The economic effects of expanded compensation disclosures

This paper analyzes the effects of expanded compensation disclosures on manager pay. For identification, I use the introduction of the Compensation Discussion and Analysis (CD&A) in the 2007 proxy season, a significant expansion in required compensation disclosures, to compare manager pay at firms with and without the disclosure in a difference-in-differences analysis. These disclosures are associated with increasing pay, contrary to the conventional wisdom that pay disclosures reduce pay levels via better shareholder monitoring. I hypothesize that enhanced ex ante disclosures of incentive plans reduce boards’ flexibility to make ex post adjustments or to use subjectivity and pressure boards toward more formulaic plans. Both effects impose higher payout risk on managers, leading to increased pay levels. Consistent with this hypothesis, the CD&A introduction is associated with lower likelihood to earn variable cash pay, greater use of formula-based pay, and higher pay at firms with more volatile measures of performance.     

Corporate governance, compensation consultants, and CEO pay levels

This study investigates the relation between corporate governance and CEO pay levels and the extent to which the higher pay found in firms using compensation consultants is related to governance differences. Using proxy statement disclosures from 2,110 companies, we find that CEO pay is higher in firms with weaker governance and that firms with weaker governance are more likely to use compensation consultants. CEO pay remains higher in clients of consulting firms even after controlling for economic determinants of compensation. However, when consultant users and non-users are matched on both economic and governance characteristics, differences in pay levels are not statistically significant, indicating that governance differences explain much of the higher pay in clients of compensation consultants. We find no support for claims that CEO pay is higher in potentially “conflicted” consultants that also offer additional non-compensation-related services.     

It's OK to pay well,if you write well: The effects of remuneration disclosure readability

We examine whether, and how, shareholders’ votes in the Say-on-Pay (SOP) are affected by the readability of the Compensation Discussion and Analysis (CD&A). Despite the SEC's Plain English requirement, qualitative disclosures on executive remuneration are generally long and complex. Extant evidence on whether low readability results in higher or lower shareholder dissent in the SOP, however, is ambiguous. We resolve this debate by demonstrating that the effects of readability on SOP voting are heterogeneous; while obfuscation may reduce dissent when CEO compensation is close to “normal” levels, diminished readability results in increased scepticism when pay levels are clearly excessive. The moderating role of readability is most pronounced for firms with less sophisticated shareholders, consistent with readability acting as a heuristic cue. Our results are robust to propensity score matching, and are less pronounced (1) when shareholders have less time to review the CD&A, and (2) when shareholders are distracted by competing AGMs, suggesting they are driven by readability, directly. Overall, our results highlight that greater use of Plain English in remuneration disclosures can have a substantial persuasive impact on shareholders.     

Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform

Beginning in 2018, U.S. public firms were required to report the ratio of the chief executive officer's (CEO) compensation to their median employee's compensation in the annual proxy statement. Exploiting the staggered reporting of pay ratios, we find little evidence that total CEO compensation changes in response to pay ratio disclosure reform. However, we do find that boards significantly adjust the mix of compensation awarded by reducing the sensitivity of CEO pay to equity price changes, particularly when the CEO is likely to garner media scrutiny, and by reducing reliance on stock-based and other compensation components that are most susceptible to media coverage surrounding the pay ratio disclosure. Firms ultimately disclosing higher pay ratios garner more media coverage around the filing of their proxy statement, and more negative-toned coverage in the subsequent month. Finally, we find evidence that greater pay disparity is associated with greater selling activity by retail investors and more negative say-on-pay votes following pay ratio reform, consistent with a broad set of investors responding to public scrutiny resulting from pay ratio disclosures.     

Corporate governance when founders are directors

We examine chief executive officer (CEO) compensation, CEO retention policies, and mergers and acquisition (M&A) decisions in firms in which founders serve as a director with a nonfounder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay-for-performance sensitivity for nonfounder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared with nonfounder firms. Overall, the evidence suggests that boards with founder-directors provide more high-powered incentives in the form of pay and retention policies than the average US board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared with nonfounder firms.     

Excessive financial services CEO pay and financial crisis: Evidence from calibration estimation

The questions of whether there ever existed excessive risk-taking incentives from executive compensation in the financial industry, and whether top executives of financial services firms actually responded to such excessive incentives that eventually led to the crisis remain unanswered. The prior research has attempted to answer the second question, however, with conflicting evidence and without a clear definition of excessive. To answer the first question, this paper uses a numerical calibration approach to estimate the optimal level of CEO pay and derive the excessive compensation which provides excessive risk-taking incentives. We then examine the extent of excessive compensation in the financial industry relative to the non-financial industries during the 2000s and whether there were changes in compensation practices between the post Sarbanes–Oxley period and the pre-crisis period. We find mixed evidence in favor of the presence of higher excessive pay in the financial industry, and the CEO compensation practices remained largely unchanged over time. In addition, the relation between excessive pay and excessive risk-taking in the financial industry is somewhat weak, suggesting that CEO compensation might not be a major cause for the crisis in 2008.     

