Accounting Comparability and Relative Performance Evaluation in CEO Compensation

45 Pages Posted: 1 Jul 2017 Last revised: 1 Jun 2018

See all articles by Gerald J. Lobo

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Michael J. Neel

University of North Texas

Adrienne Rhodes

Texas A&M University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: May 25, 2018

Abstract

We investigate whether accounting comparability is associated with the likelihood that CEO compensation is tied to relative accounting performance (e.g., return on assets). We predict that higher accounting comparability increases the risk-sharing benefit of accounting-based RPE because peer firm performance better controls for common risk in RPE firm performance. Thus, firms that have higher accounting comparability with potential performance peers will be more likely to include accounting-based RPE as a component of the total CEO compensation contract. We find support for this prediction using (1) an explicit test design that relies on the ex ante terms of CEO compensation contracts obtained from proxy disclosures, and (2) an implicit design that relies on the actual realizations of CEO compensation. To provide further evidence, we examine the association between accounting comparability and the selection of performance peers when the CEO compensation contract includes an accounting-based RPE component. We find that higher comparability between the RPE firm and a potential peer firm increases (decreases) the potential peer firm’s likelihood of being selected into (dropped from) the peer group. Cross-sectional analyses show that this association is less pronounced, or not present, when the relative performance measure is price-based (as opposed to accounting-based), indicating that these results do not merely reflect a more general role of comparability in all RPE contracts.

Keywords: Accounting Comparability, Relative Performance Evaluation, RPE, Peer Selection

JEL Classification: M12, M41

Suggested Citation

Lobo, Gerald J. and Neel, Michael J. and Rhodes, Adrienne, Accounting Comparability and Relative Performance Evaluation in CEO Compensation (May 25, 2018). Available at SSRN: https://ssrn.com/abstract=2995039 or http://dx.doi.org/10.2139/ssrn.2995039

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Michael J. Neel (Contact Author)

University of North Texas ( email )

Ryan College of Business
1155 Union Circle Suite 329L
Denton, TX 76203
United States

Adrienne Rhodes

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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