Pay for the Right Performance

In December 2006, the Securities and Exchange Commission issued new rules that require enhanced disclosure on how firms tie CEO compensation to performance. We use this new available data to study the terms of performance-based awards in CEO compensation contracts in S&P 500 firms. We observe large variations in the choice of performance measures and horizons. Our evidence is consistent with predictions from optimal contracting theories: firms rely on performance measures that are more informative of CEO actions. Furthermore, our results do not support the argument that entrenched CEOs rig the contractual terms toward performance measures that are easier to manipulate