Jensen and Murphy (1990) examine the relationship between CEO pay and firm performance, finding that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. They argue that while stock ownership provides incentives, most CEOs hold trivial fractions of their firms' stock, and ownership levels have declined over time. The authors hypothesize that political forces limit the pay-performance sensitivity. They estimate that the pay-performance sensitivity for CEOs in the bottom half of their sample is $8.05 per $1,000, while for those in the top half, it is $1.85 per $1,000. The authors find that the pay-performance relation and CEO pay have declined since the 1930s, consistent with implicit regulation. They also find that stock options and inside stock ownership provide incentives, but these holdings are not generally controlled by the board. The authors conclude that their results are inconsistent with formal agency models of optimal contracting, as the pay-performance sensitivity is small for an occupation where incentive pay is expected to play an important role. They also find that dismissals are not a major source of managerial incentives. The authors suggest that the pay-performance relation is influenced by political forces that constrain the type of contracts that can be written between management and shareholders. They also find that the pay-performance sensitivity is higher for CEOs in smaller firms. The authors estimate that the total pay-performance sensitivity, including compensation, dismissal, and stockholdings, is about $3.25 per $1,000 change in shareholder wealth. They also find that the pay-performance sensitivity is higher for CEOs with larger stockholdings. The authors conclude that their results are consistent with several alternative hypotheses, including the idea that CEOs may be unimportant inputs in the production process or that their actions may be easily monitored and evaluated by corporate boards. They also suggest that political forces play a role in the contracting process, which implicitly regulate executive compensation. The authors find that public disapproval of high rewards has truncated the upper tail of the earnings distribution of corporate executives, and that equilibrium in the managerial labor market prohibits large penalties for poor performance, reducing the dependence of pay on performance. The authors also find that the pay-performance relation, the raw variability of pay changes, and inflation-adjusted pay levels have declined substantially since the 1930s, consistent with implicit regulation.Jensen and Murphy (1990) examine the relationship between CEO pay and firm performance, finding that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. They argue that while stock ownership provides incentives, most CEOs hold trivial fractions of their firms' stock, and ownership levels have declined over time. The authors hypothesize that political forces limit the pay-performance sensitivity. They estimate that the pay-performance sensitivity for CEOs in the bottom half of their sample is $8.05 per $1,000, while for those in the top half, it is $1.85 per $1,000. The authors find that the pay-performance relation and CEO pay have declined since the 1930s, consistent with implicit regulation. They also find that stock options and inside stock ownership provide incentives, but these holdings are not generally controlled by the board. The authors conclude that their results are inconsistent with formal agency models of optimal contracting, as the pay-performance sensitivity is small for an occupation where incentive pay is expected to play an important role. They also find that dismissals are not a major source of managerial incentives. The authors suggest that the pay-performance relation is influenced by political forces that constrain the type of contracts that can be written between management and shareholders. They also find that the pay-performance sensitivity is higher for CEOs in smaller firms. The authors estimate that the total pay-performance sensitivity, including compensation, dismissal, and stockholdings, is about $3.25 per $1,000 change in shareholder wealth. They also find that the pay-performance sensitivity is higher for CEOs with larger stockholdings. The authors conclude that their results are consistent with several alternative hypotheses, including the idea that CEOs may be unimportant inputs in the production process or that their actions may be easily monitored and evaluated by corporate boards. They also suggest that political forces play a role in the contracting process, which implicitly regulate executive compensation. The authors find that public disapproval of high rewards has truncated the upper tail of the earnings distribution of corporate executives, and that equilibrium in the managerial labor market prohibits large penalties for poor performance, reducing the dependence of pay on performance. The authors also find that the pay-performance relation, the raw variability of pay changes, and inflation-adjusted pay levels have declined substantially since the 1930s, consistent with implicit regulation.