The Effects of Deferred Compensation and Performance-based Compensation on Firm Value

Abstract

This study empirically investigates the effects of two incentive systems: (i) the deferred compensation system, which involves paying lower (higher) compensation than the industry average during employees' early (later) service periods; and (ii) the performance-based compensation system. Empirical results using employee-wage data from Korean firms show that both the deferred compensation system and the performance-based compensation system have positive associations with firth value measured by Tobin's Q. However, the associations between the two types of incentive system and other value-relevant factors are not uniform. While the deferred compensation system contributes to the enhancement of ROA and an improvement in labor productivity, the performance-based compensation system stimulates sales growth.