Paying for observable luck

This article examines why CEOs are rewarded for luck, namely for observable shocks beyond their control. I propose a simple hidden action model where the agent has implicit incentives to avoid bankruptcy. After signing the contract, but before acting, the agent observes a signal on future luck. Implicit incentives are weaker after good news, and call for higher pay‐for‐performance sensitivity in good times. As a result, managerial pay is tied to luck. The model is also consistent with recent evidence of asymmetric pay for luck, that is, a larger exposure of managerial pay to good luck than to bad.     

Does the use of peer groups contribute to higher pay and less efficient compensation?

We provide empirical evidence on how the practice of competitive benchmarking affects chief executive officer (CEO) pay. We find that the use of benchmarking is widespread and has a significant impact on CEO compensation. One view is that benchmarking is inefficient because it can lead to increases in executive pay not tied to firm performance. A contrasting view is that benchmarking is a practical and efficient mechanism used to gauge the market wage necessary to retain valuable human capital. Our empirical results generally support the latter view. Our findings also suggest that the documented asymmetry in the relationship between CEO pay and luck is explained by the firm's desire to adjust pay for retention purposes and is not the result of rent-seeking behavior on the part of the CEO.     

Compensation discussion and analysis (CD&A): Readability and management obfuscation

This paper examines the relationship between the readability of the CD&A section in proxy statements and management motives to obfuscate executive compensation disclosures. Using the CD&As in the 2007 and 2008 proxy statements, we examine whether the CD&A readability is associated with the proportion of CEO pay not related to the economic determinants of compensation. We note that the average CD&A is difficult to read. We find that firms with CEO pay exceeding the benchmark pay have a more difficult to read CD&A in the 2007 proxy season. The result suggests that, in its first CD&A report, top management tends to cloak its compensation practices when the practices are not tied to the economic determinants of pay. However, we also find those firms with CEO pay exceeding the benchmark pay improve the readability of their CD&As in the 2008 proxy season, suggesting that executive compensation disclosure improves under regulatory oversight and public pressure.     

Compensation and Board Structure: Evidence From the Insurance Industry

Monitoring by outside board members and incentive compensation provisions in executive pay packages are alternative mechanisms for controlling incentive problems between owners and managers. The control hypothesis suggests that if incentive conflicts vary materially, those firms with more outside directors also should implement a higher degree of pay‐for‐performance sensitivity. Our evidence is consistent with this control hypothesis. We document a relation between board structure and the extent to which executive compensation is tied to performance in mutuals: compensation changes are significantly more sensitive to changes in return on assets when the fraction of outsiders on the board is high.     

Incentive Compensation When Executives Can Hedge the Market: Evidence of Relative Performance Evaluation in the Cross Section

Little evidence exists that firms index executive compensation to remove the influence of marketwide factors. We argue that executives can, in principle, replicate such indexation in their private portfolios. In support, we find that market risk has little effect on the use of stock‐based pay for the average executive. But executives' ability to “undo” excessive market risk can be hindered by wealth constraints and inalienability of human capital. We replicate the standard result that there is little relative performance evaluation (RPE) for the average executive, but find strong evidence of RPE for younger executives and executives with less financial wealth.     

Executive Compensation: An Overview of Research on Corporate Practices and Proposed Reforms

Two landmark episodes of the last decade, the 2001 dot-com crisis and the 2008 bursting of the housing bubble, have drawn attention to the size and structure of executive pay plans and their possible role in propagating or worsening the crises. In this policy-oriented piece, the authors discuss the key issues in the debate on executive pay and express their support for a number of reform proposals that have been advanced in academic and policy circles.
The article begins by dividing the compensation debate into four key issues:

• First, while public outrage has focused on the size of the pay packages at failed financial institutions, it is perhaps more important to focus on the structure of compensation and the process of setting compensation to prevent future crises. An effective pay package is not necessarily the one most laden with equity incentives. Too much equity exposure can cause excessive risk-taking, manipulation, and shift executive attention away from true value creation.

• Second, incentive structures should incorporate indexing and clawbacks to guard against the possibility that performance benchmarks are rewarding luck more than sustainable, long-run performance.

