CEO Stock-Based Incentive Compensation and Firm Performance: A Quantile Regression Approach

This study employs the quantile regression model to examine the non-monotonic impact of CEO stock-based compensation on firm performance, using the data for U.S. non-financial firms from 1993 to 2005. The results indicate that while the impact of CEO stock-based pay on firm performance is positive for firms in the higher earnings quantile levels, the impact is negative for firms in the lower levels. In addition, the V-shaped relationship between CEO stock-based pay and firm performance satisfactorily explains the longstanding disagreement among earlier studies with regard to whether CEO stock-based pay can enhance firm performance. Furthermore, the quantile-varying pattern of the impact of stock-based compensation on firm performance is robust after controlling for the industrial and yearly effects. It is also robust to the use of the pay-for-performance sensitivity as an alternative explanatory variable or the market-based measure of performance as the dependent variable, or the consideration of the suspected endogenous problem between firm performance and stock-based compensation.