Dual-class firms’ choice of performance measures in CEO stock compensation contracts

Abstract

Purpose

The purpose of this paper is to provide new evidence on the choice of performance measures used in dual-class firms to incentivize CEOs.

Design/methodology/approach

This paper uses coarsened exact matching and propensity score matching to match the dual-class firm sample with a control group of single-class firms. This study uses matching estimators to provide an analysis of how a dual-class structure affects the design of performance measures in performance-based stock awards. In addition, regression models are used to investigate the effect of a dual-class structure on performance measure choices.

Findings

This paper finds that market-based metrics are less likely to be used by dual-class firms relative to single-class firms. In addition, peer-based measures are much less common for dual-class than single-class firms. This study also finds that the length of the CEO’s performance evaluation period does not differ between dual-class and single-class firms.

Research limitations/implications

This paper attempts to investigate the choice of performance measures to find out the extent to which the board of directors focuses CEO efforts on firms’ long-term versus short-term objectives.

Practical implications

The findings reveal the relationships between the dual-class stock structure and the contractual features of CEO performance-based stock awards, provide empirical evidence for the company’s compensation committee and provide implications for the evolving practices of performance measures regarding CEO stock compensation. The findings are also useful to regulators, compensation consultants and firms pursuing efficient design of executive compensation.

Originality/value

This paper is among the first to study the determinants of compensation contracts. Second, prior literature seldom controls for CEO stock ownership, but this study matches dual-class firms to a control group of single-class firms that are similar in terms of CEO stock ownership and other important firm characteristics. Finally, these findings suggest that dual-class firms shield their executives from short-term market pressures and design stock compensation contracts that deemphasize volatile stock prices.

Citation

Li, J. and Hwang, Y. (2018), "Dual-class firms’ choice of performance measures in CEO stock compensation contracts", Review of Accounting and Finance, Vol. 17 No. 4, pp. 540-562. https://doi.org/10.1108/RAF-09-2016-0133