Subjective CEO Pay and Long-Term Incentives

I find that corporate boards frequently link CEO compensation to subjective performance measures that are neither accounting ratios nor stock returns. Subjective measurement incorporates soft information privately observed by the board about the CEO's contribution to long-term firm value. I show that when shareholders' investment horizon is longer, there is a larger fraction of CEO compensation based on subjectivity, consistent with optimal contracting. Moreover, subjective compensation is more relevant for maintaining long-term incentives when the other compensation components are temporarily dysfunctional, such as during periods when there is large vesting of equity awards. In particular, while large vesting of equity awards creates the distortionary incentive for CEOs to reduce investment growth, such adverse effect is significantly attenuated by subjective compensation