Pay for the Right Performance
58 Pages Posted: 23 Mar 2010 Last revised: 20 Aug 2012
Date Written: August 17, 2012
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: Suggested Citation