Executive compensation and corporate governance in China

We investigate executive compensation and corporate governance in China's publicly traded firms. We also compare executive pay in China to the USA. Consistent with agency theory, we find that executive compensation is positively correlated to firm performance. The study shows that executive pay and CEO incentives are lower in State controlled firms and firms with concentrated ownership structures. Boardroom governance is important. We find that firms with more independent directors on the board have a higher pay-for-performance link. Non-State (private) controlled firms and firms with more independent directors on the board are more likely to replace the CEO for poor performance. Finally, we document that US executive pay (salary and bonus) is about seventeen times higher than in China. Significant differences in US-China pay persist even after controlling for economic and governance factors.     

Charitable inclination and the chief executive officer's pay package

Using chief executive officers’ (CEOs’) lifetime nonemployment experience in prominent charitable organizations to create a proxy for CEO charitable inclination, I find that charitably inclined CEOs receive a significant pay premium. The pay premium sensitivity to CEO charitable inclination is particularly pronounced for male, external, and specialist CEOs who are employed at firms that are undiversified, larger, less debt reliant, poor performing, facing high product‐market competition, and that keep nonmanipulative financial statements and demonstrate high inclination to social responsibility in the area of diversity, employee relations, and internal governance. This research contributes to the broader debate on labor market pricing of CEO characteristics.     

Non‐compliance in Executive Compensation Disclosure: the Brazilian Experience

We examine the determinants and consequences of firms’ choice not to comply with a new executive compensation disclosure regulation. We exploit a unique feature of Brazilian markets, where a change in the regulation of executive compensation disclosure could arguably lead to personal security‐related costs for executives. This major reform in executive compensation disclosure in Brazil became effective in December 2009. While some firms complied with the change in regulation, other firms explicitly refused to comply fully with the regulation by using a court injunction. After controlling for firm‐specific characteristics and both social and economic inequality measures, we find that the degree of criminality in the state in which the firm is headquartered (a proxy for security‐related costs) and the level of CEO compensation are important determinants of a firm's decision not to fully disclose executive compensation information. We also show that firms which do not fully comply with the regulation face costs in the form of higher bid‐ask spreads, suggesting investors are leery of the decision not to comply with the regulation. We discuss the potential implications of our results in the context of executive compensation disclosure reform.     

CEO power,M&A decisions,and market reactions

In this study we examine the relationship between CEO power, corresponding acquisition activities and market reactions to mergers and acquisitions (M&A) announcements with a Canadian M&A dataset (1997–2005). We use CEO excess pay as a proxy for CEO power. Our empirical results show that the market reactions to M&A announcements are not related to CEO power. It implies that powerful CEOs do not necessarily make value destroying acquisitions. Our results further show that CEO power levels are significantly higher for acquiring firms compared to the CEOs of non-acquiring firms. In other words, CEOs with more relative power make more acquisitions. Such acquisitions will increase the size of the firm and will allow CEOs to demand a higher compensation level for managing larger asset pools and to derive higher performance incentives that are also generally tied to firm size.     

Information Intermediary or De Facto Standard Setter? Field Evidence on the Indirect and Direct Influence of Proxy Advisors

We examine whether proxy advisory firms (PAs) serve primarily an information intermediary role by providing research and voting recommendations to shareholders, or directly influence executive compensation by exerting pressure on firms to adopt preferred pay practices. Through a field study, we find that PAs are perceived as both information intermediaries and agenda setters and that these roles provide leverage to enable PAs to exercise significant influence over executive pay practices. Boards feel, and sometimes yield to, pressure to conform to PA “best” practices despite their own preferred compensation philosophies, even in the absence of overt PA scrutiny or negative shareholder votes. We also find that PAs are susceptible to conflicts of interest and generally use a “one‐size‐fits‐all” approach to voting recommendations. Overall, however, PAs are viewed as improving compensation practices by increasing transparency and accountability and fostering dialogue between firms and their shareholders.     

Does accounting conservatism pay?

We investigate whether or not there is a link between conservative accounting practices and the sensitivity of executive pay to accounting performance. Using several accrual‐based measures of accounting conservatism as well as alternative measures of accounting performance, we estimate an econometric model of CEO compensation that incorporates the interaction of accounting conservatism and accounting performance. Consistent with optimal contracting theory, we find that the sensitivity of executive pay to accounting performance is higher for firms that report conservative accounting earnings. These results support the hypothesis that accounting conservatism, by limiting earnings management opportunities and improving the reliability of accounting performance measures, allows firms to formulate contracts that tie executive compensation more closely to accounting performance.     

