Article
Ex Post Settling Up in Cash Compensation: New Evidence
Contemporary Accounting Research
(2019)
Abstract
This paper examines whether boards exercise discretion to reduce costly ex post settling up of having to recover CEO cash compensation for unrealized gains that fail to materialize. We predict and support three empirical findings. First, we document greater cash pay-performance sensitivity for firms exhibiting unrealized losses (proxied via negative stock returns) relative to firms with unrealized gains (proxied via positive stock returns). We use a sample of firms selected to maximize their likelihood of falling within the incentive zone; this research design addresses concerns in the literature regarding possible attribution of findings to mechanical application of bonus formula. Second, we find that future salary revisions are more sensitive to unrealized losses than to unrealized gains, consistent with Fama’s (1980) notion of ex post settling up occurring via salary revisions. Finally, we provide cross-sectional evidence that this asymmetric sensitivity is greater for firms with stronger corporate governance, less timely accounting earnings, and a larger proportion of total pay in the form of cash compensation.
Keywords
- Management compensation,
- Pay-performance sensitivity,
- Ex post settling up,
- Cash compensation contracts
Disciplines
- Business and
- Accounting
Publication Date
Spring May 11, 2019
DOI
https://doi.org/10.1111/1911-3846.12503
Citation Information
Qi (Flora) Dong, Ana Albuquerque, Bingyi Chen and Edward J. Riedl. "Ex Post Settling Up in Cash Compensation: New Evidence" Contemporary Accounting Research (2019) Available at: http://works.bepress.com/floradong/1/