CEO Compensation Structure and Firm Performance

Abstract

The relation between CEO compensation and firm performance has been extensively documented in the literature to date. However, this relation has not been explored in a setting where CEO's, even in the same industry, receive either cash-based compensation only or cash-based and equity-based compensation. Australia provides such a setting. Our objective is twofold. First, we provide evidence on the performance of firms where CEO's receive cash-based compensation only versus the performance of firms where executives received equity-based compensation. Second, we estimate a model of 'efficient' compensation structure on the basis of firm characteristics, and test the performance consequences of deviation from the efficient compensation structure. Our results are based on 696 firm years for the period of 1999-2001. We have two key findings. First, we show that on average, firm performance does not differ between firms offering cash-based compensation only and those using both cash- and equity-based compensation. Second, we find some evidence that a firm's performance is lower when a firm is using the 'wrong' compensation structure. We test the sensitivity results with respect to alternative sub-samples and variable specifications, but our results remain the same. Overall, our study provides some important new insight into the links between CEO compensation and firm performance.