Contractual Features of CEO Performance-Vested Equity Compensation

Journal of Contemporary Accounting and Economics, Forthcoming

56 Pages Posted: 27 Jul 2011 Last revised: 13 Aug 2017

See all articles by Zhan Gao

Zhan Gao

Lancaster University

Yuhchang Hwang

Arizona State University (ASU) - School of Accountancy; China Europe International Business School

Wan-Ting Wu

University of Massachusetts Boston

Date Written: July 31, 2017

Abstract

We investigate the key contractual features of CEO performance-vested (p-v) equity compensation. We hypothesize that contractual features such as relative performance evaluation (RPE), the performance period length, and the number of performance metrics can be configured to improve the informativeness of performance metrics. Consistent with the hypotheses, we find that firms using market metrics are more likely to adopt RPE and long performance periods than firms using accounting metrics. The effects of performance metrics on RPE and performance periods remain prominent after we allow these features to be jointly determined. Moreover, we find that RPE is positively associated with longer performance periods, suggesting that the two features complement each other in improving the informativeness of performance metrics in p-v equity compensation. Our findings not only reveal the intricate relations between the contractual features, but also provide empirical support for the voting guidelines by proxy advisory services and have implications for the evolving practice of executive compensation.

Keywords: executive compensation, contract design, performance metrics, relative performance evaluation, performance period

JEL Classification: G34, G38, J33

Suggested Citation

Gao, Zhan and Hwang, Yuhchang and Wu, Wan-Ting, Contractual Features of CEO Performance-Vested Equity Compensation (July 31, 2017). Journal of Contemporary Accounting and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1896289 or http://dx.doi.org/10.2139/ssrn.1896289

Zhan Gao

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom
44-1524-593-151 (Phone)

Yuhchang Hwang

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

China Europe International Business School ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Wan-Ting Wu (Contact Author)

University of Massachusetts Boston ( email )

100 Morrissey Boulevard
Boston, MA 02125
United States

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