Pay-Performance Association of CEO Compensation for Firms Using Financial and Non-Financial Performance Measures

• In Event: Governance and Financial Reporting

Abstract

The pay-performance relationship for top executives, specifically that of the chief executive officer (hereafter, CEO), has come under scrutiny in recent years, especially following the real estate meltdown and recession of 2007. Some argue that the CEO pay is too high and unrelated to performance. An aspect that has not been studied is the effect of using particular performance measures in the executive bonus contract on this relationship. In this paper, we examine the pay-performance sensitivity and elasticity of CEO bonus and total compensation when bonus contracts are based on financial and non-financial performance measures. In a sample of S&P500 firms over the period 1994-2009, we find limited evidence that the pay-performance relationship is stronger in firms that utilize non-financial performance measures. We also find some evidence that this relationship is stronger when non-financial measures are utilized over a longer period of time.

Authors

• Myojung Cho, Fordham University

• Salma S. Ibrahim, Kingston University