue. The article shows how investors can use these measures to determine whether top management has a strong value-creation incentive, a strong incentive to pursue value-destroying growth, or neither. The authors also present findings from their study of S&P 1500 companies, including an analysis of the impact of value wealth leverage on subsequent shareholder returns. The results show that companies with high value wealth leverage tend to outperform other firms in terms of excess returns, but the effects are concentrated among value (as opposed to growth) firms.

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The Journal of Investing: 19 (1)
The Journal of Investing
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Spring 2010
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What Investors Need to Know about Executive Pay
Stephen F O’Byrne, S. David Young
The Journal of Investing Feb 2010, 19 (1) 36-44; DOI: 10.3905/JOI.2010.19.1.036

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What Investors Need to Know about Executive Pay
Stephen F O’Byrne, S. David Young
The Journal of Investing Feb 2010, 19 (1) 36-44; DOI: 10.3905/JOI.2010.19.1.036
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  • Article
    • Abstract
    • PERCENT OF PAY AT RISK: THE CONVENTIONAL WAY TO THINK ABOUT INCENTIVES
    • WEALTH LEVERAGE: A BETTER WAY TO THINK ABOUT INCENTIVES
    • ESTIMATING WEALTH LEVERAGE FOR PUBLIC COMPANIES
    • HOW WE ESTIMATE COMPONENT LEVERAGE
    • FUTURE COMPENSATION PROVIDES A WEAK VALUE INCENTIVE BUT A STRONG REVENUE INCENTIVE
    • TILLERSON HAS LOW VALUE WEALTH LEVERAGE DESPITE A HIGH PERCENT OF PAY AT RISK
    • MEASURING MANAGEMENT’S INCENTIVE FOR VALUE-DESTROYING GROWTH
    • VALUE WEALTH LEVERAGE ANDCOMPANY PERFORMANCE
    • A NOTE ON THE INCENTIVE PROBLEMS BEHIND THE FINANCIAL CRISIS
    • CONCLUSIONS
    • APPENDIX
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