Executive Compensation Disclosures: The Effect of Table Versus Formula Formats
Posted: 10 May 2017
Date Written: May 10, 2017
This study investigates how the data presentation format of executive compensation disclosures affects investors’ compensation- and investment-related judgments and decisions. We examine the effect of these formats and their underlying mechanisms by conducting laboratory experiments. We compare bonus schemes presented in the table and formula formats and find an interaction effect between the data presentation format and outcome favorability. When the actual performance beats the performance targets (favorable outcome), investors are more likely to approve bonus awards presented in the formula format rather than the table format. However, there is no significant difference in approval ratings between different formats when the performance targets are missed (unfavorable outcome). In addition, we find evidence that the understandability and halo effects mediate the effect of data presentation formats on investors’ judgment. Our study contributes to several research areas including information understandability, the halo effect, compensation disclosures and shareholder voting. Our findings also have practical implications for both managers and investors.
Keywords: Data Presentation Format, Understandability Effect, Halo Effect, Bonus Scheme, Say on Pay
JEL Classification: M41
Suggested Citation: Suggested Citation