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Is CEO Compensation Shielded from Overproduction?
Long Chen,
Washington University In St. Louis
ABSTRACT. In this study, I examine whether compensation committees in manufacturing firms seek to shield CEO compensation from overproduction. I first find that overproduction, measured as Positive Change in Percent of Production Added to Inventory, has significant incremental explanatory power on earnings weight in both CEO bonus and CEO total compensation. In addition, I find that the incremental effect of overproduction on earnings weight is significantly more negative in CEO total compensation in presence of just meeting or beating analyst forecast or small profit. The results are also robust to adjusting for annual inflation growth and controlling for CEO-specific fixed effects. Overall, these findings suggest that in manufacturing firms, compensation committees perceive the apparent overproduction and at least partially mitigate the effect of overproduction on CEO compensation, and the mitigating effect is more prominent when overproduction is more likely to be opportunistic.
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