Is CEO Cash Compensation Punished for Poor Firm Performance?

Leone et al. (2006) conclude that CEO cash compensation is more sensitive to negative stock returns than to positive stock returns, due to Boards of Directors enforcing an ex post settling up on CEOs. Dechow (2006) conjectures that Leone et al.'s (2006) results might be due to the sign of stock returns misclassifying firm performance. Using three-way performance partitions, we find no asymmetry in CEO cash compensation for firms with low stock returns. Further, we find that CEO cash compensation is less sensitive to poor earnings performance than it is to better earnings performance. Thus, we find no evidence consistent with ex post settling up for poor firm performance, even among the very worst performing firms with strong corporate governance. We find similar results when examining changes in CEO bonus pay and when partitioning firm performance using earnings-based measures. In sum, our results suggest that CEO cash compensation is not punished for poor firm performance.