Firm Strategy and CEO−VP Pay Differentials in Equity Compensation

Margaret A. Abernethy, Yunhe Dong, Yu Flora Kuang, Bo Qin and Xing Yang

European Accounting Review, 2024, vol. 33, issue 3, 797-823

Abstract: We examine whether pay differentials between the chief executive officer (CEO) and vice presidents (VPs) can be explained by firms’ strategic priorities. We find that firms that pursue prospector-type strategies have a larger CEO−VP difference in equity compensation. We argue that such a pay differential relates to the relative authority that CEOs have in strategic decision-making, and we find that authority allocation based on a firm’s strategic priorities is consistent with the relative ability of the CEO vis-à-vis the VPs. Our results remain consistent after considering alternative explanations including CEO power, risk-taking incentives, and tournament incentives among VPs. Further analyses reveal that a large CEO−VP equity pay differential enhances firm value for prospector-type firms, and that shareholders and proxy advisors tend to incorporate firm strategy in their say-on-pay votes and proxy recommendations.

Date: 2024
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DOI: 10.1080/09638180.2022.2119153

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