Performance pay and catering incentives

•Firms tie executive compensation to specific accounting goals by catering to investor demand.•The effect of investor demand for specific accounting metrics on pay for performance is less pronounced in firms with powerful CEOs.•The results are robust to different specifications and subsamples.. This...

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Bibliographic Details
Published in:Finance research letters 2018-12, Vol.27, p.12-22
Main Author: Marcet, Francisco
Format: Article
Language:English
Subjects:
Accounting goals
Catering incentives
CEO
Pay for performance
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Summary:•Firms tie executive compensation to specific accounting goals by catering to investor demand.•The effect of investor demand for specific accounting metrics on pay for performance is less pronounced in firms with powerful CEOs.•The results are robust to different specifications and subsamples.. This paper explores how boards of directors design executive compensation to cater to investor demand. Following the literature of catering incentives and using a comprehensive dataset of accounting-based performance goals, we show that firms tie executive compensation to accounting goals (pay-for-performance) according to investor preferences for specific accounting metrics. Moreover, firms with powerful CEOs are less affected by investor demand for accounting metrics. Finally, our results are robust to alternative specifications and subsamples.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2018.01.008