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The Politics of Pay: A Legislative History of Executive Compensation
Abstract
This paper explores the legislative history of executive compensation, starting with Depression-era disclosure regulations and ending with the ongoing implementation of the Dodd-Frank Act. Over the past 80 years, Congress has imposed tax policies, accounting rules, disclosure requirements, direct legislation, and myriad other rules to regulate executive pay. With few exceptions, the regulations have generally been either ineffective or counterproductive, typically increasing (rather than reducing) CEO pay and leading to a host of unintended consequences, including the explosion in perquisites in the 1970s, golden parachute plans in the 1980s, stock options in the 1990s, and restricted stock in the 2000s. Part of the problem is that regulation – even when well intended – inherently focuses on relatively narrow aspects of compensation allowing plenty of scope for costly circumvention. A larger part of the problem is that the regulation is often misintended, driven by political rather than shareholder agendas.
... 9 Our study contributes to research examining executive compensation in several ways. First, existing studies of the relation between disclosure and CEO compensation find that mandated disclosure is associated with increases in executive compensation (e.g., Murphy, 2012;Hermalin and Weisbach, 2012;Park et al., 2001;Lu and Shi, 2018;Gipper, 2016). These studies attribute rises in compensation to mandated disclosures that either make CEOs more aware of outside options and/or bind board members to paying out incentive compensation by publicly revealing their compensation strategy. ...
... Proponents, mostly consisting of pension funds, unions, and shareholder activists, assert that the pay ratio disclosure 11 will inform shareholder decisions (e.g., say-on-pay voting) on CEO pay, root out ineffective pay practices that led to the financial crisis, and eventually reduce income inequality in the U.S. In contrast, critics raise questions about the effectiveness of pay ratio disclosure. They contend that the disclosure will not be comparable across different companies, which substantially limits its informational value (Murphy, 2012). Other commenters point out that the pay ratio disclosure demands high computational costs, especially for multinational companies, in determining pay for the median employee (SEC, 2015). ...
... This evidence of a nominal decline in CEOs' relative compensation lies in contrast to the bulk of evidence in previous studies, which indicate that exogenously imposed disclosure requirements are often followed by unexpected increases in executive compensation (e.g., Hermalin and Weisbach, 2012;Murphy, 2012;Park, Nelson, and Huson, 2001;Balsam et al., 2016;Lu and Shi, 2018;Gipper, 2016). However, evidence of a nominal relative decline in CEO compensation in Table 3 is consistent with concerns in Murphy and Jensen (2018) that the pay ratio disclosure provides a mechanism through which "uninvited guests" will be induced to shame boards into lowering CEO pay via public aversion to high executive pay and with empirical evidence on the role of public disclosure of top municipal manager salaries (Mas, 2017). ...
... Section 5 discusses several interventions (some implemented by regulators, others advocated by shareholders) which, although well-intentioned, both increased the level of pay and reduced its link with performance. Murphy (2012) describes how the history of executive pay regulation is …lled with unintended consequences and concludes that "with few exceptions, the regulations have generally been either ine¤ective or counterproductive". ...
... The U.S. requires publication of the main pay components for the three highest paid executives of public …rms since 1934. These disclosure requirements were expanded in 1978, 1993, 2006, and 2011, usually in response to perceived abuses (Murphy, 2012). Other countries introduced detailed disclosure requirements or comply-or-explain recommendations in the 1990s and 2000s (Canada in 1993, the U.K. in 1995, New Zealand in 1997, Ireland and South Africa in 2000, and Australia in 2003. ...
... For example, the increased disclosure of perks resulting from the SEC's 1978 rules was followed by an increase in the use of perks, likely as executives saw others'perks and requested the same. Moreover, disclosure means that CEO pay becomes a public matter a¤ected by politicians, the media, and trade unions, who may have objectives far di¤erent from shareholder or stakeholder value (Murphy, 2012). ...
... In the early 1990s, believing that powerful CEOs received inefficient, excessive compensation arrangements, Congress considered limiting CEO compensation levels (Rose and Wolfram, 2002) or limiting the CEO compensation tax deduction without regard to firm size or performance (Murphy, 2011). Instead, in 1993 Congress enacted Internal Revenue Code §162(m), which does not mandate compensation practices, but provides a tax incentive to firms to increase the link between executive pay and firm performance (Balsam and Ryan, 1996). ...
... Prior research generally recognizes that CEOs influence their compensation arrangements and that their influence increases with their individual power (Core et al., 1999;Murphy, 2011 improving board independence for firms that already had relatively independent boards is not necessary to improve the quality of governance, (b) for such firms, the 2003 regulations did not change board independence sufficiently to have a significant influence on the quality of governance, or (c) for such firms, independent directors are an ineffective mechanism for controlling CEO power because the SEC definition of an independent director fails to provide independent review. For example, with respect to the final condition, a director with social ties to the CEO can qualify as an independent director and prior literature has documented that social ties influences governance quality (Hwang and Kim, 2009). ...
... Thus, a director is not precluded from being an outside director solely because the director is a former officer of a corporation that previously was an affiliated corporation of the publicly held corporation. (Hall and Liebmann, 2000;Rose and Wolfram, 2000) through the year 2000 (Murphy, 2011). If this increase in total compensation levels is at least partially the result of increased risk premiums from an increased reliance on incentives, the link between CEO compensation and firm performance, pay-forperformance sensitivity (PPS), may have also increased. ...
Congress enacted §162(m) based upon the assumption that CEOs controlled their own compensation design. Compliance with §162(m) preserves the firm’s tax deduction for CEO compensation, but limits CEO salary and generally increases the use of risky incentives. Therefore, ceteris paribus, I predict that CEOs prefer and attempt to use their influence to secure §162(m) noncompliant compensation. To evaluate how CEOs influence firm §162(m) noncompliance, I examine the factors related to firm §162(m) noncompliance, CEO compensation design trends at firms affected by §162(m), and how the SEC’s 2003 independence governance requirements and 2006 compensation disclosure mandate affected the CEO power-§162(m) noncompliance relation.
First, I find that CEO power is positively related to firm §162(m) noncompliance behavior, suggesting that CEOs use their influence to increase firm noncompliance. However, I also find that noncompliance with §162(m) is generally related to the economic determinants of CEO compensation design in a manner consistent with agency theory, and do not find consistent evidence that noncompliance is decreasing in the quality of firm governance. Therefore, the evidence does not suggest that §162(m) noncompliance is systematically the consequence of inefficient CEO influence enabled by poor quality governance, consistent with managerial power theory. I find that firm §162(m) noncompliance behavior is generally explained by agency theory.
Second, I document that CEO salaries at firms affected by §162(m) tended to remain relatively flat with evidence of an informal $1 million benchmark and decreased as a percentage of total compensation. Further, the 2003 SEC board independence regulation weakened the positive relation between CEO power and CEO salary in excess of $1 million, noncompliant with §162(m), for those firms with lower pre-2003 independent governance processes. These findings suggest that §162(m) weakened CEO influence over salary levels.
Third, I provide evidence that the 2006 disclosure mandate strengthened the CEO power-§162(m) noncompliance relation, instead of weakening it as arguably intended. In addition, I do not find evidence that §162(m) slowed the growth of CEO total compensation levels or increased its relation to firm performance from 1994 through 2012. These findings suggest that that §162(m) did not reduce CEO influence over their total compensation arrangements.
... La première d'entre elles fut la multiplication des règles de transparence en matière de pratiques de rémunération des dirigeants. Depuis le New L'influence réelle de la pression du scandale sur les pratiques de rémunération des dirigeants reste ainsi encore à prouver (Murphy, 2012). Les règles de transparence auraient même contribué à la hausse de la rémunération des dirigeants puisqu'elles pouvaient dès lors être comparées d'une société à l'autre et mener à une montée des enchères entre sociétés sur leurs politiques de rémunération (Jensen et Murphy, 2004). ...