• Third, the compensation-setting process should be placed in the hands of shareholders, boards, and advisors who are not only independent but also possess ample expertise in the financial instruments used to incentivize pay.

• Fourth and finally, any proposals for changes in compensation design or the taxation of compensation should anticipate how executives will alter their behavior in response to the changes, and evaluate the effect of the changes net of such offsetting responses.

     

管理层权力、高管人力资本激励与企业绩效

合理的高管人力资本激励机制是发挥高管人力资本效用进而提高企业绩效的有效途径。本文通过实证检验管理层权力、高管人力资本激励与企业绩效的关系,结果表明:高管货币薪酬与企业绩效显著正相关,与国有企业相比,非国有企业的相关性更明显;管理层权力削弱了高管货币薪酬对企业绩效的激励作用。国有企业的在职消费与企业绩效显著负相关,但非国有企业其二者之间的相关性并不显著;管理层权力加大了在职消费对企业绩效的负向影响。高管团队内部薪酬差距与企业绩效显著正相关,且非国有企业比国有企业的相关性更明显;管理层权力削弱了高管团队内部薪酬差距对企业绩效的激励作用。     

Managerial compensation: Luck,skill or labor markets?

Luck, skill and labor markets all have empirical support as determinants of managerial compensation. We examine the relative importance of pay for luck, managerial skill and labor market opportunities in determining compensation. We measure luck as the predictable component of firm performance, measure skill using managerial fixed effects and measure labor market opportunities as the compensation of executives at matched firms. Our results imply that managerial skill is the most important determinant of managers' compensation, followed by firm size and labor market opportunities, and that luck is not an important determinant of managerial compensation.     

Coaches or Speculators? The Role and Impact of Venture Capital on Executive Compensation in Chinese Listed Companies

In this paper, we utilize a panel dataset that covers 1245 listed companies which accomplished their IPO during 2006 to 2014 in China to investigate the impact of venture capital (VC) firms on executive compensation, equity incentive and pay-performance-sensitivity. We make several key findings: First, we find the presence of VCs can significantly raise the executive compensation. Second, high reputation VCs and private VCs increases the likelihood of granting executive equity incentives, whereas foreign VCs are significantly negatively related with executive equity incentive. Third, the pay-performance sensitivity of government VCs and foreign VCs is significant on stock return (RET) whereas insignificant on accounting performance (ROA). Moreover, the increasing VCs share in portfolio companies enhance the pay performance sensitivity on RET. Our results show that before VCs final exiting their post-IPO portfolio companies in China, VCs’ impact on executive compensation are more consistent with grandstanding theories and intending to provide higher cash compensation to encourage executives to raise the companies’ stock price, which is indicating VCs’ changing role from a coach into a speculator after the portfolio companies’ IPO.     

CEO incentives-its not how much you pay, but how

The arrival of spring means yet another round in the national debate over executive compensation. But the critics have it wrong. The relentless attention on how much CEOs are paid diverts public attention from the real problem-how CEOs are paid. The authors present an in-depth statistical analysis of executive compensation. The study incorporates data on thousands of CEOs spanning five decades. Their surprising conclusions are at odds with the prevailing wisdom on CEO pay: Despite the headlines, top executives are not receiving record salaries and bonuses. Cash compensation has increased over the past 15 years, but CEO pay levels are just now catching up to where they were 50 years ago. Annual changes in executive compensation do not reflect changes in corporate performance. For the median CEO in the 250 largest public companies, a $1,000 change in shareholder value corresponds to a change of just 6.7 cents in salary and bonus over a two-year period. With respect to pay for performance, CEO compensation is getting worse rather than better. CEO stock ownership-the best link between shareholder wealth and executive well-being-was ten times greater in the 1930s than in the 1980s. Compensation policy is one of the most important factors in an organization's success. Not only does it shape how top executives behave but it also helps determine what kind of executives an organization attracts. That's why it's so urgent that boards of directors reform their compensation practices and adopt systems that reward outstanding performance and penalize poor performance.     

Why Do Firms Use Incentives That Have No Incentive Effects?

