The choice of performance measures, target setting and vesting levels in UK firms' Chief Executive Officer equity‐based compensation

Hameed, Affan; Padgett, Carol; Clements, Michael P.; Ullah, Subhan

Abstract

This article analyses factors influencing the choice of performance measure in CEO equity-based compensation, for a sample of 3,400 plans from 400 UK firms between 2007 and 2015. We examine the effect of the volatility of earnings per share (EPS) and of total shareholder returns (TSR) on the choice of performance measures, taking into account four categories of measure: EPS alone, TSR alone, EPS and TSR jointly, or neither EPS nor TSR. This allows us to utilize a comprehensive cross-section of plans. The results are robust to controlling for plan types, the use of different compensation consultants, industry and time-specific effects. We find that “EPS and TSR jointly” is the most common category of performance measure employed by firms. Our empirical results show that firms with higher EPS volatility and lower TSR volatility are more likely to choose TSR as a performance measure and that firms with higher EPS volatility are less likely to choose EPS alone; we argue that these results are consistent with optimal contracting theory. Second, we conduct a novel, detailed description of the performance measures, comparator groups, plan choices, threshold targets and vesting levels at minimum and maximum thresholds, used in CEO compensation contracts. We further argue that commonalities across firms in the elements of target-setting are evidence of institutional isomorphism.

Citation

Hameed, A., Padgett, C., Clements, M. P., & Ullah, S. (2023). The choice of performance measures, target setting and vesting levels in UK firms' Chief Executive Officer equity‐based compensation. International Journal of Finance and Economics, 28(4), 4246-4270. https://doi.org/10.1002/ijfe.2649

• Journal Article Type: Article
• Acceptance Date: May 8, 2022
• Online Publication Date: Jun 2, 2022
• Publication Date: 2023-10
• Deposit Date: May 11, 2022
• Publicly Available Date: Jun 3, 2024
• Journal: International Journal of Finance and Economics
• Print ISSN: 1076-9307
• Electronic ISSN: 1099-1158
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 28
• Issue: 4
• Pages: 4246-4270
• DOI: https://doi.org/10.1002/ijfe.2649
• Keywords: Performance target; CEO Compensation; Long-term incentive plans; Optimal contracting
• Public URL: https://nottingham-repository.worktribe.com/output/8045686
• Publisher URL: https://onlinelibrary.wiley.com/doi/10.1002/ijfe.2649
• Additional Information: This is the peer reviewed version of the following article: Hameed, A., Padgett, C., Clements, M. P., & Ullah, S. (2023). The choice of performance measures, target setting and vesting levels in UK firms' Chief Executive Officer equity-based compensation. International Journal of Finance & Economics, 28(4), 4246–4270, which has been published in final form at https://doi.org/10.1002/ijfe.2649. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.