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Pay for the Right Performance

58 Pages Posted: 23 Mar 2010 Last revised: 20 Aug 2012

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC) Herzliyah

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Date Written: August 17, 2012

Abstract

In December 2006, the Securities and Exchange Commission issued new rules that require enhanced disclosure on how firms tie CEO compensation to performance. We use this new available data to study the terms of performance-based awards in CEO compensation contracts in S&P 500 firms. We observe large variations in the choice of performance measures and horizons. Our evidence is consistent with predictions from optimal contracting theories: firms rely on performance measures that are more informative of CEO actions. Furthermore, our results do not support the argument that entrenched CEOs rig the contractual terms toward performance measures that are easier to manipulate.

Keywords: CEO Compensation, Market-based Performance Measure, Accounting-based Performance Measure, Performance Horizon

JEL Classification: G34, G38, J33

Suggested Citation

De Angelis, David and Grinstein, Yaniv, Pay for the Right Performance (August 17, 2012). Johnson School Research Paper Series No. 03-2011. Available at SSRN: https://ssrn.com/abstract=1571182 or http://dx.doi.org/10.2139/ssrn.1571182

David De Angelis (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://www.de-angelis.com

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall
Ithaca, NY 14853
United States
607-255-8686 (Phone)
607-254-4590 (Fax)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

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