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Corporate governance and the weighting of performance measures in CEO compensation

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  • Davila, Antonio

    (Stanford University)

  • Peñalva, Fernando

    (IESE Business School)

Abstract

We empirically examine how corporate governance affects the structure of executive compensation contracts. In particular, we analyze the implicit weights of firm performance measures in explaining CEO compensation. We find that weaker corporate governance is associated with compensation contracts that put more weight on accounting-based measures of performance (i.e., return on assets) than on stock-based performance measures (i.e., market returns). This finding is consistent with CEOs in firms with weaker governance structures -where the CEO has more influence over the contracting process- choosing to weight more heavily those performance measures that they are better able to control. To further examine the implications of these results, we investigate the association between variation in compensation and governance and find that weaker governance is associated with lower variance in compensation. We also find that executive compensation contracts in firms with weaker governance rely more on cash compensation at the expense of stock-based compensation.

Suggested Citation

  • Davila, Antonio & Peñalva, Fernando, 2004. "Corporate governance and the weighting of performance measures in CEO compensation," IESE Research Papers D/556, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-0556
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    2. Coles, Jeffrey L., 2008. "Disclosure policy: A discussion of Leuz, Triantis and Wang (2008) on "going dark"," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 209-220, August.

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