... L'intervention directe du législateur dans la régulation de la rémunération des dirigeants ainsi été beaucoup décriée (Markham, 2007 ;Murphy, 2012 ;Velikonja, 2010). La question de la détermination d'un « juste plafond » paraît en effet difficile à fonder théoriquement, sans que cela relève de l'arbitraire, comporte des effets pervers, ou soit délicat et/ou coûteux à mettre en place (Dittmann, Maug et Zhang, 2011). ...
Dix ans après la crise financière de 2008, l’engagement actionnarial apparaît comme un levier important de gouvernance et de responsabilisation des entreprises. Les fondements théoriques de ces nouvelles attentes à l’égard des actionnaires, et en particulier des investisseurs institutionnels, semblent cependant encore fragiles. Quel est le cahier des charges des actionnaires ? L’engagement actionnarial participe-t-il d’un shareholder empowerment? Ce nouveau rôle des actionnaires est-il légitime au regard notamment des intérêts des autres parties prenantes des entreprises ? L’objet de cette thèse fut aussi de comprendre quels étaient les fondements, les enjeux et les implications à la fois théoriques et empiriques de l’engagement actionnarial. La thèse commence alors par interroger la représentation classique de l’actionnaire dans les théories de la gouvernance. Elle montre comment un phénomène d’industrialisation de l’actionnariat a renouvelé les enjeux de la gouvernance d’entreprise, qu’elle déplace au niveau d’une « gouvernance de l’actionnariat ». La doctrine de l’engagement actionnarial contribue dès lors à construire une gouvernance de l’actionnariat, dont les formulations actuelles manquent encore d’une représentation de la responsabilité des actionnaires envers l’entreprise et les potentiels qu’elle mobilise. La thèse entreprend en conséquence une exploration empirique des pratiques d’engagement, et notamment des politiques de vote d’actionnaires, qui lui permet de dégager des principes d’engagement responsable pour un actionnariat industrialisé.
... Accounting and capital market data was obtained from the Thomson Reuter's Eikon database. Ownership groups were made according to data obtained from SIS Ägarservice AB's publications (Fristedt and Sundqvist 2001, Sundqvist 2010-2013 based on identity of the largest firm owner. Data on executive compensation, disclosure of executive compensation, and dual-class shares status was manually collected from the annual reports. ...
... Striking in the articles from the business press is the tendency of boards to defend pay rises in relation to 'matching the market' rather than to extraordinary CEO performance. 16 Murphy (2013) and Leuz and Wysocki (2015) warn about externalities of regulations in terms of unintended consequences. One clear trend for the higher overall disclosure regime in Sweden is the higher overall CEO pay. ...
Based on a unique country set up with concentrated ownership of firms, strong representation of major shareholders on boards and one of the highest percentages of firms with dual-class shares worldwide I study CEO pay-performance sensitivity in Swedish listed firms in the years 2001–2013. Focusing on Type II agency conflict, I find that that pay-performance sensitivity in family-controlled firms with family CEOs is significantly lower than in other types of firms, and that dual-class firms have significantly lower sensitivity of pay to accounting performance than non-dual-class firms. The results suggest that in firms with type II agency conflicts compensation practices may be driven either by family ties or by the power preferences of the controlling shareholder that uses compensation to align CEO’s interest with his/her will rather than with financial performance. The study also documents that the link between CEO pay and performance disappears in the 2010–2013 period following the implementation of the European Recommendations regarding executive compensation. This finding is in contrast to the stipulated goal of the European Commission, ‘to ensure pay for performance’ (European Commission 2009).
... First, there is an unjustified constant growth in CEO pay around the globe. For example, Murphy (2012) documented that in Standard & Poor's (S&P) top 500 firms median CEO pay increased from 2.9 million dollars in 1992 to 9.0 million dollars in 2011. Similarly, Hay group (a global consulting group) reported that top management remuneration has significantly increased 3.5 times between 2001 to 2011. ...
In this study, we examine the crucial question whether the presence of female directors in the compensation committee (CC) improves the committee objectivity (i.e., paying executives for performance) in context of three countries namely Australia, China, and Pakistan. Using the data of public listed companies of these countries we find mixed results. Our results suggest that firms with gender-diverse CC strengthen the CEO pay-performance link only in Chinese listed firms. Our findings remain consistent even after controlling for possible issue of endogeneity. Overall, this paper highlights the diversity practices of China, Australia and Pakistan and provides empirical evidence to corporate world and regulatory bodies.
... performance should result in penalties.Murphy (2011) also explored legal and regulatory questions about executive compensation in the United States. In a qualitative study, the author goes through the year 1980, which was marked by the adoption of tax rules, accounting standards, establishment of disclosure and specific legislation on the subject.Murphy (2011) states that the regulation did not carry significant effect on the relationship Company versus agent. Against the regulation, the market sets the episode of the Golden Parachutes Plan in the 1980s, stock options in the 1990s and restricted stock in the 2000s. The author concluded that the regulation on the theme led to meet only the leg ...
In this paper, we investigate the bibliographic production on executive compensation and return to shareholder in the Brazilian and international scenarios, to form a theoretical basis for the development of empirical research involving the theme. We chose the research from Jensen and Murphy (1990) as the starting point of the discussions on the subject. The main published studies focus on the North American and British scenarios, especially professors Michael C. Jensen, Harvard University, Kevin M. Murphy, University of Southern California and Martin J. Conyon, University of Pennsylvania. Professor Jensen participated in the study that marked the agency problem discussion (JENSEN; MECKLING, 1976). Murphy conducts research on the theme beginning in the 1980s, on the North American scenario, a period that also marks the beginning of Professor Conyon's studies, on the British scenario however. The three authors are a reference on the subject and from this highlight, develop studies in other economic scenarios, such as Canada, Germany and most recently China. They also develop the expertise to the development of research comparing the scenarios with each other. We believe that the findings hereby brought contribute to the development of new researches, of empirical nature, especially in countries where the issue is in full development or in areas where emerges the interest in the subject, with the addition of these variables to contribute with the agency problem understanding.
... Early economic researchers assume that pay is critical in performance, as both variables are associated and markets react positively to incentive pay contracts (Raviv, 1985 (Baker et al., 1988;Frydman & Saks, 2010). Size is also found to be an important factor in explaining pay levels (Murphy, 2012). However, the restriction of cross-sectional models to the current firm performance results in a systemic bias as pay contracts are often tied to long-term incentives (Frydman & Jenter, 2010). ...
In order to ensure profitability for shareholders, optimal contracting recommends the alignment between executive compensation and company performance. Large organizations have therefore adopted executives remuneration systems in order to induce positive market reaction and motivate executives. Complex compensation schemes are designed by Boards of Directors using strong pay-performance incentives that explain high levels of executive pay along with company size, demand for management skills and executive influence. However, the literature remains inconclusive on the pay-performance relationship owing to the various empirical methods used by researchers. Additionally, there has been little effort in the literature to compare methodologies on the pay-performance relationship. Using the dominant agency theory framework, the purpose of this study is to establish and examine the relationship between firm performance and executive pay. In addition, it intends to assess the characteristic of model specifications commonly adopted. To this aim, a quantitative analysis consisting of three complementary methods was performed on panel data from South African listed companies. The results of the main unrestricted first difference model indicate a strong non-linear relationship where the impact of current and previous firm performance on executive pay can be observed over 2 to 4-year period providing support to the optimal contracting theoretical perspective in the South African business context. In addition, CEO pay is more sensitive to firm performance as compared to Director pay. Lastly, although it affects executive pay levels, company size is not found to improve the pay-performance relationship.
... Executive pay is already heavily regulated in the US. However, the measures regulating pay have largely been ineffective, or even counterproductive, in restraining CEO pay [5]. That cautions against the call for more regulation, as does the fact that such regulations have unintended consequences, such as the rise in perquisites in the 1970s, "golden parachutes" (e.g. ...
