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Non-financial performance measures, CEO compensation, and firms’ future value

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  • Gan, Huiqi
  • Park, Myung S.
  • Suh, SangHyun

Abstract

This study examines whether non-financial performance measures (NFPMs) included in CEO bonus contracts are complementary to equity-based compensation, and whether they jointly explain future firm value. We predict that in a performance evaluation system, NFPMs integrated into CEO bonus contracts complement the use of equity-based compensation, and that they are jointly and positively associated with firms’ long-term value. Consistent with our predictions, we find that the inclusion of NFPMs in bonus contracts is positively associated with the relative importance of equity-based compensation (especially in the form of restricted stocks), indicating a complementary relationship between NFPMs and equity-based compensation. We also show that equity-based compensation is marginally associated with higher future firm value when the firm uses NFPMs in its CEOs’ bonus contracts. Overall, our findings suggest that equity-based compensation is more effective in aligning managerial efforts and actions with firms’ long-term value when firms include NFPMs in CEO bonus contracts.

Suggested Citation

  • Gan, Huiqi & Park, Myung S. & Suh, SangHyun, 2020. "Non-financial performance measures, CEO compensation, and firms’ future value," Journal of Business Research, Elsevier, vol. 110(C), pages 213-227.
    • Handle: RePEc:eee:jbrese:v:110:y:2020:i:c:p:213-227
    DOI: 10.1016/j.jbusres.2020.01.002
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