Top management compensation and shareholder returns: Unravelling differentmodels of the relationship

In order to further examine the relationship between executive pay and comp any performance, this paper investigates the linkage between two separate c omponents of executive compensation (i.e. cash compensation and stock optio ns) and market return performance, among a selected sample of US pharmaceut ical. company CEOs and COOs. In the surveyed sample, changes in cash compen sation were found to exhibit a between-firm relationship with lagged market returns, while Delta stock option grants displayed a within-firm relations hip. The former result suggests a commonality in practices across all firms , while the latter denotes idiosyncratic firm-specific practices. These con trasts represent different degrees of the agency problem in the contracts f or cash compensation as compared to the stock option components. Levels of cash compensation were affected primarily by firm size. Market returns were not instrumental influences on the levels of both compensation components.