Gryglewicz, S., Hartman-Glaser, B. and Zheng, G. (2020). Growth Options, Incentives, and Pay-for-Performance: Theory and Evidence Management Science, 66(3):1248--1277.

Pay{\textendash}performance sensitivity is a common proxy for the strength of incentives. We show that growth options create a wedge between expected-pay{\textendash}effort sensitivity, which determines actual incentives, and pay{\textendash}performance sensitivity, which is the ratio of expected-pay{\textendash}effort to performance{\textendash}effort sensitivity. An increase in growth option intensity can increase performance{\textendash}effort sensitivity more than expected-pay{\textendash}effort sensitivity so that, as incentives increase, pay{\textendash}performance sensitivity decreases. We document empirical evidence consistent with this finding. Pay{\textendash}performance sensitivity, measured by dollar changes in manager wealth over dollar changes in firm value, decreases with proxies for growth option intensity and increases with proxies for growth option exercise.