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Contractual Features of CEO Performance-Vested Equity Compensation

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SSCI ABDC-A

Abstract

We investigate the key contractual features of CEO performance-vested (p-v) equity compensation. We hypothesize that contractual features such as relative performance evaluation (RPE), the performance period length, and the number of performance metrics can be configured to improve the informativeness of performance metrics. Consistent with the hypotheses, we find that firms using market metrics are more likely to adopt RPE and long performance periods than firms using accounting metrics. The effects of performance metrics on RPE and performance periods remain prominent after we allow these features to be jointly determined. Moreover, we find that RPE is positively associated with longer performance periods, suggesting that the two features complement each other in improving the informativeness of performance metrics in p-v equity compensation. Our findings not only reveal the intricate relations between the contractual features, but also provide empirical support for the voting guidelines by proxy advisory services and have implications for the evolving practice of executive compensation.

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[Gao, Zhan] Lancaster University

[Hwang, Yuhchang] China Europe International Business School

[Wu, Wan-Ting] University of Massachusetts, Boston


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Source

Journal of Contemporary Accounting & Economics

ISSN:1815-5669

Year:2017

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