This paper illustrates why firms might choose to implement stock option plans or other pay instruments that reward “luck.” I consider a model where adjusting compensation contracts is costly and where employees' outside opportunities are correlated with their firms' performance. The model may help to explain the use and recent rise of broad‐based stock option plans, as well as other financial instruments, even when these pay plans have no effect on employees' on‐the‐job behavior. The model suggests that agency theory's often‐overlooked participation constraint may be an important determinant of some common compensation schemes, particularly for employees below the highest executive ranks.     

Executive Share Options: An Economic Framework

This paper provides an overview of the executive compensation debate with special emphasis on the role of executive share options. Widespread criticism of executive pay typically concentrates on pay levels, rather than the composition of executive pay and its determinants. The paper points out that gains from exercising executive share options are not simply rewards for the period in which they are realised and reported. The economic rationale for rewarding executives through share options is reviewed, leading to the conclusion that options are more likely to form a relatively important part of executive remuneration in organisations which face valuable, but relatively risky, investment opportunities. However, because options can aggravate conflicts of interest such as those that arise between shareholders and lenders, they are not a universally efficient form of executive compensation.     

Pay at the executive suite: How do US banks compensate their top management teams?

This study examines how a large sample of US banks compensates their top management teams (i.e., the top four to five highest ranking executives in each bank). We observe two tiers of compensation in the executive suite: the Chief Executive Officer (CEO) and the rest of the top management team. CEOs receive not only greater pay in absolute dollar, but are also rewarded more in relation to performance, as manifested in having a larger portion of their pay in performance contingent compensation. Below the CEO, top executives have similar compensation structure and pay to performance elasticities. The results are robust to a significant size effect, and alternate measures of performance.     

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.     

Pay Without Performance: Overview of the Issues

In their recent book, Pay Without Performance: The Unfulfilled Promise of Executive Compensation , the authors of this article provided a comprehensive critique of U.S. executive pay practices and the corporate governance processes that produce them, and then offered a number of proposals for improving both pay and governance. This article presents an overview of their analysis and proposals.
The authors' analysis suggests that the pay-setting process in U.S. public companies has strayed far from the economist's model of "arm's-length contracting" between executives and boards in a competitive labor market. In place of this conventional model, which is standard in corporate law as well as economics, the authors argue that managerial power and influence play a major role in shaping executive pay, and in ways that end up imposing significant costs on investors and the economy.
The main concern is not the levels of executive pay, but rather the distortion of incentives caused by compensation practices that fail to tie pay to performance and to limit executives' ability to sell their shares. Also troubling are "the correlation between power and pay, the systematic use of compensation practices that obscure the amount and performance insensitivity of pay, and the showering of gratuitous benefits on departing executives."
To address these problems, the authors propose three kinds of changes:

• 1)

  increases in transparency , accomplished in part by new SEC rules requiring annual corporate disclosure that provides "the dollar value of all forms of compensation" (including "stealth compensation" in the form of pensions and other post-retirement benefits) and an analysis of the relationship between the past year's pay and performance, as well as more timely and informative disclosure of insider stock purchases and sales;

       
  
  

关键下属高管晋升锦标赛的创新激励效应研究

本文以2006-2016年我国A股上市公司为样本,探讨关键下属高管与CEO之间的薪酬差距如何影响企业创新.研究发现:关键下属高管-CEO薪酬差距越大,企业创新产出越高.进一步地,相比整个高管团队内部的薪酬差距,关键下属高管与CEO之间的薪酬差距对企业创新的影响更强;关键下属高管-CEO薪酬差距对企业创新的激励效应主要体现在关键下属高管晋升CEO的机会较大时,以及国有企业和技术密集型行业中.此外,降低代理成本是关键下属高管-CEO薪酬差距促进企业创新的重要作用机制,且关键下属高管-CEO薪酬差距促进了企业创新对企业价值的提升作用.本文研究结论对推动企业创新及优化上市公司高管薪酬激励体系具有重要的现实意义.     

