Estimating the sensitivity of CEO compensation to gross versus net accounting performance

Author(s)

Dirk E. Black, Shane Dikolli, Christian Hofmann, Thomas Pfeiffer

Abstract

In empirically estimating the relation between CEO compensation and accounting-based firm and peer performance, researchers often define the performance variables net of CEO compensation expense. We analytically show that a researcher's use of CEO compensation as a regression's dependent variable and as an expense in defining a regression's independent variables representing accounting-based firm and peer performance will bias the researcher's pay-for-performance and relative performance evaluation (RPE) regression coefficients. In a panel estimation of CEO compensation, we document an attenuation bias in the coefficients on net firm and net peer performance. This evidence may partially explain inferences of weak CEO incentives and limited usage of RPE in prior work. Our results imply that in CEO compensation regressions, a researcher can remove biases in inferring CEO incentives and RPE usage by using gross rather than net accounting performance variables—that is, by adding back CEO compensation expense to net accounting measures.

Organisation(s)

Department of Accounting, Innovation and Strategy

External organisation(s)

University of Nebraska-Lincoln, University of Virginia, Ludwig-Maximilians-Universität München

Journal

Contemporary Accounting Research

Volume

41

Pages

255-291

No. of pages

37

ISSN

0823-9150

DOI

https://doi.org/10.1111/1911-3846.12917

Publication date

11-2023

Peer reviewed

Yes

Austrian Fields of Science 2012

502052 Business administration, 502006 Controlling

Keywords

ASJC Scopus subject areas

Economics and Econometrics, Accounting, Finance

Portal url

https://ucrisportal.univie.ac.at/en/publications/1eeb8a5b-9cde-4b99-a6ce-de634e353a50