Performance Periods in CEO Performance-Based Equity Awards: Theory and Evidence

John Harry Evans; Yuhchang Hwang; Zhan Gao; Wan-Ting Wu

doi:10.2308/accr-51839

Performance Periods in CEO Performance-Based Equity Awards: Theory and Evidence

John Harry Evans (First Author), Yuhchang Hwang (Participant Author), Zhan Gao (Participant Author), Wan-Ting Wu (Participant Author)

Accounting

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Abstract

This paper examines the length of time over which CEO performance is evaluated (the "performance period") in CEO performance-based equity awards (PBEAs). Departing from the primary emphasis of agency theory on moral hazard problems, we develop a model in which short performance periods are instrumental in sorting CEO talents. The model predicts that short performance periods are preferred when CEOs have low expected productivity or valuable alternative employment opportunities, and when firms face high operating uncertainty or high dispersion of managerial productivity. We find empirical support for these predictions in a sample of S&P 1500 industrial firms granting PBEAs to CEOs. We also document that CEO turnover is higher for underperforming CEOs with shorter performance periods, validating the sorting role of performance periods.

Original language	English
Pages (from-to)	161-190
Journal	The Accounting Review
Volume	93
Issue number	2
DOIs	https://doi.org/10.2308/accr-51839
Publication status	Published - 2018

Keywords

CEO compensation
CEO turnover
corporate governance
performance period
performance vesting
sorting

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Performance Periods in CEO Performance-Based Equity Awards: Theory and Evidence

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