Firm-supplier relations and managerial compensation

In this paper we examine customer firms’ managerial compensation policies when they have important supplier relations. We show that firms with greater reliance on their suppliers tend to offer higher total- and equity-based pay but lower risking-taking incentives to its top executives. Our results are consistent with the argument that suppliers making firm-specific investments are concerned about the customer firm’s prospects. Therefore, firms with important supplier relations use the compensation policies of their top executives (more equity-based and less risk-taking) to signal their commitment to a stable and promising performance in the future. To address endogeneity issues arising out of time-varying omitted variables, we exploit a 2SLS procedure to supplement our baseline OLS findings. Our results are robust alternate measures of suppliers’ relationship-specific investments and econometric models. Overall, our results indicate that some of the heterogeneity in managerial compensation can be attributed to characteristics of the firm’s supply-chain relations.     

Who should set CEO pay? The press? Congress? Shareholders?

Populist fervor in an election year has transformed executive compensation from a business issue into a political one. Critics, led by Graef Crystal, author of In Search of Excess: The Overcompensation of American Executives, charge that CEOs are ripping off shareholders with their outrageous salaries while running U.S. corporations into the ground. Politicians claim overpaid CEOs are the root cause of the U.S. competitiveness problem. Add a recessionary business climate to the fact that some CEOs earn 130 times more than their lowest paid employees, and you have the makings of a populist rebellion. In a bid to appease voters, Congress is considering several bills that would limit the deductibility of "excessive executive salaries," the SEC has opened the issue to shareholder comment, and the Financial Accounting Standards Board is looking at new accounting standards for granting stock options to executives as part of company compensation schemes. Andrew R. Brownstein and Morris J. Panner say it's time to put the debate back where it belongs--in a business context. The real question is not are executives paid too much, but are shareholders getting their money's worth. Most U.S. corporations use stock compensation to link company long-term performance to executive salaries. And because of the staggering market performance of U.S. corporations in the 1980s, an overwhelming majority of CEOs are actually paid in line with their performance. Rather than cut executive pay, Brownstein and Panner suggest that corporations extend incentive-based compensation plans to all employees, thus narrowing the salary gap and establishing pay for performance at every level of the organization.     

Expensing options solves nothing

The use of stock options for executive compensation has become a lightning rod for public anger, and it's easy to see why. Many top executives grew hugely rich on the back of the gains they made on their options, profits they've been able to keep even as the value they were supposed to create disappeared. The supposed scam works like this: Current accounting regulations let companies ignore the cost of option grants on their income statements, so they can award valuable option packages without affecting reported earnings. Not charging the cost of the grants supposedly leads to overstated earnings, which purportedly translate into unrealistically high share prices, permitting top executives to realize big gains when they exercise their options. If an accounting anomaly is the problem, then the solution seems obvious: Write off executive share options against the current year's revenues. The trouble is, Sahlman writes, expensing option grants won't give us a more accurate view of earnings, won't add any information not already included in the financial statements, and won't even lead to equal treatment of different forms of executive pay. Far worse, expensing evades the real issue, which is whether compensation (options and other-wise) does what it's supposed to do--namely, help a company recruit, retain, and provide the right people with appropriate performance incentives. Any performance-based compensation system has the potential to encourage cheating. Only ethical management, sensible governance, adequate internal control systems, and comprehensive disclosure will save the investor from disaster. If, Sahlman warns, we pass laws that require the expensing of options, thinking that's fixed the fundamental flaws in corporate America's accounting, we will have missed a golden opportunity to focus on the much more extensive defects in the present system.     

Contestability and Pay Differential in the Executive Suites

In comparison to the abundant evidence on CEOs' compensations, little is known about the compensation of other senior executives, and on how the pay differential between CEO and other senior executives affects firm performance. We examine several potential explanations of the pay differential in the executive suite, using a sample of 367 Israeli firms listed on the Tel-Aviv Stock Exchange. The empirical results fail to support the tournament and pay equity models. Instead, our evidence suggests a model where senior executives are encouraged (by the structure implied in their pay contract) to cooperate with each other (the team playing model). In a subset of firms managed by their owners we observe greater pay differentials between the owner-CEO and other senior executives. Interestingly, only in this subset of owner-managed firms, higher pay differentials can be associated with better firm performance.