Friday, Jan. 6, 2017 7:30 PM – 9:30 PM
- Chair: Charles Hadlock, Michigan State University
Compensation Goals and Firm Performance
AbstractUsing a large dataset of performance goals employed in executive incentive contracts we find that a disproportionately large number of firms exceed their goals by a small margin as compared to the number that fall short of the goal by a similar margin. This asymmetry is particularly acute for earnings and profit goals, when compensation is contingent on a single goal and is present for both long-term and short-term goals, when the pay-for-performance relationship is concave or convex and for grants with cash or stock payout. Firms that exceed their compensation target by a small margin are more likely to beat the target the next period and CEOs of firms that miss their targets are more likely to experience a forced turnover. Firms that just exceed their EPS goals have higher abnormal accruals and lower Research and Development (R&D) expenditures and firms that just exceed their profit goals have lower SG&A expenditures. Overall, our results highlight some of the costs of linking managerial compensation to specific compensation targets.
Executive Job Matching: Estimates from a Dynamic Model
AbstractI evaluate how firms' and CEOs' learning about their fit with one another affects CEO turnover and compensation decisions. Building and estimating a dynamic model of the executive labor market, I find that learning and selection eliminate low-quality matches and provide explanatory power for the excess skewness of CEO compensation in the data after controlling for firm and CEO characteristics. I further establish that learning generates a hump-shaped hazard rate curve of CEO turnover conditional on CEO tenure. Using a hand-collected dataset of CEO turnover, I discover that the speed and precision of learning determine the level and length of the "discovery phase" of the conditional hazard rate curve. I also find that CEO compensation demonstrates a firm's evaluation of the match quality and is predictive of the expected future tenure of its CEO. In short, I demonstrate the importance of learning and selection in explaining the relations between CEO compensation, CEO turnover, and firm performance.
- G3 - Corporate Finance and Governance