Executive Compensation and Deployment of Corporate Resources: Evidence from Working Capital

Abstract

Firms provide compensation incentives to executives, primarily in the form of bonus payments, to alleviate slack in the deployment of corporate resources to working capital. Financially constrained firms are heavy users of working capital incentives. So are firms that are less exposed to external takeover threats. Among the different components of working capital, inventories and payables are the main drivers of executive bonuses. Overall, our evidence supports the optimal contracting view of bonus payments in executive compensation.

Keywords: working capital, bonus payment, executive compensation, financial constraint

JEL Classification: G30, G31, J33