CEO Pay Mix and Firm Performance

This paper explores the relationship between the proportion of cash-based pay to total compensation and the market valuation of firm. In a cross-section of 2,257 publicly traded firms in the U.S., we found the non-linear relationship between pay mix and market valuation of the firm’s assets. Tobin’s Q falls as the proportion of cash-based pay to total compensation increases from 0 to 50%, and continue to decrease, although more slowly, as pay mix rises further to 75% and begin to rise as pay mix rises beyond 75%. One interpretation of these findings is that the decreases of Tobin’s Q with the cash-pay mix reflect a misalignment of incentive between CEOs and shareholders, while the increase reflects risk-insurance effects of CEO contract, suggesting the contrasting effects of a cashbased compensation.