Abstract
We investigate how the data presentation format of executive compensation disclosures affects investors’ compensation- and investment-related judgment and decisions. We examine the effects of these formats and their underlying mechanisms via laboratory experiments. We compare bonus schemes presented in the table and formula formats and find an interaction effect between data presentation format and compensation favorability. When a manager receives unfavorable compensation due to missed performance targets, the table format is easier to understand than the formula format, whereas the latter appears more scientific than the former. These two effects work in opposite directions and therefore, result in an insignificant difference in approval ratings when the table, versus the formula, format is used. However, when the manager receives favorable compensation for beating performance targets, investors do not pay much attention to the disclosure’s understandability but still favor the formula format, as it has a scientific appearance. Therefore, we find that investors’ approval ratings are higher when using the formula format than the table format. We contribute to several research areas such as information understandability, the halo effect, compensation disclosures, and shareholder voting. Our findings also have practical implications for both managers and investors.
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