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E-MailThis post comes to us from Ken Shaw and May Zhang, both Assistant Professors of Accounting at the University of Missouri Trulaske College of Business.
In our paper, Is CEO Cash Compensation Punished for Poor Firm Performance?, which was recently accepted for publication in the Accounting Review, we examine the asymmetry in the CEO pay-performance relation. In particular, we examine whether CEO pay is more sensitive to poor stock price performance than to good performance, as claimed by Leone, Wu, and Zimmerman (2006, Journal of Accounting and Economics).
Our main sample consists of 14,632 firm-year observations over 1993-2005. We measure firm performance using the change in return on assets (ROA) and stock returns. We use a three-way performance partition to identify firm-year observations as strong, intermediate, or poor performers. We regress changes in CEO cash compensation on change in ROA and stock return performance variables, allowing for differing slopes among the performance partitions and controlling for firm size, book-market ratio, leverage, cash constraints, and the issuance of new equity or debt securities. We find no asymmetry in CEO cash compensation for firms with low stock returns. Further, we find that CEO cash compensation is less sensitive to poor earnings performance than it is to better earnings performance. These results suggest CEO cash compensation is not punished for poor firm performance.
In additional analyses, we test whether CEO pay is punished for poor firm performance in subsamples of firms with strong corporate governance. We alternatively define firms with strong corporate governance as those with a low G-Index, a high percentage of independent directors, or a high percentage of shares owned by institutional investors. Even among the worst-performing firms with the strongest corporate governance, we are unable to find evidence of CEO pay being punished for poor firm performance.
The full paper is available for download here.
