Sales Growth, CEO Pay, and Corporate Governance in India

Abstract

Although stock return-based performance metrics are common in CEO compensation contracts in the US, similar CEO pay arrangements may not be appropriate in India given higher stock return volatility and lower liquidity. Instead, sales growth as a performance metric could be useful in incentivizing Indian CEOs to pursue earnings growth consistent with shareholder value maximization. In this study, we examine the use of sales growth as a performance metric in extant India CEO pay arrangements and whether the usage is consistent with efficiency. Our findings suggest that the weight placed on sales growth in determining CEO compensation in India is positive and is higher for more powerful CEOs. We also find that board vigilance is effective in moderating the weight placed on sales growth in CEO pay arrangements. Finally, we show that the weight placed on sales growth in assessing CEO pay negatively impacts future firm performance, particularly for firms that are in the later stages of the firm lifecycle, are less profitable, and have weaker shareholder monitoring. Collectively, our findings are consistent with inefficiency (efficiency) in CEO pay contracting in the use of sales growth as a performance metric in later (early) stage firms, less (more) profitable firms, and weaker (stronger) shareholder monitoring firms. More broadly, our findings albeit India-specific are of potential interest to CEO pay arrangement debates in the US and elsewhere where sales growth is an important performance metric in determining CEO compensation.

Keywords: Sales growth, CEO compensation, CEO power, Corporate governance, India

JEL Classification: M12, M52, L25, G30