Competitive Target Pay Practices for CEO Compensation

39 Pages Posted: 17 Apr 2023

See all articles by Mascia Ferrari

Mascia Ferrari

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Dipartimento di Comunicazione ed Economia

Francesco Reggiani

Free University of Bozen-Bolzano

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Stephen F. O'Byrne

Shareholder Value Advisors, Inc.

Date Written: March 30, 2023

Abstract

The competitive target pay policy sets a target dollar number for total CEO compensation within a specified range of the amounts paid to a CEO’s peers chosen from similar sized firms in the same industry. If such a policy were widely adopted by compensation committees, we would observe a negative cross-sectional association between the stock price performance of a firm and change in the equivalent shares awarded to the CEO. That is exactly what we document in our sample of 21,614 firm-year observations, drawn from Execucomp covering the years 1992 to 2018. We go on to demonstrate, via simulations, that such a practice penalizes the sensitivity of CEO wealth to stock price performance as poor (superior) stock price performance is rewarded (penalized) with larger (smaller) equity grants. Directors’ equity compensation also strongly reflects the adoption of competitive pay policies. Finally, we document that Institutional Support Services (ISS)’s recommendations on CEO pay proposals do not appear to recognize the weakened link between CEO wealth and performance due to competitive pay policy.

Keywords: CEO, compensation, target pay, competitive pay policy, compensation committee, director pay

JEL Classification: G34, G38, J31, J33, J38, K22, K34, M12, M41, M48, M52

Suggested Citation

Ferrari, Mascia and Reggiani, Francesco and Rajgopal, Shivaram and O'Byrne, Stephen F., Competitive Target Pay Practices for CEO Compensation (March 30, 2023). Available at SSRN: https://ssrn.com/abstract=4407139 or http://dx.doi.org/10.2139/ssrn.4407139

Mascia Ferrari

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Dipartimento di Comunicazione ed Economia ( email )

Shool of Social Scences
Viale Allegri, 9
REGGIO EMILIA, RE 42121
Italy

Francesco Reggiani

Free University of Bozen-Bolzano ( email )

Sernesiplatz 1
Bozen-Bolzano, BZ 39100
Italy

Shivaram Rajgopal (Contact Author)

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Stephen F. O'Byrne

Shareholder Value Advisors, Inc. ( email )

21 Bonnie Way
Larchmont, NY 10538
United States
914-833-5891 (Phone)

HOME PAGE: http://www.valueadvisors.com/Contact.htm

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