The Impact of Clawback Adoption on Executive Cash Compensation Structure

Prior research suggests an asymmetric relation between CEO cash compensation and firm performance as measured by market-adjusted stock returns. As discussed by Leone et al. (2006), the underlying rationale for this asymmetry is the difficulty in the ex post settling- up of cash compensation. We examine a later period (2007-2014) and find asymmetry between cash compensation (for CEOs and CFOs) and firm performance as measured by market-adjusted stock returns as well as accounting-based measures. Further, we find that clawback adoption is followed by reduced asymmetry in this relation, a finding consistent with clawback’s ex post settling-up characteristics. We contribute to the literature by showing that clawback adoption has had a favorable impact on the structure of CEO/CFO compensation consistent with Holmstrom (1979).