Complexity of CEO Compensation Packages: Obfuscation or Transparency?



We examine the extent to which the complexity of CEO compensation packages is consistent with either the efficient contracting view or managerial power view. Using a sample of firms from ExecuComp and a sample of firms from Incentive Lab from 2006 – 2012, we construct both an ex post and an ex ante measure of the complexity of CEO compensation and examine their relation with both economic determinants of contract complexity and excess CEO pay. We find that larger firms, firms with more business segments, and firms with foreign operations have more complex CEO compensation packages. Firms with more growth opportunities and more volatile operations have less complex plans, reflecting plans based heavily on equity as an incentive alignment mechanism for firms with high growth opportunities and on salary for firms with more volatile operations as a way to compensate CEOs for assuming higher risk. However, we also find that excess CEO pay is positively related to the complexity of CEO compensation packages. In total, our results provide support for both the efficient contracting view and the managerial power view of the design of CEO compensation packages. To validate our results, in further analysis we show that the component of contract complexity related to excess pay is associated with future poor performance. We also provide evidence that while post 2009 contracts have become more complex, they have become clearer from a linguistic perspective, consistent with contracts becoming more standard as a way to meet the new SEC disclosure requirements.

This seminar is organised by the Erasmus Accounting Research Group.