Estimating the sensitivity of CEO compensation to gross versus net accounting performance

Black, Dirk E.; Dikolli, Shane S.; Hofmann, Christian und Pfeiffer, Thomas (29. November 2012): Estimating the sensitivity of CEO compensation to gross versus net accounting performance. SSRN

Abstract

In an empirical estimation of the relation between CEO compensation and accounting-based firm and peer performance, researchers often define the performance variables net of CEO compensation expense. We analytically show that a researcher’s use of CEO compensation both as a regression’s dependent variable and as an expense in defining accounting-based independent variables introduces a covariance that biases the researcher’s estimated regression coefficients on focal-firm and peer performance either upwards or downwards. In a panel estimation of CEO compensation, we document empirical evidence of a downward absolute coefficient bias on net focal-firm performance and net peer performance. This evidence may help explain prior inferences of weak CEO incentives and limited usage of relative performance evaluation (RPE). Our results imply that in CEO compensation regressions, a researcher can remove estimation bias in inferring CEO incentives and RPE usage by using gross rather than net accounting performance variables, i.e., by adding back CEO compensation expense to net accounting measures.

• Dokumententyp: Paper
• Fakultät: Betriebswirtschaft > Institut für Unternehmensrechnung und Controlling
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• ISSN: 1556-5068
• Sprache: Englisch