Sensitivity of executive pay to accounting performance measures in all-equity firms |
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| Authors: | Raghavan J. Iyengar H. James Williams Ernest M. Zampelli |
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| Affiliation: | School of Business, North Carolina Central University, Durham, 27707, USA;;Seidman College of Business, Grand Valley State University, Grand Rapids, 49504, USA;;Department of Business and Economics, The Catholic University of America, Washington, 20064, USA |
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| Abstract: | We investigate the relation between chief executive officer compensation and accounting performance measures as a function of the firm's capital structure. We specifically analyse pay–performance relationships for all‐equity firms relative to high‐levered firms. We find a significant positive association between return on equity and the level of compensation for all‐equity firms. Consistent with optimal contracting theory, we cannot discern any such relationship for high‐levered firms. Because of agency costs of debt, managerial compensation in high‐levered firms plays the role of a precommitment mechanism in addition to its conventional role of aligning management incentives with shareholder interest. |
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| Keywords: | Executive compensation All-equity High levered Capital structure Agency costs of debt |
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