Do CEO pay cuts really work?

Research Seminars
Academic Areas Accounting
Professor Hariom Manchiraju, Assistant Professor, Indian School of Business
April 10, 2013 | Wednesday
AC 2 Mini Lecture Theatre (MLT), Level 2, hyderabad, Hyderabad, India
Open to Public
Prior research shows that large compensation cuts provide ex ante incentives for CEOs to exert effort to avoid poor performance and that CEOs take actions to improve poor performance once pay is cut. In this study, we examine whether such CEO pay cuts really work. We re-examine the improvement in firms’ accounting performance following a CEO pay cut and find that much of this improvement is achieved via accruals and real activities manipulation. We also find that compensation committees do not punish manipulative activities sufficiently in the sense that pre-managed and managed components of earnings are compensated similarly in the year following the pay cut. Overall, our findings suggest that using the pay cut as a strategy to induce CEO effort might have unintended consequences.
(Co-authored with Gerald J. Lobo, Sri S. Sridharan)