Through the rhetoric art: CEO incentives in sustainability sensitive industries

Purpose This paper aims to explore the relationship between the readability of sustainability reports and chief executive officer (CEO) attributes, comprising monetary, non-monetary incentives and personal characteristics. Design/methodology/approach The study is based on an international sample of companies operating in sustainability-sensitive industries during 2016–2018. Findings The results prove that CEO monetary incentives, as well as CEO non-monetary incentives, negatively influence the readability of sustainability reports, revealed in a positive relationship with readability indexes, by providing reports with greater reading difficulty. Additionally, this study shows evidence about the relation of complementarity between these incentives. Other CEO characteristics have no significant effect on the readability of sustainability reports. Originality/value This research sheds the light on the role of CEO incentives in obfuscating sustainability information to portray the company, operating in sustainability-sensitive industries, in a favorable image.

CEO dominance and firm innovation effort

PurposeThe purpose of this paper is to investigate whether innovation effort is lower for firms exhibiting signs of higher chief executive officer (CEO) dominance and whether such CEOs can be incentivized to pursue risky ventures such as innovation projects in line with shareholder's interests that are geared toward the long-term growth of the firm.Design/methodology/approachThe paper utilizes panel data of US publicly listed companies (2007–2016) to address the influence of CEO dominance on firm innovation effort and the moderating effects of incentives in this relationship through ordinary least squares (OLS) estimations. A two-stage least squares (2SLS) technique is also employed to address possible endogeneity. As a robustness check, further analysis is conducted utilizing an alternative proxy for CEO incentive as well as Tobit analysis (with panel-level random effects).FindingsResults from both OLS and Tobit estimations offer two key findings. First, there is a significantly negative relationship between CEO pay slice and firm research and development (R&D) intensity. Second, the interaction effect of CEO incentives and CEO dominance is significant and positive.Research limitations/implicationsWhen provided with the right incentives, such as those that reward long-term performance, dominant CEOs can be incentivized to go after risky ventures like innovation projects that are crucial to promoting the long-term growth of the firm.Originality/valueThis paper utilizes R&D instead of patent outputs as proxies for innovation where the former enables studying R&D efforts for more recent periods compared to prior studies that utilize patent data.

Board Expertise and Executive Incentives

We investigate how board expertise affects chief executive officer (CEO) incentives and firm value. The CEO engages in a sequence of tasks: first acquiring information to evaluate a potential project, then reporting his or her assessment of the project to the board, and finally implementing the project if it is adopted. We demonstrate that the CEO receives higher compensation when the board agrees with the CEO on the assessment of the project. Board expertise leads to (weakly) better investment decisions and helps motivate the CEO's evaluation effort; however, it may induce underreporting and reduce the CEO's incentives to properly implement the project. Consequently, if motivating the CEO to evaluate projects is the major concern (e.g., innovative industries), board expertise exhibits an overall positive effect on firm value; however, if motivating the CEO to implement projects is the major concern (e.g., mature industries), board expertise can harm firm value. This paper was accepted by Shiva Rajgopal, accounting.

Performance-Vesting Share Award Outcomes and CEO Incentives

I investigate the incentives provided by performance-vested stock awards (PVSAs) and the accuracy of ex ante PVSA valuations. In PVSAs, the number of shares awarded to the CEO varies based on how firm performance compares to target performance levels. The incentives provided by PVSAs and their valuations depend on the difficulty of the performance targets, which cannot be easily determined using ex ante disclosures. Using a hand-collected dataset of PVSA outcomes, I find that target difficulty is such that CEOs have incentives to earn additional shares from improved firm performance in 75% of PVSAs. In contrast, findings in prior studies using methodologies that rely on comparisons of PVSA targets to similarly named financial statement metrics suggest only 12% of awards provide such incentives. I further find that, on average, PVSAs pay out 115% of shares disclosed in ex ante valuations, suggesting that the valuations of awards are understated.