Striking Oil in the Boardroom: Overpaying Executives through Manipulating Actual Performance Metrics
73 Pages Posted: 10 Jun 2020 Last revised: 6 May 2021
Date Written: May 5, 2021
Using hand-collected proxy statement data, we examine the distribution of performance metrics used to calculate executive compensation in 86 US oil and gas firms. We find that the distribution of actual–target differences is significantly discontinuous at zero over the 13-year period 2006-2018. Executives are nearly three times more likely to just beat than to just miss their performance targets. When we split metrics into transparent and non-transparent measures, we find significant discontinuities only in the non-transparent group, which persist even after 2011, when the US Securities and Exchange Commission (SEC) updated its disclosure guidance for non-GAAP performance metrics in proxy statements. The discontinuities also disappear when firms are financially distressed or have better governance. Our findings suggest that managers can routinely manipulate realized performance metrics to increase their performance-based compensation. Our framework can help analysts and investors in their firm governance assessments and the SEC in its redesign and enforcement of disclosure rules for non-transparent realized performance metrics.
Keywords: executive compensation, manipulation, transparency, performance measures, discontinuity
JEL Classification: G34, J33, M12, M52, Q40
Suggested Citation: Suggested Citation