... 11. A brief history of Say on PayWhile making headlines for many decades(Murphy 2012), CEO pay has become a recurring topic of debate during the New Economy of the nineties, when the growing use of stock options as incentive tool (favored by a benign accounting treatment) led to a rapid increase in CEO pay (the average CEOto-worker pay ratio peaked at more than 400 in 2000, up from 18 in 1965;Mishel and Sabadish 2012). As the dot-com bubble burst and a series of accounting and governance scandals unfolded in 2001-2002 (e.g. ...
This monograph explores the relation between corporate governance and executive compensation and evaluates the conditions under which shareholders can benefit from the right to interfere with the pay setting process by voting on the compensation proposed by the board of directors (Say on Pay). The first part of the monograph lays out the theoretical framework. The second part provides an overview of the origins and country-specific differences in Say on Pay regulation and a detailed summary and evaluation of the empirical literature on the subject.
... It is therefore apparent that the call for regulation of wages may be due to jealousy, not that wages are social decision critical. (Murphy 2012) For motivation model's construction in a particular enterprise defining functions' aims to combine remuneration's elements is crucial. Dobbs, Huyett and Koller point that in most enterprises in financial sector remunerating for total return for shareholders (TRS) is no longer practised, however there are some companies that still practise this method (Dobbs et al., 2010). ...
The paper concerns the duties and responsibilities of managers using the principle of clawback. The authors proposed their own model of financial model of construction of remuneration for managers. There are in practice ethical problems concerning the level of requirements and qualifications versus salary and the level of legal and financial liability, especially against top-managers of the largest enterprises; often in a situation of extensive economic and social impact of their decisions. The problem of a manager’s responsibility has a dual nature. On the one hand the manager is charged with overall responsibility for all financial and PR losses of a company, on the other hand the manager takes moral, legal and financial responsibility for particular decisions. This article considers the financial responsibility area. The subprime financial crisis has sparked a discussion about the responsibility of top management in the context of disclosure of large bonuses paid to the senior managers and lack of consequences for bankruptcies. Very high salaries the executives were paid, were not sufficiently related to the system of contractual and administrative responsibility.
... Executive pay is already heavily regulated in the US. However, the measures regulating pay have largely been ineffective, or even counterproductive, in restraining CEO pay [5]. That cautions against the call for more regulation, as does the fact that such regulations have unintended consequences, such as the rise in perquisites in the 1970s, "golden parachutes" (e.g. ...
Chief executive officer (CEO) compensation is defined as the sum of base pay, bonuses, stock grants, stock options, other forms of compensation and benefits. Inflation-adjusted, median total CEO compensation in the United States almost tripled between 1992 and 2000, with grants of stock options evolving to be the largest component of compensation. This article presents the arguments for and against this level and composition of CEO compensation.
... Compared to outside shareholders who can hold a diversified portfolio, CEOs of U.S. public firms usually have a disproportionately large fraction of their personal wealth (and human capital) invested in the company they work for. Restricted stock and executive stock options typically cannot be sold or exercised for several years until they vest (Murphy, 2012; Kahl, Liu, and Longstaff, 2003). Once vested, a CEO's ability to sell her stocks may be further limited by tax considerations, stock illiquidity, blackout periods, insider trading regulations, and public or peer pressure. ...
Most large U.S. public firms have adopted executive stock ownership requirements (‘SORs’) in recent years. Compared to CEOs already in compliance, CEOs not in compliance at SOR adoption subsequently increase stock holdings, exposing them to more company-specific risk, which may provide a risk-reducing incentive and diminish their subjective valuation of firm equity. Using changes in state capital gains tax rates as an instrument, we find that these CEOs reduce firm idiosyncratic risk, but not market risk, through investment allocations and M&A across industries; reduce earnings volatility and financial leverage; and receive increased compensation. A placebo test further addresses endogeneity.
... In the US remuneration disclosure has a long tradition (for a summary, see Murphy 2011). The US was the first country to set rules for disclosure of executive remuneration of publicly traded firms when in 1938 the SEC passed a Securities Act that requested companies to name directors, officers, and other persons whose remuneration exceeded $25,000. ...
Manuscript Type
Conceptual
Research Questions/Issues
Executive remuneration, whether as a tool for resolving agency problems or as a sign of them, has been discussed in the literature for decades. The discussion, however, has been focused on non‐financial firms, and bankers’ remuneration, particularly in the context of corporate governance, has been overlooked until recently. However, following the financial crisis, regulators have begun intervening into banking boards’ responsibilities, including remuneration. This raises numerous questions, in particular, how far the existing non‐financial literature applies to banks, and if not, why and how this impacts on appropriate corporate governance in banking, and what challenges this brings?
Research Findings/Insights
The paper argues that due to numerous externalities, notably the interconnectivity and systemic risk of the banking sector, a traditional approach to remuneration based on resolving the principal‐agent conflict is inappropriate. Active involvement of regulators is needed to balance the short‐term performance of the banking sector with the long‐term needs of society. This, however, means that remuneration and corporate governance of banks is no longer an individual bank issue but is a national and probably an international phenomenon. In some cases this may require fundamental changes to the national governance structure, culture, and practices.
Theoretical/Academic Implications
The analysis questions the suitability of the common idea of assessing corporate governance in banks in the same way as is done for non‐financial institutions. Given that several traditional non‐financial board responsibilities have been partially passed over to regulators in the banking sector, a new theoretical model of corporate governance is needed for banks. The paper examines relational contracts (echoed to some extent in stewardship, stakeholder, and network theories), and argues that these cannot be expected to be successful in the banking environment.
Practitioner/Policy Implications
The paper highlights the importance of tying the corporate governance of banks with other regulatory measures employed to restrict risk taking. It also stresses the need for harmonization of corporate governance metrics for the banking sector at a national/international level.
We identify the location of an executive's undergraduate university education as a proxy for their geographic preference. Executives whose university education took place near a firm's headquarters are paid 4.40% to 11.01% less than their peers, suggesting the transparency of university education allows firms to use the location of their headquarters as a form of intangible compensation. This geographic preference discount persists across all levels of the C-Suite, corporate governance quality, time periods, and after controlling for opaque measures of where the executive grew up. Our study shows the location of an executive's undergraduate university is a consequential component of his or her geographic preference, and that such preference has meaningful implications for his or her compensation.
The Tax Cuts and Jobs Act of 2017 (TCJA) introduced two major changes that may influence executive compensation: (1) reducing corporate tax rates from 35 to 21 percent, and (2) eliminating the performance-based pay exception in Section 162(m). These changes provide incentives to maximize deductible compensation expense in 2017, before the TCJA goes into effect. Consistent with our expectation, we find that the increase in CEO bonus and stock option compensation is significantly greater in 2017 relative to prior years. Our difference-in-differences results are consistent with the tax rate reduction driving the bonus increase and the repeal of the performance-based exception leading to the increase in CEO stock options. The TCJA also changed the definition of covered employees to include the CFO. We find weak evidence for abnormal increases in CFO performance-based compensation. Overall, our findings suggest that firms responded to the TCJA in the period before it was effective.
We examine the role of large firms in generating income inequality. Specifically, we consider the growth in the use of asset-based rewards for senior executives, combined with continued use of salaries and wages for other employees, and the impact this has on measures of inequality within firms. Our paper presents data on intra firm inequality from the UK FTSE 100 for the period 2000–2015. It looks at ratios of CEO to average earnings and attempts to explain both the growth in inequality on this measure and the extent of variance between firms. It distinguishes between a period of ‘administered inequality’ up to the early 1980s when intra-firm processes defined differential pay and a subsequent one of ‘outsourced inequality’, when capital market measures dominate executive pay. In the latter period, intra firm inequality measures are defined by upward movements in capital market measures and the extent of outsourcing of low paid work. We conclude by discussing a number of UK public policy proposals regarding executive pay.
When decision makers are informed about the decisions of their peers, does this make them more selfish or more generous? We study the effect of social information on selfishness (as measured by dictator game giving) in a twice-repeated setting. We vary whether or not dictators receive information about the allocation decisions of other dictators. Independently we vary whether being the dictator is determined randomly or earned. We find that dictators act more generously in the first round with than without social information in case dictator positions are randomly assigned; no such effect is found in case dictators’ positions are earned. Allocations in the second round are generally more selfish than those in the first round. This effect is significantly stronger with than without social information, indicating that being informed about the decisions of their peers makes dictators more selfish. These results indicate that transparency about allocation decisions is unlikely to make such decisions more generous.
