Complexity of CEO Compensation Packages

70 Pages Posted: 25 Apr 2022

See all articles by Ana M. Albuquerque

Ana M. Albuquerque

Boston University - Questrom School of Business

Mary Ellen Carter

Boston College - Department of Accounting

Zhe (Michael) Guo

Boston University - Questrom School of Business

Luann J. Lynch

University of Virginia - Darden School of Business

Date Written: March 25, 2022

Abstract

Despite claims that CEO compensation contracts are increasingly complex, little is known about the extent to which they are, what drives that complexity, and its implications. We develop a new measure of compensation contract complexity and find that complexity relates to factors capturing firm complexity as well as the inclusion of contract provisions to address principal-agent conflicts. Firms that allow for ex-post renegotiation have simpler contracts, and external pressures are associated with greater contract complexity. We find that complexity has deleterious consequences; compensation complexity is associate with lower future firm performance. And, that relation is stronger when firms face extreme changes in business conditions and when the performance metrics in compensation contracts are weakly correlated, consistent with information overload hampering decision making. The unintended consequences of complexity confirm concerns raised by investors and the media, and our findings may be useful to boards as they design CEO pay packages.

Keywords: CEO compensation, contracts, complexity, incentives, information overload

JEL Classification: J33, M52

Suggested Citation

Albuquerque, Ana M. and Carter, Mary Ellen and Guo, Zhe (Michael) and Lynch, Luann J., Complexity of CEO Compensation Packages (March 25, 2022). Darden Business School Working Paper No. 4066889, Available at SSRN: https://ssrn.com/abstract=4066889 or http://dx.doi.org/10.2139/ssrn.4066889

Ana M. Albuquerque (Contact Author)

Boston University - Questrom School of Business ( email )

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

HOME PAGE: http://sites.google.com/bu.edu/ana-albuquerque/home

Mary Ellen Carter

Boston College - Department of Accounting ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Zhe (Michael) Guo

Boston University - Questrom School of Business ( email )

United States

Luann J. Lynch

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

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