Is CEO Cash Compensation Punished for Poor Firm Performance?

44 Pages Posted: 20 Dec 2009 Last revised: 15 Jan 2010

See all articles by Kenneth W. Shaw

Kenneth W. Shaw

University of Missouri at Columbia - School of Accountancy

May H. Zhang

Fordham University - Graduate School of Business Administration

Date Written: December 1, 2008

Abstract

Leone et al. (2006) conclude that CEO cash compensation is more sensitive to negative stock returns than to positive stock returns, due to Boards of Directors enforcing an ex post settling up on CEOs. Dechow (2006) conjectures that Leone et al.’s (2006) results might be due to the sign of stock returns misclassifying firm performance. Using three-way performance partitions, we find no asymmetry in CEO cash compensation for firms with low stock returns. Further, we find that CEO cash compensation is less sensitive to poor earnings performance than it is to better earnings performance. Thus, we find no evidence consistent with ex post settling up for poor firm performance, even among the very worst performing firms with strong corporate governance. We find similar results when examining changes in CEO bonus pay and when partitioning firm performance using earnings-based measures. In sum, our results suggest that CEO cash compensation is not punished for poor firm performance.

Keywords: CEO compensation, bonus contracts, pay-for-performance sensitivity

Suggested Citation

Shaw, Kenneth W. and Zhang, May H., Is CEO Cash Compensation Punished for Poor Firm Performance? (December 1, 2008). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1525601

Kenneth W. Shaw

University of Missouri at Columbia - School of Accountancy ( email )

420 Cornell Hall
Columbia, MO 65211
United States
573-882-5939 (Phone)
573-882-2437 (Fax)

May H. Zhang (Contact Author)

Fordham University - Graduate School of Business Administration ( email )

1790 Broadway, 13th FL
New York, NY 10019
United States

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