Compensation Diclosures and the Weaponization of Executive Pay: Evidence from Revenue-Based Performance Evaluation

Abstract

Using detailed, grant-level compensation data for large publicly listed firms between 1998-2013, I document that revenue-based compensation is more prevalent in CEO pay packages when the benefits of committing to aggressive product market behavior are greater. Furthermore, this relation does not emerge until after the introduction of the Compensation Discussion and Analysis section of the proxy statement (CD&A), which serves as a plausibly exogenous shock to contract observability. Lastly, post-CD&A product market outcomes are consistent with the shift towards revenue-based pay fostering more aggressive product market equilibria: higher revenues and expenses, but lower margins and profits. Collectively, these results are consistent with a large body of theoretical literature based on Schelling’s (1960) theory of “strategic delegation.” Notably, Fershtman and Judd (1987) show that oligopolistic competitors can boost profits by strategically incentivizing managers with revenue-based pay to commit to aggressive product market behavior, and Katz (1991) demonstrates that this approach to commitment is only effective if managers’ pay packages are observable to rivals.