This study employs the quantile regression model to examine the non-monotonic impact
of CEO stock-based compensation on firm performance, using the data for U.S.
non-financial firms from 1993 to 2005. The results indicate that while the impact of CEO
stock-based pay on firm performance is positive for firms in the higher earnings quantile
levels, the impact is negative for firms in the lower levels. In addition, the
“V-shaped” relationship between CEO stock-based pay and firm performance satisfactorily
explains the longstanding disagreement among earlier studies with regard to whether
CEO stock-based pay can enhance firm performance. Furthermore, the quantile-varying
pattern of the impact of stock-based compensation on firm performance is robust after
controlling for the industrial and yearly effects. It is also robust to the use of the payfor-performance
sensitivity as an alternative explanatory variable or the market-based
measure of performance as the dependent variable, or the consideration of the suspected
endogenous problem between firm performance and stock-based compensation.