Investment Opportunities and the Structure of Performance-Based Executive Compensation

Posted: 26 Feb 1998

See all articles by William R. Baber

William R. Baber

Georgetown University - Department of Accounting and Business Law

Surya N. Janakiraman

University of Texas at Dallas - Department of Accounting & Information Management

Sok-Hyon Kang

George Washington University - School of Business

Abstract

The contracting paradigm advanced in Smith and Watts (1992) suggests that both the risk-sharing and incentive consequences of performance-contingent compensation depend on the extent that investment opportunities comprise firm value. Following Smith and Watts we hypothesize that sensitivity of CEO compensation to measures of firm performance varies directly with future investment opportunities. We also hypothesize that investment opportunities promote the use of market-based rather than accounting-based performance measures. Results using 1992- 1993 compensation paid to 1249 CEOs of publicly-traded U.S. firms are consistent with these hypotheses.

JEL Classification: J33, M49

Suggested Citation

Baber, William R. and Janakiraman, Surya N. and Kang, Sok-Hyon, Investment Opportunities and the Structure of Performance-Based Executive Compensation. Available at SSRN: https://ssrn.com/abstract=55515

William R. Baber (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Surya N. Janakiraman

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

Sok-Hyon Kang

George Washington University - School of Business ( email )

405 Government Hall
GWU
Washington, DC 20052
United States
(202) 994-6058 (Phone)
(202) 994-5164 (Fax)

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