Business, Management and Accounting
4 years ago

CEO compensation tied to firm performance, governance structure influences weight distribution.

Review of Accounting Studies
Governance structure and the weighting of performance measures in CEO compensation
Antonio Dávila, Fernando Peñalva

Paper Summary

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The way a company is run affects how much weight is put on different performance measures in a CEO's pay. Companies with strong defenses against takeovers and where the CEO has more say in decisions tend to focus more on accounting-based performance measures like return on assets, rather than stock-based measures like market returns. In these companies, CEO pay is more stable and includes more cash rather than stock. However, the CEO's incentives to perform well don't change based on the company's governance structure.