We investigate the stock returns for acquirers of firms holding registered patents (“innovative targets”). We find that acquiring innovative targets is associated with significantly positive stock performance relative to acquisitions of non-innovative targets. Specifically, acquirers of innovative targets enjoy higher announcement and interim period abnormal returns. Acquirers of innovative targets also enjoy higher post-acquisition returns, but only in settings where the acquirer’s and target’s industry is unambiguously close (i.e., they share the same 3-digit primary SIC code), suggesting that when the acquirer has familiarity and expertise in that industry the acquirer is able to better exploit the target firm’s patents. Additionally, we find that an acquirer’s innovation level can be critical to their post-acquisition stock performance; that is, acquirers holding at least one patent of their own prior to the acquisition enjoy significantly higher post-acquisition returns, and this benefit does not depend on the innovativeness of the target firm.
This article is an historical analysis of the U.S. labor movement’s shareholder activism during the 2000s, which was based on their pension-plan assets. During the previous decade, corporate governance had tilted to give shareholders greater voice in corporate decisions. The protagonists were public pension plans such as CalPERS. Come the 2000s, they were replaced by unions and union-influenced pension plans. Their agendas overlapped but union investors were distinctive in their use of shareholder activism to make companies more public-minded, raise labor’s organizing power, and challenge executive power by reliance not only on shareholder activism but also political activities. Labor’s signature issue was executive pay, which was a topic that that shareholder activists during the 1990s had avoided other than to push for stock-based pay. But three waves of corporate scandals during the following decade caused other shareholders to become skeptical of executive pay-setting methods. Union investors zeroed in on expensing and backdating of stock options, and fought for say on pay, the issue where they had the greatest impact. An interaction between private orderings and regulation now developed, whereby shareholder pay reforms found their way into law. With inequality a major social concern, unions repeatedly contrasted lofty executive pay to stagnant wages. Yet little was said about lofty payouts to shareholders, which may have been a more important driver of inequality than executive pay. The article ties corporate governance to larger social and political developments in the U.S., and to the labor movement, embedding corporate governance in historical context.
Neste artigo investigamos a produção bibliográfica sobre remuneração de executivos e o retorno ao acionista nos cenários brasileiro e internacional, a fim de formar uma base teórica para o desenvolvimento de pesquisas empíricas que envolvam o tema. Elegemos a pesquisa de Jensen e Murphy (1990) como marco inicial das discussões sobre a temática. Os principais estudos publicados concentram-se nos cenários norte americano e britânico, com destaque para os professores Michael C. Jensen, Harvard University, Kevin M. Murphy, University of Southern California e Martin J. Conyon, University of Pennsylvania. Prof. Jensen participou do estudo que marcou a discussão do problema de agência (JENSEN; MECKLING, 1976). Murphy desenvolve pesquisas sobre a temática a partir dos anos 1980, no cenário norte americano, período que também marca o início dos estudos do Prof. Conyon, porém, no cenário britânico. Os três autores são referência no tema e, a partir deste destaque, desenvolvem estudos em outros cenários econômicos, tais como Canadá, Alemanha e mais recentemente China. Também desenvolvem a expertise para o desenvolvimento de pesquisas comparando os cenários entre si. Acreditamos que os achados aqui trazidos contribuirão para o desenvolvimento de novas pesquisas, de caráter empírico, principalmente em países em que a temática está em franco desenvolvimento ou ainda em regiões em que surge o interesse sobre o assunto, com o incremento destas variáveis para contribuir com o entendimento do problema de agência. Palavras chave: Remuneração executiva, retorno para o acionista, bibliometria. Área Temática: Contabilidade para Usuários Externos (CUE). 1. INTRODUÇÃO Neste artigo investigamos a produção bibliográfica sobre remuneração de executivos e o retorno ao acionista nos cenários brasileiro e internacional, a fim de formar uma base teórica para o desenvolvimento de pesquisas empíricas que envolvam o tema. As pesquisas sobre remuneração executiva e sua implicação prática sempre são questionadas quando da existência de crises e/ou problemas concentrados no meio empresarial. Observa-se o episódio dos "bônus milionários" e mais recentemente em 2009, quando os Estados Unidos ainda estavam enredados pela crise mundial e o congresso americano voltou suas atenções para identificar o responsável, que culminou com a eleição da "cultura dos bônus de Wall Street". Também há de se observar os casos Enron / WorldCom e a crise subprime 2007 (KRAUTER, 2013). A relação existente entre executivos e acionistas é percebida por Jensen e Meckling (1976) quando da divulgação da Teoria da Agência, tal que o principal (acionista), detentor do capital, contrata o agente (executivo) que possui a expertise de gerir e tomar decisões acerca de um negócio, a seu favor. Entretanto, se houver a maximização da utilidade pessoal de cada um,
Since the 1980s, advanced democracies have experienced CEO pay scandals at an accelerating rate. However, this course varied across countries. Existing theories come short in explaining why some democracies experienced more frequently scandals involving overcompensation of the CEOs in core industries. Further, most studies are based on the US political and corporate system, which differ from European democracies. This is problematic as these are currently the only studies we rely on when it comes to public policy making. I develop an argument, based on a critical review, on why we need more political science studies on the different policies on CEO pay. This direction of research may more accurately tackle questions such as why some democracies meet obstacles for CEO pay reforms, more than others.
What are the distinguishing characteristics of the CEO labour market in the financial sector? How has this market evolved, particularly after the 2008 financial crisis and the subsequent regulation of CEO and bank manager pay structures? In this chapter, we discuss answers to these questions, highlighting similarities and differences between the financial and nonfinancial industries. We identify the causes and mechanisms of the strikingly high compensation levels that have been observed since the mid-1980s, focusing on topics related to the peculiarities of compensation for bank CEOs. As banks are considered special firms in an economic system, we argue that banking CEOs are alike. We then discuss the impacts of regulatory mechanisms on CEO pay schemes and the agency problems that they can cause. Conflicts between CEOs and shareholders and debtholders arise from distorted incentives embedded into CEO compensation structures, which were particularly evident in the lead-up to the 2008 financial crisis. We review the main regulatory interventions implemented in the US and EU after the financial crisis. We conclude this chapter with a description of the interconnected factors that may affect bank executive incentives.
Il lavoro prende in considerazione il tema della remunerazione degli amministratori di società quotate, in particolare quella degli amministratori esecutivi, analizzando criticamente e in chiave comparata le regole adottate nell'ordinamento italiano.
Using data of 2140 US firms over the period of 1998-2012, we investigate if gender-compensation relationship exists in executives’ compensation and bonus plans of the US firms; and whether this compensation difference is more visible during economic downswings. We find that not only the gender premium exists for male CEOs in executives’ compensation plans of the US companies but also the male executive bonuses are more sensitive to market downturns compared to their female counterparts. On average, female executives get a gender disadvantage in the form of lower total compensation and bonuses compared to their male counterparts, which persists even during adverse economic conditions. Finally, contrary to our initial expectations, we find male and female CEOs are equally likely to be laid-off, even during market recessions, despite female CEOs being claimed better manager by the mainstream literature.
The Sarbanes-Oxley Act demanded the presence of more financial experts on corporate boards to improve governance. Directors from lending banks require particular attention because of the conflicts of interest between shareholders and debtholders despite their financial expertise. In this paper, we examine whether commercial banker directors work in the best interests of shareholders in providing incentives to the CEO. We find that the CEO's compensation VEGA is lower if an affiliated banker director is on the board. Further, we find that commercial banker directors increase debt-like compensation (Sundaram and Yermack, 2007) and make it less sensitive to risk.
