Seminari Rohit Sonika

Rohit Sonika (Hanken School of Economics) will present his paper “CEO Pay and the Complementarity of Compensation Components.”

Abstract

Incentive ability of executive compensation depends partly on the complemen- tarity between components in a compensation structure and how adjustments are made to this structure (Lambert, Larcker, and Verrecchia, 1991). Due to manda- tory expensing of stock options under FAS 123R, we empirically ascertain the impact of addition or substitution of new equity components in a CEO’s com- pensation structure on pay-performance sensitivity, and, consequentially, on ¿rm decision-making. Our ¿ndings reveal that ¿rms engaging in substitution of new components in place of existing ones are more aggressive in reducing overall stock options held by a CEO, while also reducing the sensitivity of the compensation package. However, such downward adjustments do not lead to adverse behaviour with respect to ¿rm investment or ¿nancing decisions. Adding ¿rms, on the con- trary, signi¿cantly increase overall compensation (while reducing overall stock op- tion grants), with insigni¿cant adjustment to sensitivities, leading to an aggregate loss in pay-performance relationship.