Governance structure and the weighting of performance measures in CEO compensation

Toni Davila () and Fernando Peñalva
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Toni Davila: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Fernando Peñalva: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN

No D/601, IESE Research Papers from IESE Business School

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 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2005-07-07
New Economics Papers: this item is included in nep-bec
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