Do Boards Exercise Discretion to Reduce Costly Ex Post Settling Up?

62 Pages Posted: 13 Aug 2014

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University Questrom School of Business

Bingyi Chen

Boston University - School of Management

Flora Dong

Kennesaw State University

Eddie Riedl

Boston University - Questrom School of Business

Date Written: August 10, 2014

Abstract

This paper examines whether boards exercise discretion to reduce costly ex post settling up of having to recover CEO cash compensation for unrealized gains that fail to materialize. We predict and support three empirical findings. First, we document greater cash pay-performance sensitivity for firms exhibiting unrealized losses (proxied via negative stock returns) relative to firms with unrealized gains (proxied via positive stock returns). We use a sample of firms selected to maximize their likelihood of falling within the incentive zone; this research design addresses concerns in the literature regarding possible attribution of findings to mechanical application of bonus formula. Second, we find that future salary revisions are more sensitive to unrealized losses than to unrealized gains, consistent with Fama’s (1980) notion of ex post settling up occurring via salary revisions. Finally, we provide cross-sectional evidence that this asymmetric sensitivity is greater for firms with stronger corporate governance, less timely accounting earnings, and a larger proportion of total pay in the form of cash compensation.

Keywords: Management compensation, Pay-performance sensitivity, Ex post settling up, Cash compensation contracts

JEL Classification: D23, J33, M40, M46

Suggested Citation

Albuquerque, Ana M. and Chen, Bingyi and Dong, Qi and Riedl, Edward J., Do Boards Exercise Discretion to Reduce Costly Ex Post Settling Up? (August 10, 2014). Boston U. School of Management Research Paper No. 2479330. Available at SSRN: https://ssrn.com/abstract=2479330 or http://dx.doi.org/10.2139/ssrn.2479330

Ana M. Albuquerque (Contact Author)

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-358-4185 (Phone)
617-353-6667 (Fax)

Bingyi Chen

Boston University - School of Management ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Qi Dong

Kennesaw State University ( email )

1000 Chastain Rd
Kennesaw, GA 30144
United States

Edward J. Riedl

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-2317 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
123
Abstract Views
2,132
rank
227,312
PlumX Metrics