Executive Compensation Incentives Contingent on Long-Term Accounting Performance

• In Event: Executive Compensation

Abstract

The percentage of S&P 500 firms granting multi-year accounting-based performance (MAP) incentives to CEOs increased from 16.2% in 1996 to 43.3% in 2008, with much of the growth happening in the post-2002 period. Firms’ decisions to grant MAP plans depend on the signal quality of stock vs. accounting performance measures, shareholder horizons, and board independence. CEOs with MAP plans do not receive higher total compensation, but do receive significantly fewer option grants. MAP plan-granting firms have better post-grant changes in performance and earnings quality compared with matched peers. The evidence suggests that while the changes in accounting rules and public sentiment may partially contribute to the rise of MAP incentives, firms rationally consider their characteristics and use MAP plans to improve incentive alignment.

Authors

• zhi li, Tulane University

• lingling wang, Tulane University