Non-financial performance measures, CEO compensation, and firms’ future value

Huiqi Gan, Myung S. Park and SangHyun Suh

Journal of Business Research, 2020, vol. 110, issue C, 213-227

Abstract: This study examines whether non-financial performance measures (NFPMs) included in CEO bonus contracts are complementary to equity-based compensation, and whether they jointly explain future firm value. We predict that in a performance evaluation system, NFPMs integrated into CEO bonus contracts complement the use of equity-based compensation, and that they are jointly and positively associated with firms’ long-term value. Consistent with our predictions, we find that the inclusion of NFPMs in bonus contracts is positively associated with the relative importance of equity-based compensation (especially in the form of restricted stocks), indicating a complementary relationship between NFPMs and equity-based compensation. We also show that equity-based compensation is marginally associated with higher future firm value when the firm uses NFPMs in its CEOs’ bonus contracts. Overall, our findings suggest that equity-based compensation is more effective in aligning managerial efforts and actions with firms’ long-term value when firms include NFPMs in CEO bonus contracts.

Keywords: Non-financial performance measures; Compensation structure; Equity-based compensation; Firms’ future value (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:110:y:2020:i:c:p:213-227

DOI: 10.1016/j.jbusres.2020.01.002

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