Powerful CEOs, cash bonus contracts and firm performance

Abstract

We investigate whether powerful chief executive officers (CEOs) influence the conditions of their cash bonus contracts. Specifically, we examine (i) the association between CEO power and the proportion of ex‐ante cash bonus to base salary (bonus ratio), (ii) the association between CEO power and the relative use of non‐financial to financial performance targets in cash bonus contracts, and (iii) the performance consequences of incorporating non‐financial targets in cash bonus contracts. Results show that powerful CEOs are associated with greater ex‐ante bonus ratios and higher proportions of non‐financial performance targets compared to less powerful CEOs. Furthermore, the use of quantitative and corporate social responsibility (CSR)‐related non‐financial performance targets is positively associated with subsequent firm performance, and the use of undefined non‐financial performance targets is negatively associated with subsequent firm performance. These results are robust to alternative econometric specifications and variable definitions.

CEO Compensation and Firm Performance: The Role of ESG Transparency

“…The CEO being at the helm of affairs of a company plays a crucial role in determining organization's progress towards strategic decision-making (Malik et al, 2020). It also plays a key role in CSR which is positively related to 288 Rath et al subsequent firm performance (Bachmann et al, 2020). Thus, ultimately there exists a strong relationship between CEO compensation and firm performance (Hall & Liebman, 1998).…”

Do females on boards affect acquisition outcomes and target selection: a replication and extension of Levi, Li and Zhang (2014)

“…Consistent with prior research conducted in the Australian setting (e.g. Ghannam et al, 2019;Bachmann et al, 2020), CEO Chair duality is not included as a control since the role of CEO and Chairperson are separated in the majority of Australian listed firms.…”

Subjectivity in Performance Evaluations: A Review of the Literature*

“…Examining influence activities that occur when subjectivity is used in performance evaluations has not received a great deal of attention during the period under review (Table 2, panel G) As this area of the research has not been well examined, it is important to identify when employees are likely to engage in influence activities and in which situations they are likely to be successful in influencing their managers' evaluations. For example, the current research shows that when employees are powerful, they are most likely to influence their pay (and succeed) (Bachmann et al 2020). Future research should consider whether there are other employee characteristics (e.g., confidence, gender, rank, tenure) that will lead to influence activities and what characteristics of the manager and/or the organization (e.g., confidence, size of the company, overall incentive structure) will lead to the success of influence activities.…”

“…Another cost of subjectivity in performance evaluations is that it provides an opportunity for employees to engage in activities that would influence their managers to provide higher ratings of performance and/or compensation (Bol 2008). For example, an archival study using data from the Australian Stock Exchange shows that the more powerful the CEOs are, the more likely it is that subjective nonfinancial targets will be used in their bonus contracts, which are negatively associated with future firm performance (Bachmann et al 2020). That said, new disclosure requirements (i.e., CD&A) mandated by the SEC enhance oversight of payments to employees and, therefore, provide one way to mitigate such influence activities.…”