I study the increasing focus of CEO compensation on subjective performance measures during the recent decade. I document that 63% of large US public firms use subjective measures to evaluate CEO performance, and that reliance on subjective measures is positively correlated with long-term institutional ownership. Using a recent law change in corporate governance, I identify that a longer institutional investor horizon induces a higher weight on subjective measures in compensation design. I also find that the more complex business structure a firm has, the more reliant is CEO compensation on subjective performance measures. Overall, my findings are consistent with a significant theme of incomplete contract theory suggesting that soft performance information can provide effective i...[ Read more ]

I study the increasing focus of CEO compensation on subjective performance measures during the recent decade. I document that 63% of large US public firms use subjective measures to evaluate CEO performance, and that reliance on subjective measures is positively correlated with long-term institutional ownership. Using a recent law change in corporate governance, I identify that a longer institutional investor horizon induces a higher weight on subjective measures in compensation design. I also find that the more complex business structure a firm has, the more reliant is CEO compensation on subjective performance measures. Overall, my findings are consistent with a significant theme of incomplete contract theory suggesting that soft performance information can provide effective incentives if the contract is provided by a long-term oriented principal.