EXECUTIVE PAY AND THE DISCLOSURE ENVIRONMENT: CANADIAN EVIDENCE

We examine the economic consequences of the Ontario Securities Commission's requirement that firms disclose details of executive pay in proxy statements. Before 1993, Canadian firms only reported executive compensation in the aggregate. We predict the increased availability of compensation information will force boards of directors to compete in the managerial labor market by offering higher pay. We also predict public pressure on boards of directors to justify the level of executive pay will result in increased weight on incentive pay. The data support these hypotheses. We also document that pay‐performance sensitivity has increased. JEL classification: G30     

CEO power and the structure of CEO pay

This paper fleshes out the rent extraction view of CEO compensation put forward by the managerial power theory (Bebchuk, Fried, & Walker, 2002), and tests its main implications on the relation between CEO power and the structure of CEO pay. For a measure of CEO power most relevant to managerial power theory, we use the CEO pay slice due to Bebchuk, Cremers, and Peyer (2011). Based on the sample of S&P 500 firms for the period of 1999–2008, we find that the implied relation between power and pay is largely supported. Our findings suggest that the managerial power theory has relevance in explaining the relation between power and pay when the focus is on managerial bargaining power. Given the multiple dimensions of CEO power, however, the scope of power may need to be broadened for a better understanding of how managerial power affects firm performance.     

When is enough,enough? Market reaction to highly dilutive stock option plans and the subsequent impact on CEO compensation

Using data from the 1998 proxy season, we find that higher levels of potential dilution from management-sponsored, executive-only stock option plans result in significantly negative cumulative abnormal returns in the 3-day period surrounding the proxy date. We also present evidence of a significantly negative relationship between the percentage vote against the option proposal and the percentage change in executive pay from the 1998 to 1999 compensation years. We interpret this finding to support the idea that boards of directors are responsive to shareholder concerns about CEO option awards following a high level of shareholder opposition.     

The power of the pen and executive compensation

We examine the press’ role in monitoring and influencing executive compensation practice using more than 11,000 press articles about CEO compensation from 1994 to 2002. Negative press coverage is more strongly related to excess annual pay than to raw annual pay, suggesting a sophisticated approach by the media in selecting CEOs to cover. However, negative coverage is also greater for CEOs with more option exercises, suggesting the press engages in some degree of “sensationalism.” We find little evidence that firms respond to negative press coverage by decreasing excess CEO compensation or increasing CEO turnover.     

The impact of bank merger growth on CEO compensation

We examine the impact of bank mergers on chief executive officer (CEO) compensation during the period 1992–2014, a period characterised by significant banking consolidation. We show that CEO compensation is positively related to both merger growth and non‐merger internal growth, with the former relationship being higher in magnitude. While CEO pay–risk sensitivity is not significantly related to merger growth, CEO pay–performance sensitivity is negatively and significantly related to merger growth. Collectively, our results suggest that, through bank mergers, CEOs can earn higher compensation and decouple personal wealth from bank performance. Furthermore, we document a more severe agency problem in CEO compensation as a consequence of bank mergers relative to mergers in industrial firms. Finally, we find that the post‐financial crisis regulatory reform of executive compensation in banks has limited effectiveness in curbing the merger–pay links.     

The efficiency of compensation contracting in China: Do better CEOs get better paid?

Over recent years, China adopted a number of ‘western-style’ reforms of corporate governance and executive compensation. We investigate whether boards of Chinese firms evaluate CEO ability and remunerate their CEOs accordingly, an essential tenet of efficient compensation contracting. Using Data Envelopment Analysis to measure CEO ability, we do not find any evidence that CEO ability matters in compensation contracting decisions—it does not lead to either higher pay, stronger pay-for-performance sensitivity, or a higher likelihood of equity grants. This is surprising, since we find evidence that higher ability CEOs achieve superior firm performance. In contrast, we find that powerful CEOs do not overperform, while they enjoy large abnormal pay. Overall, our results suggest that Chinese firms fail to embrace new corporate governance reforms and are unable to fully utilize the reforms’ benefits.

     

Executive compensation in less regulated markets: the impact of debt monitoring

This paper shows that in the lightly regulated Alternative Investment Market (AIM) voluntary corporate board structures might not reduce agency costs between shareholder and executive directors. In this less regulated market, we find that the extent of debt affects executive pay. In addition, the theoretical determinants of executive pay affect CEO and other executives’ pay and incentives differently in this market. We find no evidence that debt levels affect CEO pay in a matched sample of Main Market firms. Our results suggest that debtholders could be better monitors of executive directors’ actions, in comparison to voluntary governance committees in less regulated markets.     

CEO excess compensation: The impact of firm size and managerial power

Chief executive officer (CEO) compensation has received a great deal of attention over the past several decades. Critics assert that CEO compensation is “excessive” because it is only weakly linked to firm performance (i.e., managerial rent-extraction). On the other hand, defenders suggest that CEO compensation is “justified” given the incremental shareholder wealth created by CEOs, or that large CEO compensation packages merely reflect labor market forces. Prior research documents that CEO power and firm size are associated with larger compensation, but providing evidence that the larger compensation is excessive (i.e., not economically justified) has proven difficult. For each test firm we identify a potential replacement CEO (i.e., an executive-specific, within-country (US) compensation benchmark) and create an empirical test of excess compensation. We also examine the possibility that excess compensation is conditional upon firm size or CEO power. In spite of an inherent bias against finding excess compensation, the results suggest that the most powerful CEOs receive compensation that is not economically justified. We find no evidence of CEO excess compensation in the largest firms.