Firm Performance and Executive Compensation Structure

Abstract

This issue examines the executive compensation structure of 828 non-financial U.S. firms, providing the evidence which supports incentive compensation. This issue shows that the total compensation level positively affects firm performance, as measured by Tobin's Q and ROA. Different from the prior empirical research, this issue represents that not all the type of equity-based compensation motivates the top managers to increase firm value. The empirical results reveal that stock options have no effect on corporate performance, while restricted stocks have significantly positive influence on firm performance. Thus, the firm should be critical thinking when using equity-based compensation. Also, the major compensation type, salary, has a passive effect on firm performance. Finally, the authors find that the link between compensation structure and corporate performance is stronger than the link between total compensation level and corporate performance. That means compensation structure provide more incentives for executives to maximise firm value.