Information in CEO Take-home Pay: Evidence from Long-term Incentive Plans
51 Pages Posted: 13 Sep 2022 Last revised: 8 Nov 2022
Date Written: October 30, 2022
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: Suggested Citation