The Impact of the Alignment between Performance Measures, Uncertainty and CEO Compensation on Firm Performance
Agency theory advocates that CEO compensation should tie to firm performance to better align managers’ and shareholders’ interests. The factor of uncertainty can not be neglected in determining CEO compensation. Following contingency theory, firm performance should be higher when contextual factors and compensation are aligned than when they are not. Prior research pays little attention to this issue. This study fills this gap to probes that firm performance is superior when CEO compensation is more aligned with performance measures and uncertainty factors. Uncertainty factors are captured by noise in earnings, risk of stock return and operating risk. The performance measures are measured through accounting and non-accounting performance measures.