Debt Dynamics in Executive Compensation

Abstract

The prevailing agency theory framework in executive compensation studies highlights the conflict of interest between managers and shareholders. Our study extends the literature by examining the incorporation of debt-related performance metrics (DPMs). Using a manually collected dataset, we find that approximately 19% of US publicly traded firms incorporated DPMs in their compensation contracts. The likelihood of including DPMs increases after creditors’ monitoring incentives increase due to credit quality deterioration or debt maturity pressure. We demonstrate shareholders incorporate more non-debt metrics in their incentive programs in response to DPM inclusion. Our study contributes to understanding the agency costs of debt and debt-related factors in executive compensation