Asymmetric pay-for-performance and corporate governance in the market downturn

Abstract

This paper examines the pay-for-performance, corporate governance, and their connection by analyzing the change of executive compensation when the stock market changes from upturn to downturn. We provide the evidence to support the managerial power explanation for the change in executive compensation. We find the asymmetric pay-for-performance and corporate governance in different market conditions and different firm’s market performance. In addition, the outperformed firms reward CEO with more cash-based compensation and less stock-based compensation in the market downturn. Therefore, we conclude that the CEOs of outperformed firms have stronger managerial power than those of underperformed firms. We also find supportive evidence of our conclusion that the firms with lower debt ratio, smaller number of board meetings, and the presence of interlocked relationship have higher probability to be the outperformed firms. This evidence is consistent with the prediction of managerial power approach