The competitive target pay policy sets a target amount of total compensation within a specified range of the amount paid to executive peers. 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 with larger (smaller) share grants. Directors’ equity compensation is also strongly consistent with competitive pay policies. Finally, we document that Institutional Support Services (ISS)’s recommendations on CEO pay proposals do not appear to recognize the weakened links between CEO wealth and performance due to competitive pay policy.
Ferrari, Mascia, S., O’Byrne, F., Reggiani e S., Rajgopal. "Competitive Target Pay Practices for CEO Compensation" Working paper, 2020.
Competitive Target Pay Practices for CEO Compensation
F. Reggiani;
2020
Abstract
The competitive target pay policy sets a target amount of total compensation within a specified range of the amount paid to executive peers. 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 with larger (smaller) share grants. Directors’ equity compensation is also strongly consistent with competitive pay policies. Finally, we document that Institutional Support Services (ISS)’s recommendations on CEO pay proposals do not appear to recognize the weakened links between CEO wealth and performance due to competitive pay policy.
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