Macroeconomic fluctuations in interest rates, exchange rates, and inflation can be considered sources of good or bad “luck” for corporate performance if management is unable to adjust operations to these fluctuations. Based on a sample of 2,091 US firms, we decompose the impacts of macroeconomic fluctuations on three measures of CEO compensation. Our study provides empirical support for the importance of considering macroeconomic fluctuations in designing CEO incentive schemes. It adds to the managerial power literature on moral hazard and CEO compensation by pinpointing the obvious risk that the CEO in an asymmetric and non-linear reward system will be inclined to prioritize his/her own cash flow at the expense of fulfilling an assumed agency role. The policy conclusion for remuneration committees and board of directors is to filter out macroeconomic influences on performance to be rewarded whenever an asymmetric compensation scheme has been opted for.
When politicians feel popular pressure to act, but are unwilling or unable to address the root cause of the problem, they resort to symbolic policymaking. In this paper, I examine excessive executive compensation as an issue that rose to the top of the political agenda during both the Great Depression and the Great Recession. Presidential candidates, members of Congress, the media, and the public alike blamed corporate greed for the economic downturn. In both instances, however, enacted legislation stopped short of changing the way in which executive pay was determined or placing effective, enforceable limits on it. I analyze the nature of the democratic process and contend that public policy scholars need to pay more attention to the occurrence of symbolic policies. The category of symbolic policies offers a more accurate approach to understanding the politics of executive compensation in the United States during the two crises and helps explain why, in spite of the recent legislative efforts, it continues to rise.
Recent theory suggests that firms incorporate synergistic interrelationships among executives into optimal incentive design (Edmans, Goldstein, and Zhu 2013). We focus on Pay Performance Sensitivities (PPS) and use dispersion in PPS across top executives as a proxy for the incentive design component shaped by an executive team's synergy profile. We model optimal PPS dispersion and use residuals from this model to measure deviations from optimal. We find that firm performance is increasing (decreasing) in the residual when PPS dispersion is too low (too high). We conjecture that deviations from optimal are sustained by adjustment costs, finding that firms only close around 60 percent of the gap between target and actual PPS dispersion over the subsequent year. Viewing a team's equity grants as a vector, we provide evidence that firms use subsequent equity grants to actively manage PPS dispersion toward optimality. Cross-sectional analysis reveals that the deleterious effect of deviations from optimal is decreasing in the duration of a team's tenure together, and increasing in the importance of effort coordination across team members for firm performance.
JEL Classifications: M41.
Investors are heading back to China after ending a buyers' strike in response to numerous accounting scandals and corporate governance failures. There have been several successful IPOs in recent months, and the market is awaiting the listing of the internet giant The Alibaba Group.
The Alibaba IPO has focused investor attention on the use of the variable interest entity (or VIE) structure by other overseas listed Chinese companies as well as Alibaba. The VIE structure allows outside investors some measure of influence or control over Chinese operations that is exercised through contracts instead of actual equity ownership. By using such contracts, companies are able to circumvent Chinese laws that severely restrict ownership in many industries, including the internet sector.
The contracts attempt to replicate the benefits of direct ownership, but do so imperfectly. The biggest concern over the VIE structure is the enforceability of the contracts. China has a law that invalidates contracts that attempt to do what is illegal through legal means. One court case involving a VIE‐like structure led China's Supreme Court to rule that the contracts were unenforceable, and arbitrators reached the same decision.
The biggest nightmare of investors in Chinese VIE structures is that the Chinese owner of the operating company could choose to abrogate the contracts and take ownership of the VIE. The highest profile example of this took place in 2011, when Alipay faced increased regulatory scrutiny and Jack Ma responded by extracting it from the Alibaba Group.
The fix for China's VIE problem has to come from Chinese regulators, and reforms to foreign investment rules that have been proposed may make the VIE structure obsolete. But until then, investors have to weigh the unusual risk of investing in companies that they do not own.
Business students may dream of receiving pay packages like that of Michael Eisner at Disney. However, many of them will work for the compensation consultant who determines the economics of the pay arrangements, for the valuation consultant who values the different components of the pay arrangements, for the accountant who must audit the financial statement impacts of the pay arrangements, or as a manager in the company whose employees respond to the incentives provided by the pay arrangements. No matter their eventual role, it is critical that every student understands these various aspects of executive pay arrangements, and how these practices have evolved over time. The course module presented herein is designed to effectively integrate these perspectives in as few as five or as many as nine 80-minute sessions that could be a substantive component of an MBA or Master of Accounting capstone course, or a component of a corporate governance elective. A case based on the CEO compensation of Boeing Inc. over the last 60 years provides a series of assignments that effectively integrate the module.
This paper analyzes the problem of optimal taxation of top labour incomes. We develop a model where top incomes respond to marginal tax rates through three channels: (1) the standard supply-side channel through reduced economic activity, (2) the tax avoidance channel, (3) the compensation bargaining channel through efforts in influencing own pay setting. We derive the optimal top tax rate formula as a function of the three elasticities corresponding to those three channels of responses. The first elasticity (supply side) is the sole real factor limiting optimal top tax rates. The optimal tax system should be designed to minimize the second elasticity (avoidance) through tax enforcement and tax neutrality across income forms, in which case the second elasticity becomes irrelevant. The optimal top tax rate increases with the third elasticity (bargaining) as bargaining efforts are zero-sum in aggregate. We then analyze top income and top tax rate data in 18 OECD countries. There is a strong correlation between cuts in top tax rates and increases in top 1% income shares since 1975, implying that the overall elasticity is large. But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model. This suggests that the first elasticity is modest in size and that the overall effect comes mostly from the third elasticity. Consequently, socially optimal top tax rates might possibly be much higher than what is commonly assumed.
This article brings a broad range of statistical studies and evidence to bear on three common perceptions about the CEO compensation and governance of U.S. public companies: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance.
While average CEO pay increased substantially during the 1990s, it has declined since then— by more than 30%—from peak levels that were reached around 2000. Moreover, when viewed relative to corporate net income or profits, CEO pay levels at S&P 500 companies are the lowest they've been in the last 20 years. And the ratio of large-company CEO pay to firm market value is roughly similar to its level in the late 1970s, and lower than the levels that prevailed before the 1960s. What's more, in studies that begin with the late '70s, private company executives have seen their pay increase by at least as much as public companies. And when set against the compensation of other highly paid groups, today's levels of CEO pay, although somewhat above their long-term historical average, are about the same as their average levels in the early 1990s.
At the same time, the pay of U.S. CEOs appears to be reasonably highly correlated with corporate performance. As evidence, the author cites a 2010 study reporting that, over the period 1992 to 2005, companies with CEOs in the top quintile (top 20%) of realized pay in any given year had generated stock returns that were 60% higher than the average companies in their industries over the previous three years. Conversely, companies with CEOs in the bottom quintile of realized pay underperformed their industries by almost 20% in the previous three years. And along with lower pay, the CEOs of poorly performing companies in the 2000s faced a significant increase in the likelihood of dismissal by their own boards.
When viewed together, these findings suggest that corporate boards have done a reasonably good job of overseeing CEO pay, and that factors such as technological advances and increased scale have played meaningful roles in driving the pay of both CEOs and others with top incomes—people who are assumed to have comparable skills, experience, and opportunities. If one wants to use increases in CEO pay as evidence of managerial power or “board capture,” one also has to explain why the other professional groups have experienced similar, or even higher, growth in pay. A more straightforward interpretation of the evidence reviewed in this article is that the market for talent has driven a meaningful portion of the increase in pay at the top. Consistent with this conclusion, top executive pay policies at roughly 97% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd-Frank mandated “Say-on-Pay” votes in 2011 and 2012, the first two years the measure was in force.
Say on pay - that is empowering shareholders to vote on the remuneration arrangements of their firm's senior executives - has become an international policy response to the perceived explosion in rewards for top management. In this paper we examine the operation of say in pay in the UK, the country which pioneered its adoption, using the population of non-investment trust companies in the FTSE 350 over the period 2003-2012. We find executive remuneration and dissent on the remuneration committee report are positively correlated. However, the magnitude of this effect is small.We find that dissent plays a role in moderating future executive compensation levels, although this effect is restricted to levels of dissent above 10%, and primarily acting upon the higher quantiles of rewards. We find no evidence of an increased restraining effect of dissent on pay following the onset of the financial crisis. This article is protected by copyright. All rights reserved.
