Executive Compensation and Non-financial Performance Measures: A Study of the Incentive Relevance of Mandated Non-Financial Disclosures in the U.S. Airline Industry

Abstract:     
This paper provides empirical evidence that industry-specific non-financial metrics, whose disclosure is mandated by the U.S. Department of Transportation (DOT) for the ten largest U.S. airlines, have explanatory power for top executive pay-for-performance relations beyond that provided by financial measures and other non-financial measures such as load factor and market share. Interestingly, for a subset of these airlines, we find that, over a smaller sample period, customer satisfaction, whose disclosure is not mandated, is not generally incentive-relevant, suggesting that disclosure requirements can affect the incentive relevance of non-financial measures of performance. Finally, we find that for airlines, DOT non-financial measures, unlike others such as load factor, influence top executives' compensation through the non-cash and not the cash component of compensation. Overall, our evidence improves understanding of the similarities and differences in the use of non-financial performance measures in compensation design when the disclosure of some of these metrics, but not all, is required.

Note: Previously titled "Executive Compensation and Non-financial Performance Measures: A Study of the Incentive and Value Relevance of Mandated Non-financial Disclousres in the U.S. Airlines Industry"

Number of Pages in PDF File: 33

Keywords: Executive compensation, Incentive contracts, Pay-for-performance, Non-financial performance measures, Customer satisfaction, Airline industry

JEL Classification: G34, J33, L93, M3, M4

working papers series