IDEAS home Printed from https://ideas.repec.org/a/wly/camsys/v19y2023i4ne1370.html
   My bibliography  Save this article

Does chief executive compensation predict financial performance or inaccurate financial reporting in listed companies: A systematic review

Author

Listed:
  • Denise Rousseau
  • Byeong Jo Kim
  • Ryan Splenda
  • Sarah Young
  • Jangbum Lee
  • Donna Beck

Abstract

Background Financial incentives for chief executive officers (CEOs) are thought to motivate them to lead their company toward achieving important business objectives. Based on the Rousseau et al. (2019) protocol, this systematic review assesses the predictive effects of CEO incentives on certain business outcomes. Objectives This review addresses whether CEO financial incentives predict: (1) firm financial performance and (2) financial restatement due to misreporting. Search methods We searched nine research databases for published peer‐reviewed literature (to July 23–26, 2021 and an attenuated search from those dates to July 27–31, 2023) and thirteen professional association websites for non‐published gray literature (to August 2021). We also hand‐searched selected relevant journals. Selection criteria We reviewed peer‐reviewed and unpublished studies available in English since 1980. Eligible studies regarding our first question assessed CEO financial incentives (1) 1 year or more before the measurement of outcomes, (2) controlled for pre‐incentive firm performance or market conditions, and (3) analyzed CEO financial incentives as predictors of firm outcomes. Eligible studies regarding our second question assessed whether financial restatement had occurred and analyzed effects of CEO incentives on this outcome. Data collection and analysis We extracted standardized regression coefficients for each effect or converted unstandardized regressions to standardized. Analyses were conducted using STATA. All studies were assessed to have moderate risk of bias. Main results For our first question, 20 studies (15,398 firms) met our criteria for meta‐analysis of effects. Bonuses, the most commonly studied incentive, had a small positive effect on next year's accounting performance metric Return on Assets (ROA, 0.046 [k = 7, 95% confidence interval (CI) = 0.014, 0.078]). The bonus effect in the market‐related metric of Stock Returns (−0.026 [k = 5, 95% CI = −0.119, 0.067]) fell within a CI including 0, as did its effect on another market‐related metric, Market‐to‐Book value (Tobin's Q, 0.028 [k = 3, 95% CI = −0.024, 0.08]). We conclude that Bonuses show no predictive effect on the following year's market‐related metrics but do affect ROA. Stock Options had no effect on next year's ROA (0.027 [k = 5, 0.95% CI = 0.000, 0.052]), nor on Market‐to‐Book Value (Tobin's Q, 0.097 [k = 5, 95% CI = −0.027, 0.220]) or Stock Return (0.042 [k = 6, −0.033, 0.117]), indicating no predictive effect for Stock Options on either accounting or market‐related performance. We sought but found too few studies to report on effects of incentives on other financial outcomes or for lags greater than 1 year. For our second question, three studies (n = 2044 firms) met our criteria. The overall effect size for CEO Incentives on Restatement (−0.09 [k = 3, 95% CI = −0.363, 0.184) fell within a CI including zero. We conclude that current evidence does not support a direct relationship between CEO financial incentives and Restatement. Authors' conclusions This review affirms a small effect of CEO Bonuses, but no effect of Stock Options, on the accounting performance metric ROA. In contrast, neither Bonuses nor Stock Options predict a firm's market‐related metrics. CEO incentives also are unrelated to Financial Restatement. Despite widespread use of CEO financial incentives, lack of evidence supporting their use, beyond the bonus‐ROA effect we identify, suggests caution regarding current CEO financial incentive practice and greater consideration of alternative arrangements to enhance firm performance.

