The relation between earnings-based measures in firm debt contracts and CEO pay sensitivity to earnings

• Autores: Adrienne Rhodes
• Localización: Journal of accounting and economics, ISSN 0165-4101, Vol. 61, Nº. 1, 2016, págs. 1-22
• Idioma: inglés
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• Resumen

  • Abstract I investigate how implicit incentives provided by earnings-based debt covenants affect the structure of CEO compensation contracts. This provides a new and unique view of how the CEO׳s incentives are shaped by not only his compensation contract but also debt contracts. I find when debt contracts contain an earnings-based covenant, the CEO׳s pay sensitivity to earnings is muted. Additionally, I find some evidence that pay sensitivity to earnings varies with earnings-based covenant slack. This study provides evidence consistent with shareholders rebalancing the CEO׳s earnings incentives in the presence of earnings-based covenants, thereby tilting incentives away from earnings performance.