Stock-Based versus Cash Compensation: Does the Correlation between Earnings and Stock Returns Matter?

Abstract

I empirically examine the role of the correlation between earnings and

stock returns in determining the structure of compensation packages for

top executives. I develop two competing hypotheses on the relation

between the returns-earnings correlation and the structure of executive

compensation and empirically test the association between the returnsearnings

correlation and use of stock-based pay. The results show that

the returns-earnings correlation is positively associated with the use of

stock-based compensation, after controlling for other determinants of

stock-based compensation such as firm size and firms growth

opportunities.