Governance Structure and the Weighting of Performance Measures in CEO Compensation

IESE Business School Working Paper No. 601

30 Pages Posted: 12 Jan 2006

See all articles by Tony Davila

Tony Davila

University of Navarra - IESE Business School

Fernando Penalva

IESE Business School - University of Navarra; European Corporate Governance Institute (ECGI)

Abstract

We empirically examine how governance structure affects the design of executive compensation contracts and, in particular, the implicit weights of firm performance measures in CEO compensation. We find that compensation contracts in firms with higher takeover protection and where the CEO has more influence on governance decisions put more weight on accounting-based measures of performance (return on assets) than on stock-based performance measures (market returns). In additional tests, we further find that CEO compensation in these firms has lower variance and a higher proportion of cash (versus stock-based) compensation. We further find that CEOs' incentives (measured as changes in CEO annual wealth, which includes changes in the value of CEOs' equity holdings, in addition to yearly compensation) do not vary across governance structures. These findings are consistent with CEOs in firms with high takeover protection and high CEO influence on governance being able to influence the contracting.

Keywords: CEO compensation, executive compensation, performance measures, compensation contracts

Suggested Citation

Davila, Antonio and Penalva, Fernando, Governance Structure and the Weighting of Performance Measures in CEO Compensation. IESE Business School Working Paper No. 601, Available at SSRN: https://ssrn.com/abstract=875324 or http://dx.doi.org/10.2139/ssrn.875324

Antonio Davila (Contact Author)

University of Navarra - IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Fernando Penalva

IESE Business School - University of Navarra ( email )

Ave. Pearson 21
Barcelona, Barcelona 08034
Spain
932534200 (Phone)
932534343 (Fax)

HOME PAGE: http://www.iese.edu

European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels
Belgium

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