In this paper, I consider the evidence for three common perceptions of U.S. public company CEO pay and corporate governance: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially through the 1990s, it has declined since then. CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s although they remain above their long-term historical average. The ratio of large-company CEO pay to firm market value is roughly similar to its level in the late-1970s and lower than its pre-1960s levels. These patterns suggest that similar forces, likely technology and scale, have played a meaningful role in driving CEO pay and the pay of others with top incomes. With regard to performance, CEOs are paid for performance and penalized for poor performance. Finally, boards do monitor CEOs. The rate of CEO turnover has increased in the 2000s compared to the 1980s and 1990s, and is significantly tied to poor stock performance. While corporate governance failures and pay outliers as well as the very high average pay levels relative to the typical household undoubtedly have contributed to the common perceptions, a meaningful part of CEO pay appears to be market determined and boards do appear to monitor their CEOs. Consistent with that, top executive pay policies at over 98% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd-Frank mandated Say-On-Pay votes in 2011.
We examine whether CEO compensation before the 2007 financial crisis led to excessive risk taking in sixty-nine large financial firms. Risk taking is proxied by the extent of U.S. Federal Reserve emergency loans provided to these firms. We find that the amount of emergency loans and total days the loans are outstanding are both increasing in pre-crisis CEO risk-taking incentives. Consistent with the secretive nature of these loan programs, the extent of loan assistance is uncorrelated with crisis period stock returns. Our results somewhat support recent regulatory initiatives on managerial incentive compensation for systemically important financial firms.
“Focusing events” increase the saliency of related issues and the likelihood that policymakers will respond with legislative action. The Great Depression and the present global financial crisis meet the criteria of focusing events which succeeded at making executive compensation a salient political issue. A systematic examination of all of the policy responses concerning executive compensation to these two economic crises illustrates how a single focusing event can result in symbolic changes, such as the compensation caps legislated for companies receiving assistance from the Reconstruction Financial Corporation (RFC) and the Troubled Asset Relief Program (TARP), and also significant changes that meet the criteria of a punctuated equilibrium, such as the compensation disclosure requirements enacted as part of the Securities Acts of 1934 and 1935, and the advisory, shareholder say-on-pay requirements enacted as part of the Wall Street Consumer Protection Act of 2010. The variety of responses to a single event is explained as a function of the extent to which the particular policy alternatives had previously been part of the policy agenda.
We derive the optimal compensation contract in a principal-agent setting in which outcome is used to provide incentives for both effort and risky investments. To motivate investment optimal compensation entails rewards for high as well as low outcomes, and it is increasing at the mean outcome to motivate effort. If rewarding low outcomes is infeasible, option-based compensation is a near-efficient means of overcoming the manager's induced aversion against undertaking risky investments, whereas stock-based compensation is not. However, option-based compensation may induce excessively risky investments, and capping pay can be important in curbing such behavior.
In theory, aligning managers' incentives with those of shareholders using equity-based compensation can reduce agency costs (Jensen and Meckling, 1976). However, prior research suggests that regulatory intervention in the equity-granting process can offset alignment benefits and potentially exacerbate agency costs, creating negative externalities for both financial reporting and contracting (Choudhary et al., 2009; Murphy, 2011). I choose the period surrounding the adoption of SFAS 123R, which requires firms to expense stock option grants to employees, to analyze unintended contracting externalities of regulation. I provide evidence on whether relative performance evaluation (RPE), which some firms use to reduce agency costs between shareholders and CEOs, changed following the adoption of SFAS 123R. I find that the use of RPE declined for total CEO compensation surrounding SFAS 123R. I then examine whether changes in RPE for restricted stock grants and stock option grants drove the change in RPE for total CEO compensation. I find that restricted stock was substituted for stock options as a component of total CEO compensation surrounding SFAS 123R. Consistent with restricted stock being less risky than stock options for CEOs, I find little evidence that RPE was used for either restricted stock grants or option grants in the post-SFAS 123R period. The results suggest that boards of directors use RPE less when less risky components of CEO compensation make up a higher proportion of total CEO compensation. Changes in accounting regulation can have unintended consequences for the design of CEO compensation contracts.
We examine the economic consequences of more than 150 shareholder proposals to expense employee stock options (ESO) submitted during the proxy seasons of 2003 and 2004, the first case in which the SEC allowed a shareholder vote on an accounting matter. Our results indicate that these proposals affected accounting and compensation choices. Specifically, (i) targeted firms were more likely to adopt ESO expensing relative to a control sample of S&P 500 firms, (ii) among targeted firms, the likelihood of adoption increased in the degree of voting support for the proposal, and (iii) non-targeted firms were more likely to adopt ESO expensing when a peer firm was targeted. Additionally, (i) CEO pay decreased in firms in which the proposal was approved relative to a control sample of S&P 500 firms, and (ii) among targeted firms, approval of the proposal was associated with decreases in CEO compensation and the use of ESO in CEO pay. Our findings reveal an increasing influence of shareholder proposals on governance practices.
In this study, I summarize the current state of executive compensation, discuss measurement and incentive issues, document recent trends in executive pay in both U.S. and international firms, and analyze the evolution of executive pay over the past century. Most recent analyses of executive compensation have focused on efficient-contracting or managerial-power rationales for pay, while ignoring or downplaying the causes and consequences of disclosure requirements, tax policies, accounting rules, legislation, and the general political climate. A major theme of this study is that government intervention has been both a response to and a major driver of time trends in executive compensation over the past century, and that any explanation for pay that ignores political factors is critically incomplete.
A common view is that there is little correlation between firm performance and CEO pay. Using a new fifteen-year panel data set of CEOs in the largest, publicly traded U. S. companies, we document a strong relationship between firm performance and CEO compensation. This relationship is generated almost entirely by changes in the value of CEO holdings of stock and stock options. In addition, we show that both the level of CEO compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980, largely because of increases in stock option grants.
Disclosure rules adopted by the Securities Exchange Commission in 1992 allowed limited managerial discretion in reporting the value of stock options granted. I provide evidence that managers adopted valuation methodologies that reduced reported or perceived compensation and that also reduced potential accounting charges for stock options. I interpret this evidence as supporting the hypothesis that managers bear non-pecuniary costs from high reported levels of compensation--through increased political or shareholder pressure--and adopt reporting methodologies that reduce these costs.
This paper surveys the recent literature on CEO compensation. The rapid rise in CEO pay over the past 30 years has sparked an intense debate about the nature of the pay-setting process. Many view the high level of CEO compensation as the result of powerful managers setting their own pay. Others interpret high pay as the result of optimal contracting in a competitive market for managerial talent. We describe and discuss the empirical evidence on the evolution of CEO pay and on the relationship between pay and firm performance since the 1930s. Our review suggests that both managerial power and competitive market forces are important determinants of CEO pay, but that neither approach is fully consistent with the available evidence. We briefly discuss promising directions for future research.
This paper analyzes the repricing of employee stock options after market-wide crash. The model identifies sufficient conditions for renegotiation to be optimal and for optimal compensation to be a fixed salary plus stock options. Empirical results support the renegotiation prediction. Stock opition grants increase in both number and value after the 1987 crash. Firms with underwater options grant significantly more options post-crash than pre-crash, whereas firm with in-the-money options don't. Furthermore, firms suffering the largest impact from the crash are the most likely to increase grants after the crash.
We examine repricing activity surrounding the FASB's 1998 announcement regarding accounting for repriced options. We find that repricing increases during, and decreases after, the 12-day window between the announcement and proposed effective dates, consistent with firms timing repricings to avoid recording an expense. We find that firms experiencing increasing earnings patterns, firms with earnings around zero, and growth firms are more likely to reprice in the window, but having repriced recently decreases the likelihood of doing so. The evidence suggests that firms trade off financial reporting benefits against reputation costs in decisions to time repricings to get favorable accounting treatment.
