Corporate Performance and Compensation Objectives

Analyzing a comprehensive dataset of performance benchmarks embedded in executive incentive contracts, we observe a notable trend: a significant proportion of companies surpass their targets by a narrow margin, contrasting with fewer instances of falling short by a similar degree. This imbalance is most pronounced with earnings objectives, particularly evident in contracts reliant on a solitary goal, featuring a concave-shaped pay-performance relationship around the target, and involving non-equity-based rewards. Companies narrowly exceeding compensation targets are more likely to outperform them in subsequent periods, while CEOs overseeing firms that miss targets face a higher risk of forced turnover. Those just surpassing Earnings Per Share (EPS) objectives exhibit elevated abnormal accruals and reduced Research and Development (R&D) spending, whereas those narrowly exceeding profit goals demonstrate diminished Selling, General and Administrative (SG&A) expenses. In sum, our findings underscore the drawbacks of tying executive compensation to specific performance benchmarks. © 2023 International Association for Housing Science. All rights reserved.