The use of stock-based pay for sorting: an empirical analysis of compensation for new CEOs

Examining stock-based compensation for newly hired CEOs, this article finds that the sensitivity of stock-based pay to performance is higher for new economy, young and volatile firms. Of the components of stock-based pay, it is option grants that generate such variation across firms. It also finds that this cross-firm variation in pay-performance sensitivity is more pronounced for the CEO's first year in office. These findings support the view that firms use stock-based pay to new CEOs for sorting.