The effect of incentive plans on stock returns has been studied extensively

The effect of incentive plans on stock returns has been studied extensively. In the earliest of the studies linking financial incentives to subsequent performance, Masson (1971) found that firms provided greater financial incentives for their CEOs exhibited better stock market performance over the post war period. Among financial economists, the dominant approach to the study of executive compensation view manager’s pay arrangements as a (partial) remedy to the agency problem. Under this approach, which be labelled with the “optimal contracting approach”, boards are assumed to design compensation scheme to provide managers with efficient incentives to maximize shareholder value (Lucyan Arye Bebchuk ; Jesse M. Fried, 2003).