Naresh Bansal

Do CMO Incentives Matter? An Empirical Investigation of CMO Compensation and its Impact on Firm Performance

Despite growing interest in various facets of the Chief Marketing Officer (CMO) position, there is very little research on CMO compensation. Accordingly, we set out to investigate the determinants of CMO compensation and its effect on firm performance. Employing the lens of agency theory, we hypothesize that the CMO’s marginal productivity will positively impact the amount of total compensation as well as the extent of performance-based compensation in the CMO’s compensation contract. Moreover, we hypothesize that deviations in contracting elements from predicted levels will adversely impact firm performance. Analyzing a sample of 9,230 firm-year observations over the period 1992-2013, we find that CMOs employed at firms with high advertising and R&D intensity, and operating in competitive product markets, command larger amounts of total compensation. Moreover, a greater proportion of their compensation is market-based, with heightened sensitivity to movements in the firm’s stock price. We also find that deviations in CMO compensation elements have an adverse impact on operating performance (ROA), earnings surprises, and stock returns. Specifically, a 10% deviation in market-based compensation from predicted levels reduces ROA by 0.28%, dampens earnings surprises by 0.19%, and degrades annualized stock returns by 2.4%.

Intermediary Asset Pricing and the Nonlinear Relation between Volatility and the Equity Size Premium

Over the 1960-2014 period, we find that the equity size premium is pervasively positive, sizable, and statistically significant solely over periods that follow a high-risk month; defined as a month that ends with the expected market volatility being in its top quintile. Following the other lower-risk months, the size premium is essentially zero and statistically insignificant. Conditional CAPM alphas for Small-minus-Big (SMB) long/short portfolio returns also exhibit a very similar risk-based contingent variation. Our results indicate a nonlinear positive intertemporal risk-return relation for the equity size premium, seemingly attributed to high-risk episodes where small-cap stocks face relatively higher market volatility-, default-, and illiquidity-risk. Our findings suggest support for: (1) Hahn-Lee’s (2006) and Kapadia’s (2011) view that default risk has a role for understanding the size premium, (2) Acharya-Pedersen’s (2005) implication that illiquidity shocks can predict higher future returns, and (3) Ang et al’s (2006) view that stocks with a more negative sensitivity to market volatility innovations should have a higher risk premium.