Pay-Performance Sensitivity Before and After SOX

49 Pages Posted: 7 Sep 2013 Last revised: 14 Mar 2014

See all articles by Hui Chen

Hui Chen

University of Zurich

Debra C. Jeter

Vanderbilt University - Accounting

Ya-Wen Yang

Wake Forest University - Schools of Business

Date Written: August 30, 2013

Abstract

The purpose of this paper is to investigate the impact on pay-performance sensitivity of the Sarbanes-Oxley Act. We compare managers’ pay-performance sensitivity before and after 2001-2002, a period during which regulatory changes were initiated to increase scrutiny over managerial manipulation and improve financial reporting quality. Based on ExecuComp data from 1992 to 2005 (and excluding the years 2001 and 2002), our results show that pay-performance sensitivity using either market-based or accounting-based measures of performance increased significantly following these events. When we further decompose executive pay into its cash-based and equity-based components, we find evidence of an increase in the link between performance and executive compensation for five of six measures for each performance metric. The evidence presented here is consistent with an improvement in the perceived credibility of reported earnings and an increased reliance on earnings in compensation contracts, which in turn resulted in an increase in the link between executive compensation and shareholder wealth.

Keywords: Pay-performance sensitivity, executive compensation, Sarbanes-Oxley

JEL Classification: M41, G30, J33

Suggested Citation

Chen, Hui and Jeter, Debra C. and Yang, Ya-Wen, Pay-Performance Sensitivity Before and After SOX (August 30, 2013). Vanderbilt Owen Graduate School of Management Research Paper No. 2321732. Available at SSRN: https://ssrn.com/abstract=2321732 or http://dx.doi.org/10.2139/ssrn.2321732

Hui Chen

University of Zurich ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

Debra C. Jeter (Contact Author)

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States

Ya-Wen Yang

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States
336-758-2934 (Phone)

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