Non-price and Price Performance Vesting Provisions and CEO Incentives

50 Pages Posted: 11 Jan 2015 Last revised: 25 Feb 2022

See all articles by John E. Core

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Heidi A. Packard

University of Michigan at Ann Arbor - Accounting

Date Written: February 23, 2022

Abstract

A large body of empirical work provides mixed support for the central prediction from agency theory that noisier performance measures receive less weight in incentive contracts. We develop a method to calculate price-based and non-price-based performance measure weights using CEO pay and holdings of stock, options, and performance-vested awards. Consistent with theory, we find that noisier performance measures receive less weight. We find that this negative relation strengthened following the adoption of ASC 718 (formerly SFAS 123R), which equalized the accounting treatment for options and other share-based awards. We further find that firms that increased non-price incentives for CEOs realized improvements in ROA and in Tobin’s Q. Our results suggest that misaligned incentives prior to ASC 718, and the under-weighting of non-price measures in particular, negatively affected firm performance.

Keywords: performance-vesting provisions, agency theory, executive compensation, performance measures

JEL Classification: G30, J33, M12, M52

Suggested Citation

Core, John E. and Packard, Heidi A., Non-price and Price Performance Vesting Provisions and CEO Incentives (February 23, 2022). Available at SSRN: https://ssrn.com/abstract=2547590 or http://dx.doi.org/10.2139/ssrn.2547590

John E. Core (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02138
United States

Heidi A. Packard

University of Michigan at Ann Arbor - Accounting ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
761
Abstract Views
3,913
Rank
60,866
PlumX Metrics