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Performance pay and catering incentives

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  • Marcet, Francisco

Abstract

This paper explores how boards of directors design executive compensation to cater to investor demand. Following the literature of catering incentives and using a comprehensive dataset of accounting-based performance goals, we show that firms tie executive compensation to accounting goals (pay-for-performance) according to investor preferences for specific accounting metrics. Moreover, firms with powerful CEOs are less affected by investor demand for accounting metrics. Finally, our results are robust to alternative specifications and subsamples.

Suggested Citation

  • Marcet, Francisco, 2018. "Performance pay and catering incentives," Finance Research Letters, Elsevier, vol. 27(C), pages 12-22.
    • Handle: RePEc:eee:finlet:v:27:y:2018:i:c:p:12-22
    DOI: 10.1016/j.frl.2018.01.008
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    References listed on IDEAS

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    1. Adair Morse & Vikram Nanda & Amit Seru, 2011. "Are Incentive Contracts Rigged by Powerful CEOs?," Journal of Finance, American Finance Association, vol. 66(5), pages 1779-1821, October.
    2. Malcolm Baker & Jeffrey Wurgler, 2004. "A Catering Theory of Dividends," Journal of Finance, American Finance Association, vol. 59(3), pages 1125-1165, June.
    3. Li, Wei & Lie, Erik, 2006. "Dividend changes and catering incentives," Journal of Financial Economics, Elsevier, vol. 80(2), pages 293-308, May.
    4. Baker, Malcolm & Wurgler, Jeffrey, 2004. "Appearing and disappearing dividends: The link to catering incentives," Journal of Financial Economics, Elsevier, vol. 73(2), pages 271-288, August.
    5. Bennett, Benjamin & Bettis, J. Carr & Gopalan, Radhakrishnan & Milbourn, Todd, 2017. "Compensation goals and firm performance," Journal of Financial Economics, Elsevier, vol. 124(2), pages 307-330.
    6. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
    7. Christopher Polk & Paola Sapienza, 2009. "The Stock Market and Corporate Investment: A Test of Catering Theory," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 187-217, January.
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