The Effect of Total Shareholder Return (TSR) on Performance Target Setting：Evidence from Executive Bonus Target Ratcheting

[Purpose] This study examines the effect of total shareholder return (TSR) on the degree of target ratcheting. [Methodology] This study analyzes data from S&P 1500 firms in the U.S., from 2012 to 2020, and focusing on CEO compensation linked to TSR and performance targets based on earnings per share (EPS). [Findings] I find that firms aligning CEO compensation with TSR exhibit a greater degree of target ratcheting compared to those that do not. Furthermore, the findings show that the tendency to strategically withhold end－of－year performance is less pronounced in firms with greater use of TSR. This implies that, consistent with the prediction, as the ratchet effect decreases, firms are more likely to incorporate past performance data when establishing performance targets. [Implications] Overall, this study makes an incremental contribution by suggesting that TSR serves as a key determinant of target ratcheting in executive compensation practices.