The Shielding of CEO Compensation from the Effects of Strategic Expenditures

Augustine Duru, Raghavan J. Iyengar, Alex Thevaranjan

Research output: Contribution to journalArticle

30 Scopus citations

Abstract

This study investigates whether and why compensation committees shield CEO compensation from income-decreasing effects of strategic expenditures. We document that firms do shield recurring strategic expenditures such as research and development and advertising expenditures. We also find that firms shield research and development expenditures more than advertising expenditures. Our results are consistent with prior findings that suggest that compensation committees shield CEOs from nonroutine transactions such as restructuring charges and extraordinary losses. Using a two-task principal-agent framework, we show that such shielding improves the efficiency of the contract by making the shielded income measure more congruent with the principal's objectives.

Original languageEnglish (US)
Pages (from-to)175-193
Number of pages19
JournalContemporary Accounting Research
Volume19
Issue number2
DOIs
StatePublished - Jan 1 2002

Keywords

  • Agency model
  • CEO compensation
  • Shielding
  • Strategic expenditures

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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