TY - JOUR
T1 - The Influence of CEO Power on Compensation Contract Design
AU - Abernethy, M.
AU - Kuang, Y.
AU - Qin, B.
PY - 2015
Y1 - 2015
N2 - We investigate whether CEO power influences a firm's decision to change its compensation system in response to regulatory and public pressure. In particular, we assess whether CEO power influences the choice of performance measures as a form of camouflage to minimize the impact of these reforms on their wealth. We examine one component of CEO pay, namely, the use of performance-vested stock option (PVSO) plans, and find that firms with powerful CEOs attach less challenging targets in the initial PVSOs granted to their CEOs. Such firms also appear to adopt PVSO plans early, and are more likely to do so when faced with public outrage over executive compensation. Our results suggest that powerful CEOs attempt to appease public outrage by quickly adopting PVSOs, but that adopting PVSOs early does not appear to be an optimal strategy for increasing shareholder value. Regulators intended that implementation of PVSOs would be beneficial to shareholders by improving the link between CEO pay and firm performance. However, our results indicate that powerful CEOs can negate some of the beneficial effect of PVSOs through their influence on adoption and choice of performance targets.
AB - We investigate whether CEO power influences a firm's decision to change its compensation system in response to regulatory and public pressure. In particular, we assess whether CEO power influences the choice of performance measures as a form of camouflage to minimize the impact of these reforms on their wealth. We examine one component of CEO pay, namely, the use of performance-vested stock option (PVSO) plans, and find that firms with powerful CEOs attach less challenging targets in the initial PVSOs granted to their CEOs. Such firms also appear to adopt PVSO plans early, and are more likely to do so when faced with public outrage over executive compensation. Our results suggest that powerful CEOs attempt to appease public outrage by quickly adopting PVSOs, but that adopting PVSOs early does not appear to be an optimal strategy for increasing shareholder value. Regulators intended that implementation of PVSOs would be beneficial to shareholders by improving the link between CEO pay and firm performance. However, our results indicate that powerful CEOs can negate some of the beneficial effect of PVSOs through their influence on adoption and choice of performance targets.
UR - https://www.scopus.com/pages/publications/84954506742
UR - https://www.scopus.com/inward/citedby.url?scp=84954506742&partnerID=8YFLogxK
U2 - 10.2308/accr-50971
DO - 10.2308/accr-50971
M3 - Article
SN - 0001-4826
VL - 90
SP - 1265
EP - 1306
JO - The Accounting Review
JF - The Accounting Review
IS - 4
ER -
