An empirical analysis of the dynamic relation between a CEO's multiple performance measure compensation contract and the horizon problem

The second chapter of this dissertation examines multiple performance measures in the presence of the horizon problem to determine whether a CEO's compensation structure, the ratio of earnings-based compensation to total compensation, is affected by the CEO's career concerns. In examining whether the CEO's compensation contract is affected by his career concerns, I recognize that a CEO who is nearing retirement can leave the firm for a variety of reasons. As such, I use a competing risks regression, a hazard model that allows for the comparison between observation groups by how the CEO left the firm, to incorporate the reason a CEO left into the analysis of the relation between a CEO's compensation structure and his tenure. The three groups of interest in the competing-risks regression are whether the CEO retired, resigned following poor performance, or left following a merger or acquisition. I find no evidence that a CEO's tenure for each of these groups is associated with his compensation structure. I also do not find evidence of significant differences between the compensation structures of CEOs who retired, resigned following poor performance, or left following a merger or acquisition. The lack of associations and differences between compensation structures does not offer insight into whether compensation committees adjust compensation contracts to offset a CEO's career concerns as he gets ready to leave the firm but do suggest that, if the compensation structure is being adjusted, it is done in a manner that assumes all CEOs will leave for the same reason. I do find evidence that a CEO's tenure is associated with firm performance for both the retirement and poor-performance groups. This suggests that the board of directors actively monitors the CEO's performance.;I use the estimates of CEO tenure generated by the competing risks regression in a maximum-likelihood regression of the determinants of a CEO's compensation structure. I find that CEOs with more earnings-based compensation have longer tenures. I also find that the relative noise ratio, the ratio of the noise in earnings to the noise in stock price, is positively associated with a CEO's compensation structure.;While a CEO's compensation structure is not related to his tenure, changes in his compensation structure are related to his tenure for both the poor performance and the merger and acquisition groups. For the poor performance group, stock-based compensation increased with tenure. In addition, the changes in compensation structure for both the poor performance and retirement groups are similar. Finally, changes in performance are negatively associated with tenure for CEOs in the poor performance group. The combination of these results suggest that compensation committees increase stock-based compensation as CEOs approach retirement but not in a manner that suggests the compensation committee distinguishes between how a CEO will leave the firm. Instead, it appears that compensation committees allow firm performance to determine how a CEO, who is of retirement age, leaves the firm.;For the mergers and acquisition groups, increases in stock-based compensation are associated with shorter tenures. The changes in compensation structure for the mergers and acquisition group are significantly different than the changes in compensation structure of both the retirement and poor performance groups. Univariate statistics indicate that the changes in compensation structure for the mergers and acquisition group result in compensation structures that are similar to the retirement group's for the period immediately preceding when the CEO left the firm. Thus, the changes in compensation structure for the mergers and acquisition group also appears to support the notion that, while compensation committees appear to adjust a CEO's compensation structure as he approaches retirement, they do not do so in a manner that is indicative that they anticipate how a CEO will leave the firm.;A different method of examining the shareholder-CEO contracting relationship is to examine the sensitivity of a CEO's compensation to changes in shareholder's wealth. In the third chapter of this dissertation, I examine the shareholder-CEO contracting relationship in regard to the incentive ratio, which is the ratio of a measure of the sensitivity of changes in the CEO's earnings-based compensation contract to changes in shareholder wealth to a measure of the sensitivity of the CEO's stock-based compensation to changes in shareholder wealth. While the proxy for a CEO's incentive ratio is positively correlated with my proxy of the CEO's compensation structure, the correlation is not statistically significant, suggesting that these two measures capture different features of the shareholder-CEO contracting relationship.;While the empirical evidence in Chapter 2 does not indicate any association between a CEO's compensation structure and his tenure, the empirical evidence in Chapter 3 suggests a significant association between the CEO's incentive ratio and his tenure. (Abstract shortened by UMI.)...