Suggested Citation

  • Denise Rousseau & Byeong Jo Kim & Ryan Splenda & Sarah Young & Jangbum Lee & Donna Beck, 2023. "Does chief executive compensation predict financial performance or inaccurate financial reporting in listed companies: A systematic review," Campbell Systematic Reviews, John Wiley & Sons, vol. 19(4), December.
    • Handle: RePEc:wly:camsys:v:19:y:2023:i:4:n:e1370
    DOI: 10.1002/cl2.1370
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/cl2.1370
    Download Restriction: no
    File URL: https://libkey.io/10.1002/cl2.1370?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Burns, Natasha & Kedia, Simi, 2006. "The impact of performance-based compensation on misreporting," Journal of Financial Economics, Elsevier, vol. 79(1), pages 35-67, January.
    2. James Gong & Siyi Li, 2013. "CEO incentives and earnings prediction," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 647-674, May.
    3. Bradley W. Benson & Hui L. James & Jung Chul Park, 2019. "Heterogeneity in the Effect of Managerial Equity Incentives on Firm Value," The Financial Review, Eastern Finance Association, vol. 54(3), pages 583-638, August.
    4. Balafas, Nikolaos & Florackis, Chris, 2014. "CEO compensation and future shareholder returns: Evidence from the London Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 27(C), pages 97-115.
    5. Handan ÇAM, 2017. "3rd International conference on social sciences & education research," Journal of Economic and Social Thought, KSP Journals, vol. 4(3), pages 352-353, Seprember.
    6. Edmans, Alex, 2011. "Does the stock market fully value intangibles? Employee satisfaction and equity prices," Journal of Financial Economics, Elsevier, vol. 101(3), pages 621-640, September.
    7. Denise M. Rousseau & Donna Beck & ByeongJo Kim & Ryan Splenda & Sarah Young, 2019. "PROTOCOL: Does executive compensation predict publicly traded firms’ financial performance or inaccurate financial reporting?," Campbell Systematic Reviews, John Wiley & Sons, vol. 15(4), December.
    8. Michael C. Jensen & Kevin J. Murphy, 2010. "CEO Incentives—It's Not How Much You Pay, But How," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 64-76, January.
    9. Kruse, Douglas L. & Freeman, Richard B. & Blasi, Joseph R. (ed.), 2010. "Shared Capitalism at Work," National Bureau of Economic Research Books, University of Chicago Press, number 9780226056951, June.
    10. Leon Zolotoy & Don O’Sullivan & Geoffrey P. Martin, 2022. "Behavioural Agency and Firm Productivity: Revisiting the Incentive Alignment Qualities of Stock Options," Journal of Management Studies, Wiley Blackwell, vol. 59(7), pages 1756-1787, November.
    11. Richard B. Freeman & Joseph R. Blasi & Douglas L. Kruse, 2010. "Introduction to "Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options"," NBER Chapters, in: Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options, pages 1-37, National Bureau of Economic Research, Inc.
    12. David Blackwell & Donna Dudney & Kathleen Farrell, 2007. "Changes in CEO compensation structure and the impact on firm performance following CEO turnover," Review of Quantitative Finance and Accounting, Springer, vol. 29(3), pages 315-338, October.
    13. Min-Lee Chan & Cho-Min Lin & Hsin-Yu Liang & Ming-Hua Chen, 2014. "Does Ceo Incentive Pay Improve Bank Performance? A Quantile Regression Analysis Of U.S. Commercial Banks," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-28.
    14. Christopher S. Armstrong & Alan D. Jagolinzer & David F. Larcker, 2010. "Chief Executive Officer Equity Incentives and Accounting Irregularities," Journal of Accounting Research, Wiley Blackwell, vol. 48(2), pages 225-271, May.
    15. Wicherts, Jelte M. & Veldkamp, Coosje Lisabet Sterre & Augusteijn, Hilde & Bakker, Marjan & van Aert, Robbie Cornelis Maria & van Assen, Marcel A. L. M., 2016. "Degrees of freedom in planning, running, analyzing, and reporting psychological studies A checklist to avoid p-hacking," OSF Preprints umq8d, Center for Open Science.
    16. Shuo Wang & Yuhui Gao & Gerard Hodgkinson & Denise Rousseau & Patrick Flood, 2015. "Opening the Black Box of CSR Decision Making: A Policy-Capturing Study of Charitable Donation Decisions in China," Journal of Business Ethics, Springer, vol. 128(3), pages 665-683, May.
    17. Bao, May Xiaoyan & Cheng, Xiaoyan & Smith, David, 2020. "A path analysis investigation of the relationships between CEO pay ratios and firm performance mediated by employee satisfaction," Advances in accounting, Elsevier, vol. 48(C).
    18. Ming-Yuan Leon Li & Shang-En Shine Yu, 2011. "Do large firms overly use stock-based incentive compensation?," Journal of Applied Statistics, Taylor & Francis Journals, vol. 38(8), pages 1591-1606, July.
    19. repec:eme:mfppss:v:34:y:2008:i:8:p:524-536 is not listed on IDEAS