Ittner, Lambert, and Larcker (J. Accounting Economics (2003) this issue) present compelling evidence that new economy firms rely more on stock-based compensation than do old economy firms, based on 1998 and 1999 data from a proprietary sample of companies. I complement the ILL results by analyzing data over a longer time period (1992–2001) and, more importantly, document the effect of the 2000 market crash on stock-based pay in new economy firms. Finally, I offer evidence supporting the conjecture that differences in pay practices between new and old economy firms reflect accounting considerations, perceived costs, and competitive inertia.
In 1992–1993, the SEC required enhanced disclosure on executive compensation and Congress enacted tax legislation limiting the deductibility of non-performance related compensation over one million dollars, i.e. Internal Revenue Code Section 162(m). We examine the effects of these regulatory changes and report small and large sample evidence that many million-dollar firms have reduced salaries in response to 162(m) and that salary growth rates have declined post-1993 for the firms most likely to be affected by the regulations. We further document that bonus and total compensation payouts are increasingly sensitive to stock returns after 1993, especially for firms with million-dollar pay packages. We also document that, once we control for other factors affecting CEO incentives, the sensitivity of the CEO's wealth to changes in shareholder wealth has increased from 1993 to 1996 for firms with CEOs near or above the million dollar compensation level. Overall, our results suggest that some firms have reduced salaries in response to 162(m). More importantly, the pay for performance sensitivity, measured using total annual compensation and firm-related CEO wealth, has increased for firms likely to be affected by 162(m).
Extant studies show that stock returns are abnormally negative before executive option grants and abnormally positive afterward. We find that this return pattern is much weaker since August 29, 2002, when the Securities and Exchange Commission requirement that option grants must be reported within two business days took effect. Furthermore, in those cases in which grants are reported within one day of the grant date, the pattern has completely vanished, but it continues to exist for grants reported with longer lags, and its magnitude tends to increase with the reporting delay. We interpret these findings as evidence that most of the abnormal return pattern around option grants is attributable to backdating of option grant dates.
Executive compensation consultants face potential conflicts of interest that can lead to higher recommended levels of CEO pay, including the desires to “cross-sell” services and to secure “repeat business.” We find evidence in both the US and Canada that CEO pay is higher in companies where the consultant provides other services, and that pay is higher in Canadian firms when the fees paid to consultants for other services are large relative to the fees for executive-compensation services. Contrary to expectations, we find that pay is higher in US firms where the consultant works for the board rather than for management.
In the Sixties, the qualified stock option was the predominant form of long-term incentive compensation contract for major industrial firms in the U.S. In the early Seventies these same firms replaced their tax-qualified stock option plans with non-qualified sttock options and later modified these plans to include a variety of new contingent compensation arrangements, some of which were based on accounting numbers instead of stock prices. This paper develops the hypothesis that tax considerations play an important role in explaining the form of compensation contracts. The pattern and timing of changes in the compensation plans of the top 100 industrial firms provides evidence consistent with the tax hypothesis.
This study documents that the abnormal stock returns are negative before unscheduled executive option awards and positive afterward. The return pattern has intensified over time, suggesting that executives have gradually become more effective at timing awards to their advantage, and possibly explaining why the results in this study differ from those in past studies. Moreover, I document that the predicted returns are abnormally low before the awards and abnormally high afterward. Unless executives possess an extraordinary ability to forecast the future market-wide movements that drive these predicted returns, the results suggest that at least some of the awards are timed retroactively.
We estimate that 13.6% of all option grants to top executives during the period 1996-2005 were backdated or otherwise manipulated. Our study primarily focuses on grants that were unscheduled and at-the-money, of which we estimate that 18.9% were manipulated. The fraction is 23.0% before the new two-day filing requirement took effect on August 29, 2002, and 10.0% afterward. For the minority of grants that are not filed within the required two-day window, the fraction of manipulated grants remains as high as 19.9%. We further find a higher frequency of manipulation among tech firms, small firms, and firms with high stock price volatility. In addition, firms that use smaller (non-big-five) auditing firms are more likely to file their grants late. Finally, at the firm level, we estimate that 29.2% of firms manipulated grants to top executives at some point between 1996 and 2005.
If options are correctly priced in the market, it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks. Using this principle, a theoretical valuation formula for options is derived. Since almost all corporate liabilities can be viewed as combinations of options, the formula and the analysis that led to it are also applicable to corporate liabilities such as common stock, corporate bonds, and warrants. In particular, the formula can be used to derive the discount that should be applied to a corporate bond because of the possibility of default.
This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive
assignment model. In market equilibrium, a CEO's pay depends on both the size of his firm and the aggregate firm size. The
model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance.
We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. In recent decades at least,
the size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries. In particular,
in the baseline specification of the model's parameters, the sixfold increase of U.S. CEO pay between 1980 and 2003 can be
fully attributed to the sixfold increase in market capitalization of large companies during that period.
A common view is that there is little correlation between firm performance and CEO pay. Using a new fifteen-year panel data set of CEOs in the largest, publicly traded U.S. companies, we document a strong relationship between firm performance and CEO compensation. This relationship is generated almost entirely by changes in the value of CEO holdings of stock and stock options. In addition, we show that both the level of CEO compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980, largely because of increases in stock option grants. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
This study explores corporate responses to 1993 legislation, implemented as section 162(m) of the Internal Revenue Code, that capped the corporate tax deductibility of top management compensation at $1 million per executive unless it qualified as substantially performance-based.' We detail the provisions of this regulation, describe its possible effects, and test its impact on U.S. CEO compensation during the 1990s. Data on nearly 1400 publicly-traded U.S. corporations are used to explore the determinants of section 162(m) compensation plan qualification and the effect of section 162(m) on CEO pay. Our analysis suggests that section 162(m) may have created a focal point' for salary compensation, leading some salary compression close to the deductibility cap. There is weak evidence that compensation plan qualification is associated with higher growth rates, as would be the case if qualification relaxed some political constraints on executive pay. There is little evidence that the deductibility cap has had significant effects on overall executive compensation levels or growth rates at firms likely to be affected by the deductibility cap, however, nor is there evidence that it has increased the performance sensitivity of CEO pay at these firms. We conclude that corporate pay decisions seem to be relatively insulated from this type of blunt policy intervention.
We analyze the long-run trends in executive compensation using a new panel dataset of top executives in large firms from 1936 to 2005. In sharp contrast to the well-known steep upward trajectory of pay of the past 30 years, the median real value of compensation was remarkably flat from the late 1940s to the mid-1970s, highlighting a weak relationship between compensation and aggregate firm size. While this correlation has changed considerably over the century, the cross-sectional relationship between pay and firm size has remained stable. Another surprising finding is that the sensitivity of changes in an executive's wealth to firm performance was not inconsequentially small for most of our sample period. Thus, recent years were not the first time when compensation arrangements served to align managerial incentives with those of shareholders. Overall, these trends pose a challenge to several common explanations for the recent surge in executive pay.
We investigate factors associated with firms' decisions in 2002 and early 2003 to recognize stock-based compensation expense under Statement of Financial Accounting Standards (SFAS) No. 123. We find that the likelihood of SFAS 123 expense recognition is significantly related to the extent of the firm's participation in capital markets, the private incentives of top management and members of the board of directors, the level of information asymmetry, and political costs. Although recognizing firms have significantly smaller SFAS 123 expense, we find no significant incremental relation between recognition likelihood and SFAS 123 expense magnitude after controlling for other factors that we expect explain the recognition decision. We also find positive and significant announcement returns for earlier announcing firms, particularly those stating that increased earnings transparency motivates their decision. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2004.
