JultikaUniversity of Oulu repository

Purpose: Over the past five years from 2008 to 2012, important economic metrics in the United States have been in weak levels, whereas CEO pay seems to go in spite of the economic situation, thence there is a demand for studying on the true status of the pay-for-performance and providing incentives for CEOs through aligning CEO interests with shareholder interests over this economic period. Therefore, this study investigates whether CEO pay is rewarded according to firm performance over this weak economy period, and compares the result with corresponding previous findings in order to find out the specification of pay-for-performance in this economic period. In a whole, this study devotes to supply useful information on providing CEO incentives through pay-for-performance over a period with weak economic metrics. Design: In the theoretical part, the principal-agent problem and its solutions are investigated. CEO pay is investigated for cash compensation, incentive compensation, total compensation and CEO firm-specific wealth. Firm performance is investigated for contemporaneous and lagged accounting performance and stock market performance. The empirical study adopts a quantitative test of pay-performance sensitivity to investigate the relationship between CEO pay and firm performances. Ordinary least square regressions are applied in the empirical analysis. Data: Ihe empirical analysis is based on two sets of observations: CEO compensation and firm financial information, which are both retrieved from Standard & Poor’s Compustat ExecuComp database for the S&P 1500 Index firms. The two sets of observations are matched. The bank, insurance and real estate companies (SIC codes 6000–6799) are excluded. Findings: Relative to previous findings, sensitivities between CEO pay and firm accounting performance are smaller which is driven by the looser pay-for-performance of CEO cash pay, whereas sensitivities between CEO pay and firm market performance are larger which is driven by the closer pay-for-performance of CEO incentive pay. The findings indicate that over weak economy period CEO cash pay is less used while CEO incentive pay is more frequently used to provide incentives for CEOs, and the ensuring function of base salaries tends to be more notable. This study also finds that CEO incentive pay is more significantly associated with prior performances over the period with weak economic metrics. In addition, when inside stockholdings are considered into CEO firm-specific wealth, negative and significant sensitivity is found for accounting performance whereas positive and significant sensitivity is found for market performance, which suggests that the raise of firm accounting performance cannot has enough positive effect on the value of CEO firm-specific wealth, and CEO firm-specific wealth is more closely tied to firm values for providing incentives for CEOs, Also, the considerable rise of CEO ownership is taken into account for the enhanced incentives.