Kimberly J. Smith

You Can Pay Me Now and You Can Pay Me Later: The Dynamic Response of Executive Compensation to Firm Performance

Empirical studies estimating the impact of firm performance on executive pay have primarily concentrated on the short-run response. In this study, the authors present estimates of the complete dynamic response of CEO pay to firm performance. They find that the cumulative response of pay to performance is roughly ten times that of the contemporaneous response, a onetime innovation in firm performance typically raises pay over the next 4-5 years, and compensation arrangements have shifted toward greater performance sensitivity and longer-term pay arrangements over the four decades studied. Copyright 1995 by University of Chicago Press.

Postauditing capital expenditures and firm performance: The role of asymmetric information

Abstract The design of a firms management control system and its relationship with firm performance are important issues faced by todays managers. This paper hypothesizes that the relationship between firm performance and control (postauditing) of capital investments is dependent on the following firm related variables: asymmetric information, capital intensity, level of capital expenditures, and insider ownership. Among the arguments advanced and empirically confirmed are that (1) firm performance is a function of the appropriate match between postaudit sophistication and these firm related variables, and (2) the performance of firms whose postauditing procedures are “not sophisticated enough” is generally lower than that of firms whose postauditing procedures are “too sophisticated”.

Asymmetries in Dynamic CEO Compensation

In this study we test the null hypothesis of symmetry in contemporaneous and long-run responses of CEO cash and total compensation to stock and accounting returns. Over the long run, we find that cumulative cash and total compensation responses are concave in stock returns (i.e., are more sensitive to stock returns when company performance is poor). Although prior research has documented concavity in contemporaneous cash compensation (Leone et al. 2006), we find that the majority of the asymmetry for cash compensation, and virtually all of the asymmetry for total compensation, occur after the contemporaneous period. Prior research (e.g., Shaw and Zhang 2010) has also documented that contemporaneous cash compensation is convex in accounting returns (i.e., less sensitive to accounting returns when company performance is poor). We also find contemporaneous convexity for cash (and for total) compensation, but this convexity reverses over time, such that the long-run cumulative cash and total compensation responses are directionally, but not significantly, concave in accounting returns. Our findings of concavity are consistent with “prudent” boards of directors steering CEOs away from downside risk via their long-run compensation contracts. Our weaker results for accounting returns are consistent with a substitution of accounting conservatism for concavity in pay arrangements. However, our long-run results are not consistent with CEO cash or total pay being shielded from the effects of poor outcomes in either stock or accounting performance.