Information in CEO Take-home Pay: Evidence from Long-term Incentive Plans

51 Pages Posted: 13 Sep 2022 Last revised: 8 Nov 2022

See all articles by Zhi Li

Zhi Li

Chapman University - The George L. Argyros School of Business & Economics

Qiyuan Peng

University of Dayton - School of Business Administration

Lingling Wang

University of Connecticut - Department of Finance

Date Written: October 30, 2022

Abstract

Complex performance-based incentive plans drive a growing wedge between executives’ reported ex-ante pay and their actual take-home pay. Using hand-collected data on actual payouts from CEOs’ long-term accounting-based incentive plans, we find that actual payouts contain information on the realized pay-for-performance relation and CEO quality beyond what ex-ante pay could predict. On average, firms tie payouts to performance and the strong payout-for-performance is not a result of earnings management or contract design. Shareholders react positively when CEOs achieve payouts at the target level or higher. These CEOs are more likely to receive shareholder support in future compensation proposals and less likely to leave the firm over the next two years. The actual payout data also reveal a small subset of firms that make abnormally high plan payouts to CEOs that are not tied to performance. Supporting managerial rent-seeking, these firms have powerful CEOs, weaker governance, and less transparent compensation disclosure and design. Together, our findings show that actual payouts from performance-based compensation plans contain unique information that could benefit shareholders, which lends support for the SEC’s recent push for enhanced disclosure on executives’ actual pay.

Keywords: Executive compensation payout, Actually-paid compensation, Performance plans, Accounting-based incentives, Pay for performance

JEL Classification: M12; J33; G32; M41

Suggested Citation

Li, Zhi and Peng, Qiyuan and Wang, Lingling, Information in CEO Take-home Pay: Evidence from Long-term Incentive Plans (October 30, 2022). University of Connecticut School of Business Research Paper No. 22-16, Available at SSRN: https://ssrn.com/abstract=4203820 or http://dx.doi.org/10.2139/ssrn.4203820

Zhi Li

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
714-6287224 (Phone)

Qiyuan Peng (Contact Author)

University of Dayton - School of Business Administration ( email )

Dayton, OH 45469
United States

Lingling Wang

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

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