TY - JOUR
T1 - Estimating the sensitivity of CEO compensation to gross versus net accounting performance
AU - Black, Dirk E.
AU - Dikolli, Shane
AU - Hofmann, Christian
AU - Pfeiffer, Thomas
N1 - Publisher Copyright:
© 2023 The Authors. Contemporary Accounting Research published by Wiley Periodicals LLC on behalf of Canadian Academic Accounting Association.
PY - 2024/3/1
Y1 - 2024/3/1
N2 - In empirically estimating the relation between CEO compensation and accounting-based firm and peer performance, researchers often define the performance variables net of CEO compensation expense. We analytically show that a researcher's use of CEO compensation as a regression's dependent variable and as an expense in defining a regression's independent variables representing accounting-based firm and peer performance will bias the researcher's pay-for-performance and relative performance evaluation (RPE) regression coefficients. In a panel estimation of CEO compensation, we document an attenuation bias in the coefficients on net firm and net peer performance. This evidence may partially explain inferences of weak CEO incentives and limited usage of RPE in prior work. Our results imply that in CEO compensation regressions, a researcher can remove biases in inferring CEO incentives and RPE usage by using gross rather than net accounting performance variables—that is, by adding back CEO compensation expense to net accounting measures.
AB - In empirically estimating the relation between CEO compensation and accounting-based firm and peer performance, researchers often define the performance variables net of CEO compensation expense. We analytically show that a researcher's use of CEO compensation as a regression's dependent variable and as an expense in defining a regression's independent variables representing accounting-based firm and peer performance will bias the researcher's pay-for-performance and relative performance evaluation (RPE) regression coefficients. In a panel estimation of CEO compensation, we document an attenuation bias in the coefficients on net firm and net peer performance. This evidence may partially explain inferences of weak CEO incentives and limited usage of RPE in prior work. Our results imply that in CEO compensation regressions, a researcher can remove biases in inferring CEO incentives and RPE usage by using gross rather than net accounting performance variables—that is, by adding back CEO compensation expense to net accounting measures.
KW - compensation studies
KW - estimation bias
KW - managerial incentives
KW - measurement error
KW - pay-for-performance sensitivity
KW - relative performance evaluation
UR - http://www.scopus.com/inward/record.url?scp=85182649429&partnerID=8YFLogxK
U2 - https://doi.org/10.1111/1911-3846.12917
DO - https://doi.org/10.1111/1911-3846.12917
M3 - Article
VL - 41
SP - 255
EP - 291
JO - Contemporary Accounting Research
JF - Contemporary Accounting Research
SN - 0823-9150
IS - 1
ER -