This Paper develops an account of the role and significance of managerial power and rent extraction in executive compensation. Under the optimal contracting approach to executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value. In contrast, the managerial power approach suggests that boards do not operate at arm’s length in devising executive compensation arrangements; rather, executives have power to influence their own pay, and they use that power to extract rents. Furthermore, the desire to camouflage rent extraction might lead to the use of inefficient pay arrangements that provide suboptimal incentives and thereby hurt shareholder value. The authors show that the processes that produce compensation arrangements, and the various market forces and constraints that act on these processes, leave managers with considerable power to shape their own pay arrangements. Examining the large body of empirical work on executive compensation, the authors show that managerial power and the desire to camouflage rents can explain significant features of the executive compensation landscape, including ones that have long been viewed as puzzling or problematic from the optimal contracting perspective. The authors conclude that the role managerial power plays in the design of executive compensation is significant and should be taken into account in any examination of executive pay arrangements or of corporate governance generally.
Opting for Options: Stock Plans Continue in Widespread Favor Despite Tax ChangesExcerpts From Carter Message to Congress on Proposals to Change Tax System
- Elia
- J Charles
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Opting for Options: Stock Plans Continue in Widespread Favor Despite Tax Changes
- Charles J Elia
Elia, Charles J, 1967, "Opting for Options: Stock Plans Continue in Widespread Favor
Despite Tax Changes," Wall Street Journal (July 15).
Authorities probe improper backdating of options: Practice allows executives to bolster their stock gains; a highly beneficial pattern
- Mark Maremont
Maremont, Mark, 2005, "Authorities probe improper backdating of options: Practice allows
executives to bolster their stock gains; a highly beneficial pattern," Wall Street
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GE Settles Charges Over Failure To Spell Out Pact With Ex-CEO
- Kathryn Kranhold
Kranhold, Kathryn, 2004, "GE Settles Charges Over Failure To Spell Out Pact With Ex-CEO," Wall Street Journal (September 24).
Experts see tax curbs on executives' pay as more political than fiscal
- Milt Freudenheim
Freudenheim, Milt, 1993, "Experts see tax curbs on executives' pay as more political than
fiscal," New York Times (February 12).
Paydirt: Sarbanes-Oxley A Pussycat On 'Clawbacks
- Phyllis Plitch
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Newswires (June 9).
Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Enacted into Law on Tech Firms' Study: Accounting Rule Attacked
- Davispolk
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Politics and Policy-Campaign '92: From Quayle to Clinton, Politicians are Pouncing on the Hot Issue of Top Executive's Hefty Salaries
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the Hot Issue of Top Executive's Hefty Salaries," 1992, Wall Street Journal (January
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Guide to Change of Control: Protecting Companies and Their Executives (Executive Compensation Advisory Services)
- Richard L Alpern
- Gail Mcgowan
Alpern, Richard L., and Gail McGowan, 2001. Guide to Change of Control: Protecting
Companies and Their Executives (Executive Compensation Advisory Services).
No Strings: Firms Lure Executives By Promising Bonuses Not Linked To Profits
- James C Hyatt
Hyatt, James C, 1975, "No Strings: Firms Lure Executives By Promising Bonuses Not
Linked To Profits," Wall Street Journal (December 24).
Corporate News: Court Deals Blow to SEC, Activists
- Jessica Holzer
Holzer, Jessica, 2011a, "Corporate News: Court Deals Blow to SEC, Activists," Wall Street
Journal (July 23).
Start-up Firms Fear Change in Accounting
- Udayan Gupta
- Lee Berton
Gupta, Udayan, and Lee Berton, 1986, "Start-up Firms Fear Change in Accounting," Wall
Street Journal (June 23).
The Consequences of the FASB's 1998 Proposal on Accounting for Stock Option Repricing Big Earners cashing in now: fearful of Clinton's tax plans, they rush to exercise their options
- Mary Carter
- Luann J Ellen
- Lynch
Carter, Mary Ellen, and Luann J. Lynch, 2003, The Consequences of the FASB's 1998 Proposal on Accounting for Stock Option Repricing, Journal of Accounting & Economics 35, 51-72. Chronicle Staff and Wire Reports, 1992, " Big Earners cashing in now: fearful of Clinton's tax plans, they rush to exercise their options, " San Francisco Chronicle (December 29).
How Journal Found Options Pattern
- Charles Forelle
Forelle, Charles, 2006, "How Journal Found Options Pattern," Wall Street Journal (May 22).
Enron's Many Strands: Executive Compensation. Enron paid some, not all, deferred compensation
- David Barboza
Barboza, David, 2002, "Enron's Many Strands: Executive Compensation. Enron paid some,
not all, deferred compensation," New York Times (February 13).
Incentives for Business Spending Proposed in Corporate Package
- Deborah Rankin
Rankin, Deborah, 1978, "Incentives for Business Spending Proposed in Corporate Package,"
New York Times (January 22).
Managerial Capital and the Market for CEOs Options on the Wane: Fewer Firms Plan Sale of Stock to Executives at Fixed Exercise Prices
- Kevin J Murphy
Murphy, Kevin J., and Jan Zábojník, 2008, Managerial Capital and the Market for CEOs. " Options on the Wane: Fewer Firms Plan Sale of Stock to Executives at Fixed Exercise Prices, " 1960, Wall Street Journal (December 6).
Accounting Firms, Investors Criticize Proposal on Executives' Stock Options
- Christi Harlan
- Lee Berton
Harlan, Christi, and Lee Berton, 1992, "Accounting Firms, Investors Criticize Proposal on
Executives' Stock Options," " Wall Street Journal (February 19).
Incentive Stock Options Get Mixed Reviews, Despite the Tax Break They Offer Executives
- Jill Bettner
Bettner, Jill, 1981, "Incentive Stock Options Get Mixed Reviews, Despite the Tax Break
They Offer Executives," Wall Street Journal (August 24).
Executives Take Advantage of New Rules on Selling Shares Bought With Options
- Alexandra Peers
Peers, Alexandra, 1991, "Executives Take Advantage of New Rules on Selling Shares
Bought With Options," Wall Street Journal (June 19).
Business chiefs try to derail proposal on stock options
- Lee Berton
Berton, Lee, 1992, "Business chiefs try to derail proposal on stock options," Wall Street
Journal (February 5).
Record Payback over Options
- Christopher Bowe
- Ben White
Bowe, Christopher, and Ben White, 2007, "Record Payback over Options," Financial Times
(December 7).
Inquiry into High Salaries Pressed by the Government
- L H Robbins
Robbins, L. H., 1933, "Inquiry into High Salaries Pressed by the Government," New York
Times (October 29).
MURPHY -36- " Chrysler Officers Got Profit of $4.2 Million On Option Stock in '63
- The Politics Of Pay: A Legislative History Of Executive Compensation
THE POLITICS OF PAY: A LEGISLATIVE HISTORY OF EXECUTIVE COMPENSATION K. J. MURPHY -36- " Chrysler Officers Got Profit of $4.2 Million On Option Stock in '63, " 1964, Wall Street Journal (January 15).
Firms Offer Packages of Long-Term Incentives as Stock Options Go Sour for Some Executives
- Roger Ricklefs
Ricklefs, Roger, 1977, "Firms Offer Packages of Long-Term Incentives as Stock Options Go
Sour for Some Executives," Wall Street Journal (May 9).
High Anxiety: Accounting Proposal Stirs Unusual Uproar In Executive Suites
- Christi Harlan
Harlan, Christi, 1994, "High Anxiety: Accounting Proposal Stirs Unusual Uproar In
Executive Suites," Wall Street Journal (March 7).
MURPHY -7-$140 million. The outrage over Grasso's pension benefits (based on formulas approved References Aboody Firms' Voluntary Recognition of Stock-Based Compensation Expense
- The Politics Of Pay: A Legislative History Of Executive Compensation
THE POLITICS OF PAY: A LEGISLATIVE HISTORY OF EXECUTIVE COMPENSATION K. J. MURPHY -7-$140 million. The outrage over Grasso's pension benefits (based on formulas approved References Aboody, David, Mary E. Barth, and Ron Kasznik, 2004, Firms' Voluntary Recognition of Stock-Based Compensation Expense, Journal of Accounting Research 42, 123-150.