Do boards effectively link firm objectives to CEO bonus performance measures?

Orla Lenihan () and Niamh M. Brennan ()
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Orla Lenihan: University of Galway
Niamh M. Brennan: University College Dublin

Journal of Management & Governance, 2025, vol. 29, issue 1, No 2, 38 pages

Abstract: Abstract This study examines whether S&P 500 boards govern their firms effectively by linking short-term operational objectives to appropriate CEO bonus performance measures. Our cross-sectional regression analysis reveals that firms with higher growth opportunities place more reliance on sales and growth performance measures in CEO bonus plans. We also find that cash-strapped firms emphasize the use of cash-based CEO performance measures. However, boards of high-cost firms do not tie a greater portion of CEO bonus to measures informative of cost-cutting efforts. This observation is contrary to effective-governance expectations and implies that boards should regularly scrutinize CEO bonus measures to ensure alignment with value-creating firm objectives. Additionally, we report an increase over time in the mean weight of social-and-environmental measures in CEO bonus plans. Boards evaluate CEO performance on sustainability issues by including quantifiable short-term performance targets in CEO bonus plans. However, there is currently a dearth of evidence on the optimality of sustainability linked executive pay in the academic literature. Our evidence on the rising weight of social-and-environmental measures in CEO bonus plans should motivate further research on this topic.

Keywords: CEO bonus; Performance measures; Firm objectives; Effective governance; Sustainability (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10997-023-09690-9

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