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Getting the Incentives Right: Backfilling and Biases in Executive Compensation Data

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  • Stuart L Gillan
  • Jay C Hartzell
  • Andrew Koch
  • Laura T Starks

Abstract

We document that backfilling in the ExecuComp database introduces a data-conditioning bias that can affect inferences and make replicating previous work difficult. Although backfilling can be advantageous due to greater data coverage, if not addressed, the oversampling of firms with strong managerial incentives and higher subsequent returns leads to a significant upward bias in abnormal compensation, pay-for-performance sensitivity, and the magnitudes of several previously established relations. The bias also can lead to one misinterpreting the appropriate functional form of a relation and whether the data support one compensation theory over another. We offer methods to address this issue. Received May 12, 2014; editorial decision May 10, 2016 by Editor David Hirshleifer.

Suggested Citation

  • Stuart L Gillan & Jay C Hartzell & Andrew Koch & Laura T Starks, 2018. "Getting the Incentives Right: Backfilling and Biases in Executive Compensation Data," The Review of Financial Studies, Society for Financial Studies, vol. 31(4), pages 1460-1498.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:4:p:1460-1498.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx061
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    Cited by:

    1. Brooks, Chris & Fenton, Evelyn & Schopohl, Lisa & Walker, James, 2019. "Why does research in finance have so little impact?," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 58(C), pages 24-52.
    2. Thi Bui & Andrew Ferguson & Peter Lam, 2021. "CEO compensation in early‐stage firms: Rewards for prospectivity and survival," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 895-928, May.
    3. Mobbs, Shawn, 2018. "Firm CFO board membership and departures," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 316-331.
    4. Choi, Seungho & Xu, Jing, 2022. "What do boards consider in CEO performance evaluation? Evidence from executive turnover," Finance Research Letters, Elsevier, vol. 50(C).
    5. Stefano Colonnello & Giuliano Curatola & Shuo Xia, 2022. "Trading Away Incentives," Working Papers 2022:16, Department of Economics, University of Venice "Ca' Foscari".
    6. Kweh, Qian Long & Tebourbi, Imen & Lo, Huai-Chun & Huang, Cheng-Tsu, 2022. "CEO compensation and firm performance: Evidence from financially constrained firms," Research in International Business and Finance, Elsevier, vol. 61(C).
    7. Zhao, Hong, 2018. "Executive labor market segmentation: How local market density affects incentives and performance," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 1-21.
    8. Song, Wei-Ling & Wan, Kam-Ming, 2019. "Does CEO compensation reflect managerial ability or managerial power? Evidence from the compensation of powerful CEOs," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 1-14.

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