Abstract
This study examines whether non-financial performance measures (NFPMs) included in CEO bonus contracts are complementary to equity-based compensation, and whether they jointly explain future firm value. We predict that in a performance evaluation system, NFPMs integrated into CEO bonus contracts complement the use of equity-based compensation, and that they are jointly and positively associated with firms’ long-term value. Consistent with our predictions, we find that the inclusion of NFPMs in bonus contracts is positively associated with the relative importance of equity-based compensation (especially in the form of restricted stocks), indicating a complementary relationship between NFPMs and equity-based compensation. We also show that equity-based compensation is marginally associated with higher future firm value when the firm uses NFPMs in its CEOs’ bonus contracts. Overall, our findings suggest that equity-based compensation is more effective in aligning managerial efforts and actions with firms’ long-term value when firms include NFPMs in CEO bonus contracts.
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