Abstract
I examine the relation between the composition of institutional ownership and the structure of CEO compensation. Consistent with my hypotheses, I find that firms with more shares held by institutions with longer investment horizons place more weight on forward-looking performance measure in determining CEO cash compensation. I also find that the percentage holdings by transient institutions, dedicated institutions, investment advisors and pension and endowment are positively associated with the percentage of CEO compensation that is equity-based. These findings continue to hold after I control for potential simultaneity bias. Finally, the results suggest that the boards of firms with higher transient institutional ownership appear to be more concerned about a negative earnings surprise and punish their CEOs more severely in determining annual bonuses. Combined, the analyses provide compelling evidence that the board considers the composition of external shareholders and their likely preferences for executive compensation policies.
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