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Firm Strategy and CEO−VP Pay Differentials in Equity Compensation

Author

Listed:
  • Margaret A. Abernethy
  • Yunhe Dong
  • Yu Flora Kuang
  • Bo Qin
  • Xing Yang

Abstract

We examine whether pay differentials between the chief executive officer (CEO) and vice presidents (VPs) can be explained by firms’ strategic priorities. We find that firms that pursue prospector-type strategies have a larger CEO−VP difference in equity compensation. We argue that such a pay differential relates to the relative authority that CEOs have in strategic decision-making, and we find that authority allocation based on a firm’s strategic priorities is consistent with the relative ability of the CEO vis-à-vis the VPs. Our results remain consistent after considering alternative explanations including CEO power, risk-taking incentives, and tournament incentives among VPs. Further analyses reveal that a large CEO−VP equity pay differential enhances firm value for prospector-type firms, and that shareholders and proxy advisors tend to incorporate firm strategy in their say-on-pay votes and proxy recommendations.

Suggested Citation

  • Margaret A. Abernethy & Yunhe Dong & Yu Flora Kuang & Bo Qin & Xing Yang, 2024. "Firm Strategy and CEO−VP Pay Differentials in Equity Compensation," European Accounting Review, Taylor & Francis Journals, vol. 33(3), pages 797-823, May.
    • Handle: RePEc:taf:euract:v:33:y:2024:i:3:p:797-823
    DOI: 10.1080/09638180.2022.2119153
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