Executive Motivations, Earnings, and Consequent Equity Performance

In this paper the financial incentives of executives are analyzed, theoretically and econometrically, with particular emphasis on the relationship between executive motivations and the sales-maximization hypothesis. Executive financial incentives are found to be primarily related to firm stock market performance. The sales performance of the firm has no consistent positive or negative effect on executive financial return. The structures of individual firms' compensation packages were tested for effects on firm performance. It was found that firms with executives whose financial rewards more closely paralleled stockholders' interests performed better in the stock market over the postwar period. For this sample of firms it was concluded that the hypothesis of present-value maximization better explains firm behavior than the hypothesis of sales maximization. It is the conclusion of this author that the sales-maximization hypothesis does not usefully characterize the "typical oligopolist," as has been asserted by William J. Baumol.