Growth options and relative performance evaluation

Abstract

Purpose

The purpose of this study is to investigate the cross-sectional associations between growth options and the peer pay–performance sensitivity of CEO compensation.

Design/methodology/approach

This study includes analytical analysis and multivariable regression analysis.

Findings

It is predicted in this study that there is a non-linear concave relation between peer pay–performance sensitivity and a firm’s growth options. Results based on the executive compensation data from ExecuComp are consistent with the hypothesis presented in this study.

Research limitations/implications

Future scholars need to consider the non-linear impact of growth options on peer pay–performance sensitivity when they conduct research related to CEO compensation by differentiating the company’s growth options to be at a low, medium and high level. In an industry, when a compensation committee decides on the peers for performance comparison purposes, the committee needs to make sure that the peer firms they select have similar operational environments, for example, they face similar growth options (e.g. low, medium or high) and idiosyncratic variances.

Practical implications

This study contributes to the managerial compensation literature by revealing the important role growth options, as well as idiosyncratic variances, play on peer pay–performance sensitivity. The results of this study have implications for both future researchers as well as industrial practitioners.

Social implications

It gives guidance on designing CEO compensation contracts.

Originality/value

This is an original work from the coauthors listed on this study.

Citation

Huang, J., Liu, L. and Ulstad, I.C. (2016), "Growth options and relative performance evaluation", International Journal of Accounting & Information Management, Vol. 24 No. 1, pp. 38-55. https://doi.org/10.1108/IJAIM-10-2014-0067