    20. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(3), pages 901-932.
    21. Amzaleg, Yaron & Azar, Ofer H. & Ben-Zion, Uri & Rosenfeld, Ahron, 2014. "CEO control, corporate performance and pay-performance sensitivity," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 166-174.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tando O. Siwendu & Cosmas M. Ambe, 2024. "A Systematic Literature Review on Transparency in Executive Remuneration Disclosures and Their Determinants," JRFM, MDPI, vol. 17(10), pages 1-15, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yixi Ning & Chien-Ping Chen & Yingxu Kuang, 2024. "The relative CEO to employee pay for luck," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(3), pages 924-946, September.
    2. Chang, Millicent & Watson, Iain, 2015. "Delayed disclosure of insider trades: Incentives for and indicators of future performance?," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 182-197.
    3. Clement Olalekan Olaniyi & Olaolu Richard Olayeni, 2020. "A new perspective into the relationship between CEO pay and firm performance: evidence from Nigeria’s listed firms," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 22(2), pages 250-277, December.
    4. Jeff Boone & Inder Khurana & K. Raman, 2011. "Investor pricing of CEO equity incentives," Review of Quantitative Finance and Accounting, Springer, vol. 36(3), pages 417-435, April.
    5. Katherine Guthrie & Illoong Kwon & Jan Sokolowsky, 2017. "What Does CEOs’ Pay-for-Performance Reveal About Shareholders’ Attitude Toward Earnings Overstatements?," Journal of Business Ethics, Springer, vol. 146(2), pages 419-450, December.
    6. Gill, David & Prowse, Victoria & Vlassopoulos, Michael, 2013. "Cheating in the workplace: An experimental study of the impact of bonuses and productivity," Journal of Economic Behavior & Organization, Elsevier, vol. 96(C), pages 120-134.
    7. Carlos Jiménez-Angueira & Nathan Stuart, 2015. "Relative performance evaluation, pay-for-luck, and double-dipping in CEO compensation," Review of Quantitative Finance and Accounting, Springer, vol. 44(4), pages 701-732, May.
    8. Ansgar Richter & Susanne Schrader, 2017. "Levels of Employee Share Ownership and the Performance of Listed Companies in Europe," British Journal of Industrial Relations, London School of Economics, vol. 55(2), pages 396-420, June.
    9. Alex Bryson & Lucy Stokes & David Wilkinson, 2023. "Is pupil attainment higher in well-managed schools?," Education Economics, Taylor & Francis Journals, vol. 31(1), pages 129-144, January.
    10. Nicolas Aubert & Xavier Hollandts, 2015. "How Shared Capitalism Affects Employee Withdrawal: An Econometric Case Study Of A French-Listed Company," Post-Print halshs-01256759, HAL.
    11. Ahmed, Shaker & Ranta, Mikko & Vähämaa, Emilia & Vähämaa, Sami, 2023. "Facial attractiveness and CEO compensation: Evidence from the banking industry," Journal of Economics and Business, Elsevier, vol. 123(C).
    12. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 75-102, December.
    13. Petri Böckerman & Alex Bryson & Pekka Ilmakunnas, 2013. "Does high involvement management lead to higher pay?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 176(4), pages 861-885, October.
    14. Bryson, Alex & Clark, Andrew E. & Freeman, Richard B. & Green, Colin P., 2016. "Share capitalism and worker wellbeing," Labour Economics, Elsevier, vol. 42(C), pages 151-158.
    15. John S. Heywood & Uwe Jirjahn, 2014. "Variable Pay, Industrial Relations and Foreign Ownership: Evidence from Germany," British Journal of Industrial Relations, London School of Economics, vol. 52(3), pages 521-552, September.
    16. Te Bao & Edward Halim & Charles N. Noussair & Yohanes E. Riyanto, 2021. "Managerial incentives and stock price dynamics: an experimental approach," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 617-648, June.
    17. Josef Schroth, 2018. "Managerial Compensation and Stock Price Manipulation," Journal of Accounting Research, Wiley Blackwell, vol. 56(5), pages 1335-1381, December.
    18. Li, John, 2022. "The effect of employee satisfaction on effective corporate tax planning: Evidence from Glassdoor," Advances in accounting, Elsevier, vol. 57(C).
    19. Kyoung Yong Kim & Pankaj C. Patel, 2021. "A Multilevel Contingency Model of Employee Ownership and Firm Productivity: The Moderating Roles of Industry Growth and Instability," Organization Science, INFORMS, vol. 32(3), pages 625-648, May.
    20. Uwe Jirjahn & Jens Mohrenweiser, 2019. "Performance Pay and Applicant Screening," British Journal of Industrial Relations, London School of Economics, vol. 57(3), pages 540-575, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:camsys:v:19:y:2023:i:4:n:e1370. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1111/(ISSN)1891-1803 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.