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Non-financial performance measures and pay-performance sensitivity

Author

Listed:
  • MyoJung Cho
  • Salma Ibrahim

Abstract

Purpose - This study aims to examine whether chief executive officer (CEO) pay-performance sensitivity to shareholder wealth is related to the use of non-financial performance measures in incentive contracts. Design/methodology/approach - Using hand-collected performance measure data in a sample of S&P 500 firms across the period 1994–2010, this study investigates the sensitivity of CEO bonus and cash pay to shareholder wealth of firms that use non-financial performance (NFPM) measures of varying types and contractual weights in their bonus contracts along with financial measures (NFPM firms) in comparison to that of firms using financial measures only (FPM firms). Findings - This study finds evidence that the pay-performance sensitivity is stronger in NFPM firms than in FPM firms. These results are driven by the use of CEO individual goals and operational efficiency. Furthermore, when using environmental, social and governance factors, the pay-performance sensitivity is stronger in terms of accounting performance only. This study also finds that using NFPM enhances pay-performance sensitivity more as their contractual weights increase and as financial risk increases. Practical implications - These findings are important to stakeholders, and especially regulators in understanding incentive effects of alternative performance measures. This study also sheds light on what types of non-financial measures are better in helping firms align CEOs’ incentives to shareholders’ interests. Originality/value - This study contributes to prior research on benefits of non-financial information within the context of executive compensation. This study presents original results about the effects of contractual weights of non-financial measures and financial risk on CEO pay-performance sensitivity. This study also presents new insights regarding how different types of non-financial measures affect CEO pay-performance sensitivity.

Suggested Citation

  • MyoJung Cho & Salma Ibrahim, 2021. "Non-financial performance measures and pay-performance sensitivity," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 20(2), pages 185-214, October.
  • Handle: RePEc:eme:jfrapp:jfra-01-2021-0018
    DOI: 10.1108/JFRA-01-2021-0018
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    More about this item

    Keywords

    Performance measurement; Non-financial performance measures; CEO bonus pay; Pay-performance sensitivity; Shareholder wealth; JM12; M40;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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