S. David Young
Professor of Accounting and Control
Corporate Governance; Investors, Stakeholders and Accountability;
This article presents two comprehensive incentive measures for top management pay: the sensitivity of management wealth to changes in shareholder wealth (“value wealth leverage”) and the sensitivity of management wealth to changes in revenue (“revenue wealth leverage”).The authors show how investors can use these measures to answer four important questions: (1) How strong is management’s incentive to create shareholder value? (2) How strong is management’s incentive to grow revenues? (3) Does management have an incentive to pursue value-destroying revenue growth? (4) Is higher-value wealth leverage (i.e., strong wealth-creation incentives) associated with significant excess returns?The incentive problems behind the recent global financial crisis are also discussed.