Business Strategy and Performance Measures in CEO Compensation Contracts

Posted: 14 Nov 2021

See all articles by Rajiv D. Banker

Rajiv D. Banker

Temple University - Department of Accounting

Rong Huang

Department of Accounting, School of Management, Fudan University

Xiaorong Li

Antai College of Economics and Management, Shanghai Jiaotong University

Bo Zhang

School of Business, Renmin University of China

Siqi Zhou

Fudan University, School of Management, Students

Date Written: October 18, 2021

Abstract

In this study, we examine how business strategies affect compensation contracting and performance evaluation. Using textual measures of business strategies derived from corporate 10-K filings, we find that firms adopting the operational excellence strategy place a higher compensation weight on accounting-based performance, while firms adopting the customer intimacy strategy tend to weigh market-based performance more than other firms. The results also show that firms focusing on the product leadership strategy grant more equity-based compensation to CEOs. Focusing on the explicit performance measures disclosed in firms’ proxy statements, we document that companies pursuing the product leadership strategy are more likely to employ learnings and growth performance measures to promote innovation activities, while companies adopting the customer intimacy strategy tend to use customer-based measures to enhance customer relationships. Finally, firms leaning towards the operational excellence strategy are more likely to adopt internal process measures to reduce costs and improve production efficiencies. Our study provides evidence that firms rely on business strategies when designing compensation contracts and selecting performance measures.

Keywords: Business strategy, performance evaluation, product leadership, customer intimacy, operational excellence

JEL Classification: M41, M48

Suggested Citation

Banker, Rajiv D. and Huang, Rong and Li, Xiaorong and Zhang, Bo and Zhou, Siqi, Business Strategy and Performance Measures in CEO Compensation Contracts (October 18, 2021). Fox School of Business Research Paper , Available at SSRN: https://ssrn.com/abstract=3960535

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Rong Huang

Department of Accounting, School of Management, Fudan University ( email )

670 Guoshun Rd.,
Shanghai, Shanghai
China

Xiaorong Li

Antai College of Economics and Management, Shanghai Jiaotong University ( email )

No. 1954, Huashan Road
Xuhui District
Shanghai, 200030
China

Bo Zhang (Contact Author)

School of Business, Renmin University of China ( email )

59 Zhongguancun Street
Haidian District
Beijing, 100872
China
86-10-62514992 (Phone)

Siqi Zhou

Fudan University, School of Management, Students ( email )

No. 670, Guoshun Road
Shanghai
China

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