Pay(out) for Performance? Evidence from Long-term Incentive Plans

52 Pages Posted: 13 Sep 2022 Last revised: 3 Apr 2024

See all articles by Zhi Li

Zhi Li

Chapman University - The George L. Argyros College of Business and Economics

Qiyuan Peng

University of Dayton - School of Business Administration

Lingling Wang

University of Connecticut - Department of Finance

Date Written: April 2, 2024

Abstract

The widespread adoption of performance-contingent compensation plans increases the gap between executives’ ex-ante reported pay and final take-home pay. The common practice of evaluating executive compensation using ex-ante reported values can be misleading. We address this issue with hand-collected plan-level realized payouts from CEOs’ long-term accounting-based incentive plans. We find a significant positive relation between firm performance and payout likelihood or levels. A 0.01 increase in average ROA during the performance period corresponds to a 6.4% increase in plan payout. The payout-performance relation is not due to earnings manipulation or contract design. Shareholders react positively and increase support for Say-on-pay voting when CEOs receive payouts at or above the target level. These CEOs are also less likely to leave. However, we uncover that some firms make excessive, performance-unrelated payouts, indicating managerial rent-seeking. Our findings cannot be inferred from ex-ante reported pay targets, highlighting the importance of understanding executives’ take-home 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, Pay(out) for Performance? Evidence from Long-term Incentive Plans (April 2, 2024). 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 College of Business and Economics ( email )

1 University Drive
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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