Are CEO’s Paid For Performance? Evaluating The Effectiveness Of Equity Incentives

Document summary

This report states that long-term incentive pay has dominated executive pay in the U.S. for the past three decades. During the observed period 2006-2015 equity-based incentive pay accounts for the largest element of CEO pay, accounting for more than 70% of the compensation for both summary pay and realized pay. Since there is always a risk that equity-based incentive pay creates a misalignment of interests between CEO’s and shareholders, this paper seeks to empirically explore whether higher equity incentives are bad for shareholder wealth. Employing a sample of 429 large-cap U.S. companies from 2006 to 2015, the authors find that companies that award higher equity incentives had below median returns.

The report suggests that apart of the issue lies in the disclosure rules mandated by the U.S. Securities and Exchange Commission (SEC), which focus on annual instead of long-term reporting. The general lack of such integrated disclosures results in an excessive focus on short-term share price gains, at the expense of long-term returns. The report suggests several remedies, such as the reporting of cumulative pay and performance data over the CEO’s full tenure, with the aim of reducing the focus on short term gains that prevails currently.