Accounting and Control

Governance Structure and the Weighting of Performance Measures in CEO Compensation

Print Share
We empirically examine how governance structure affects the design of executive compensation contracts and, in particular, the implicit weights of firm performance measures in CEO compensation. We find that compensation contracts in firms with higher takeover protection and where the CEO has more influence on governance decisions put more weight on accounting-based measures of performance (return on assets) than on stock-based performance measures (market returns). In additional tests, we find that CEO compensation in these firms has lower variance and a higher proportion of cash (as opposed to stock-based) compensation. We further find that CEO incentives (measured as changes in CEO annual wealth, which includes changes in the value of CEOs' equity holdings in addition to yearly compensation) do not vary across governance structures. These findings are consistent with the hypothesis that CEOs who work in firms with high takeover protection and who have more influence on governance negotiate different contracts.
Bibliographic citation: Dávila, Antonio; Peñalva, Fernando, "Governance Structure and the Weighting of Performance Measures in CEO Compensation", Review of Accounting Studies, Vol. 11, No. 4, 2006, pp 463 - 493

Reference: 10.1007/s11142-006-9018-8 (DOI)
Date: 12/2006
Author(s): Dávila, Antonio; Peñalva, Fernando
Document type: Article in Journal (refereed)
Languages: English