Do CMO Incentives Matter? An Empirical Investigation of CMO Compensation and Its Impact on Firm Performance

Abstract

Despite growing interest in various facets of the position of chief marketing officer (CMO), there is very little research on CMO compensation. Accordingly, we set out to investigate the determinants of CMO compensation and its effect on firm performance. Employing the lens of agency theory, we hypothesize that the CMO’s marginal productivity will positively impact the amount of total compensation as well as the extent of performance-based compensation in the CMO’s compensation contract. Moreover, we hypothesize that deviations in contracting elements from predicted levels will adversely impact firm performance. Analyzing a sample of 9,230 firm-year observations over the period 1992–2013, we find that CMOs employed at firms with high advertising and R&D intensity, and operating in competitive product markets, command larger amounts of total compensation. Moreover, a greater proportion of their compensation is market based, with heightened sensitivity to movements in the firm’s stock price. We also find that deviations in CMO compensation elements have an adverse impact on operating performance (return on assets (ROA)), earnings surprises, and stock returns. Specifically, a 10% deviation in market-based compensation from predicted levels reduces ROA by 0.28%, dampens earnings surprises by 0.19%, and degrades annualized stock returns by 2.4%. This paper was accepted by Eric Anderson, marketing.