Impact of CEO compensation structure on asymmetric cost behavior

When managers make resource capacity decisions, short-term incentives such as annual cash bonuses induce managers to focus on short-run profit while long-term incentives such as stock compensation and long-term incentive plans induce managers to focus on long-term performance. Drawing on the agency theory, we predict and find evidence of a negative (positive) association between managers’ short-term cash incentives (long-term incentives) and “cost stickiness,” asymmetric cost behavior that reflects managers’ deliberate decisions to adjust capacity when faced with a change in demand. We show that the relationship we find is distinguished from the fixed pay effect documented in the prior literature. We also find that the magnitude of bias in analysts’ earnings forecasts created due to cost stickiness decreases when short-term bonus as a proportion of CEO’s total incentives increases. Our study provides evidence of an unexamined real effect of CEO compensation structure.