Pay for Future Returns

Is managerial compensation sensitive to future performance or only to realized returns? We show that salary raises of U.S. American CEOs predict positive stock returns in the year after. The wealth e ffect of an average raise is $1.6 million, implying a wealth increase of $0.28 million per 1% stock price increase in the next year. This compares to an equity delta of $0.71 million. We verify in 649 hand-collected CEO employment contracts that salary raises are relevant outputs of compensation reviews and link the provisions to actual raises. Our results are consistent with implicit contracting to reward contribution to future performance.