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Compensation goals and firm performance

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  • Bennett, Benjamin
  • Bettis, J. Carr
  • Gopalan, Radhakrishnan
  • Milbourn, Todd

Abstract

Using a large data set of performance goals employed in executive incentive contracts, we find that a disproportionately large number of firms exceed their goals by a small margin as compared to the number that fall short of the goal by a similar margin. This asymmetry is particularly acute for earnings goals, when compensation is contingent on a single goal, when the pay-performance relationship around the goal is concave-shaped, and for grants with non-equity-based payouts. Firms that exceed their compensation target by a small margin are more likely to beat the target the next period and CEOs of firms that miss their targets are more likely to experience a forced turnover. Firms that just exceed their Earnings Per Share (EPS) goals have higher abnormal accruals and lower Research and Development (R&D) expenditures, and firms that just exceed their profit goals have lower Selling, General and Administrative (SG&A) expenditures. Overall, our results highlight some of the costs of linking managerial compensation to specific compensation targets.

Suggested Citation

  • Bennett, Benjamin & Bettis, J. Carr & Gopalan, Radhakrishnan & Milbourn, Todd, 2017. "Compensation goals and firm performance," Journal of Financial Economics, Elsevier, vol. 124(2), pages 307-330.
    • Handle: RePEc:eee:jfinec:v:124:y:2017:i:2:p:307-330
    DOI: 10.1016/j.jfineco.2017.01.010
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    More about this item

    Keywords

    Executive compensation; Managerial incentives;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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