Is U.S. CEO Equity and Cash Compensation Aligned with Agency Theory to Maximize Shareholder Returns?

Gurupdesh Pandher (), David Koslowsky and Yosef Bonaparte
Additional contact information
Gurupdesh Pandher: School of Management and Business, University Canada West, 1461 Granville Street, Vancouver, BC V6Z 0E5, Canada
David Koslowsky: College of Business, Florida International University, Miami, FL 33199, USA
Yosef Bonaparte: UC Business School, University of Colorado, Denver, CO 80202, USA

IJFS, 2025, vol. 13, issue 4, 1-22

Abstract: Recent international studies on CEO pay in Europe, Japan, and South Korea reveal significant differences from the U.S. in the use and effectiveness of equity-based CEO compensation, raising questions about the ability of conventional contracts based on agency theory to align with actual CEO compensation practices. Our study contributes to this debate by evaluating nine hypotheses from an extended principal–agent framework in which CEO equity and cash incentives are jointly determined in the shareholder return-maximizing contract. The extended model also incorporates the noisy market valuation relationship between firm income and its market equity value, and distinguishes between firm ‘business risk’ and ‘equity risk’. Our empirical results show that CEO cash incentives increase with firm growth prospects and equity risk and decline with firm business risk and firm scale as predicted by the model; meanwhile, CEO equity incentives are partially consistent. Overall, given the dominance of equity compensation in U.S. CEO pay, our results show that cash pay tied to firm business performance (e.g., operating cash flow) is efficient and plays an important role in aligning CEO and shareholder interests and reducing corporate governance risks associated with agency misalignment.

Keywords: CEO cash and equity incentives; firm growth prospects; firm business risk; equity return risk; corporate scale; Execucomp (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7072/13/4/181/pdf (application/pdf)
https://www.mdpi.com/2227-7072/13/4/181/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jijfss:v:13:y:2025:i:4:p:181-:d:1761328

Access Statistics for this article

IJFS is currently edited by Ms. Hannah Lu

More articles in IJFS from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().