The Determinants of Pay-for-Performance Sensitivity and Convexity of CEO Bonus Contracts: Evidence from S&P 1500 Firms

Recent studies have suggested that CEO’s annual bonus plans have an incentive effect comparable to stock compensation (Frydman and Jenter, 2010; Jensen and Murphy, 2011; Guay, Kepler, and Tsui, 2019). However, only a limited number of papers have addressed annual bonuses of CEOs. The aim of this paper is 1) to overview the comprehensive landscape of executive bonus plans 2) and to investigate the determinants of pay-for-performance sensitivity (hereafter, “PPS”) and the convexity in annual bonuses. We find that the 80/120% rule for target setting for annual bonus plans holds on average, with some differences acㅁross industries. We also show that firms’ growth opportunities are one of the key elements in determining bonus PPS and the convexity of bonus payouts after controlling for peer firm information and other economic factors.