Striking Oil in the Boardroom: Overpaying Executives through Manipulating Actual Performance Metrics

Abstract

Using hand-collected data, we examine the distribution of performance metrics used to calculate executive compensation in a sample of US oil and gas firms. We find that the distribution of actual-minus-target differences is significantly discontinuous at zero over the 13-year period from 2006 to 2018. Executives are nearly three times more likely to just beat than to just miss performance targets. When we split metrics into transparent and non-transparent measures, we find significant discontinuities only in the non-transparent group, even after 2011 when the US Securities and Exchange Commission (SEC) updated its guidance for non-GAAP performance metrics in proxy statements. Significant discontinuities disappear when firms are financially distressed and have stronger monitoring. Our findings suggest managers can routinely manipulate realized performance metrics to increase performance-based compensation. Our framework can help investors in their firm governance assessments and the SEC in its redesign and enforcement of disclosure rules for performance metrics.

Keywords: executive compensation, manipulation, transparency, performance measures, discontinuity

JEL Classification: G34, J33, M12, M52, Q40