The labor-leisure choice in executive compensation plans: Does too much pay reduce REIT performance?

In this study, an alternative theoretical model for the relationship between pay and performance is developed. Prior research implicitly assumes that increases in compensation will enhance effort and subsequently increase performance via the substitution effect, ignoring the possibility of an income effect. At high levels of pay, there may be a strong income effect, leading to less effort and lower performance, creating a backward bending labor supply function. The empirical evidence provides support for this theoretical construct. The results of this study also illuminate the weak relationship between pay and performance found in prior studies.