Do Informative Stock Prices Simplify Executive Compensation?

We study the effects of stock price informativeness (SPI) on the complexity of executive compensation. Using textual analysis of SEC proxy statements to construct measures of compensation complexity, we find informative stock prices reduce pay complexity. Using mutual fund redemption as an exogenous decrease in SPI, we find when the redemption pressure is high (SPI is low), CEO pay is more complex and more closely linked to accounting performance and peer firm performance. Compensation complexity leads to more excess pay, more perquisite pay, and lower future ROA. Shareholders show concerns about complex pay and require more frequent Say-on-Pay votes.

Keywords: Compensation complexity, Stock price informativeness, Market monitoring, Proxy statements, Textual analysis

JEL Classification: G14, G30, J33, M12

Suggested Citation: Suggested Citation

Bennett, Benjamin and Garvey, Gerald T. and Milbourn, Todd T. and Wang, Zexi, Do Informative Stock Prices Simplify Executive Compensation? (December 3, 2020). Fisher College of Business Working Paper No. 2019-03-007, Charles A. Dice Center Working Paper No.2019-07, Available at SSRN: https://ssrn.com/abstract=3347955 or http://dx.doi.org/10.2139/ssrn.3347955