Management Accounting Section Midyear Meeting

CEO-CFO Personality Differences and Team Incentives in Compensation Contract Design

• In Event: Performance Evaluation and Compensation

Abstract

We examine the effects of CEO-CFO personality differences on team incentives in executive compensation contract design. We expect CEO-CFO personality differences to lead to greater coordination problems, and therefore we expect boards to use team incentives in compensation plans to mitigate such problems when CEO-CFO personality difference increases. We measure the Big Five personality traits of both the CEO and CFO based on linguistic analytics of earnings conference call transcripts of 790 firms from 2004 to 2018. Following Guay et al. (2019), we measure team incentives with similarity in the performance measures used in the CEO’s and CFO’s compensation plans. As predicted, we find that larger CEO-CFO personality differences are associated with greater team incentives. Results from cross-sectional analyses suggest that firms that benefit more from coordination (i.e., higher R&D intensity, geographic dispersion) and mutual monitoring (i.e., firms with lower bonus plan pay sensitivity) are more likely to provide team incentives when CEO-CFO personality difference increases. These results suggest that boards consider CEO-CFO personality differences in compensation contract design, consistent with recent literature suggesting the coordination role of executive compensation design.

Authors

• Xiaoling Chen, University of Illinois at Urbana-Champaign

• Minjeong Kim, University of Wisconsin–Madison

• Jiaquan Yao, Jinan University