Are more able CEOs getting more compensated? Evidence from the pay-for-performance sensitivity of equity-based incentives |
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| Institution: | 1. Department of Accounting, Robert J. Manning School of Business, University of Massachusetts Lowell, 1 University Avenue, Lowell, MA 01854, USA;2. Department of Accounting, School of Business, Virginia Commonwealth University, Snead Hall, 301 W. Main Street, Richmond, VA 23284, USA;1. Smith School of Business, Queen’s University, 143 Union Street West, Kingston ON K7L 2P3, Canada;2. HEC Montréal, 3000 Chemin de la Côte-Sainte-Catherine, Montréal QC H3T 2A7, Canada;3. London Business School, Regent’s Park, London NW1 4SA, UK;4. Centre for Economic Policy Research, London EC1V 0DX, UK;5. European Corporate Governance Institute, Rue Ducale 1, Bruxelles 1000, Belgium;6. Olin Business School, Washington University, Campus Box 1133, One Brookings Drive, St. Louis, MO 63130, USA |
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| Abstract: | This study investigates whether the managerial ability of a chief executive officer (CEO) is associated with the CEO's pay-for-performance sensitivity (PPS) of the equity-based compensation. We predict that more talented CEOs receive a higher PPS of equity incentives. Using the managerial ability score (Demerjian, Lev, & McVay, 2012) and PPS measures of options and stocks (Core & Guay, 1999), we find that a CEO's PPS of the equity-based compensation is significantly increasing in the CEO's ability. We also find that the association between managerial ability and the PPS of stock incentives is more evident for small firms. Furthermore, our results show that high ability CEOs are associated with a steeper PPS of option incentives, especially when they are not near retirement. Together, our findings suggest that firms generally incorporate the relative efficiency factor of CEO's ability in designing the CEO's equity-based compensation contracts, and thus the cross-sectional variation in the CEO's PPS is positively influenced by the CEO's ability.Data availability: Data used in this study are available from public sources identified in the study. |
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