Contractual features of CEO performance-vested equity compensation

Zhan Gao, Yuhchang Hwang and Wan-Ting Wu

Journal of Contemporary Accounting and Economics, 2017, vol. 13, issue 3, 282-303

Abstract: We investigate the key contractual features of CEO performance-vested (p-v) equity compensation. We hypothesize that contractual features such as relative performance evaluation (RPE), the performance period length, and the number of performance metrics can be configured to improve the informativeness of performance metrics. Consistent with the hypotheses, we find that firms using market metrics are more likely to adopt RPE and long performance periods than firms using accounting metrics. The effects of performance metrics on RPE and performance periods remain prominent after we allow these features to be jointly determined. Moreover, we find that RPE is positively associated with longer performance periods, suggesting that the two features complement each other in improving the informativeness of performance metrics in p-v equity compensation. Our findings not only reveal the intricate relations between the contractual features, but also provide empirical support for the voting guidelines by proxy advisory services and have implications for the evolving practice of executive compensation.

Keywords: CEO compensation; Contract design; Performance metrics; Relative performance evaluation; Performance period; Corporate governance (search for similar items in EconPapers)
JEL-codes: G34 G38 J33 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:13:y:2017:i:3:p:282-303

DOI: 10.1016/j.jcae.2017.09.005

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