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.     

Show me the money-cut: Shareholder dividend suspensions and voluntary CEO pay cuts during the COVID pandemic

Many US companies with December 31, 2019 as their fiscal year end had their Annual Shareholder Meeting scheduled (usually online) during the COVID pandemic. Unexpectedly faced with significant changes in operating environments, some companies decided to suspend shareholder dividend payments. In normal circumstances, this would be interpreted as a very negative event and shareholders could be expected to respond adversely at the annual meeting. However, we investigate whether CEOs were able to maintain shareholder support by offering a previously unheard of response of “sharing the pain”, committing to cut their own pay following a dividend suspension. At issue is whether investors acted as if they updated their inferences using the new voluntary pay-cut decision to infer the extent to which the CEOs underlying personality type was well matched to crisis management. We estimate an instrumental variables model in which the dividend suspension is used as an instrument for the endogenous pay cut variable.     

Remuneration committees,shareholder dissent on CEO pay and the CEO pay–performance link

We provide evidence on whether the adoption of the full Australian Securities Exchange recommendations for remuneration committee formation and structure are associated with a lower shareholder dissenting vote or a stronger CEO pay–performance link. We find some evidence that a minority‐ and majority‐independent remuneration committee and a committee size of at least the recommended three members are associated with lower shareholder dissent. Companies with an independent committee have a stronger CEO pay–performance link. In addition, a majority‐independent committee strengthens the link between performance and growth in CEO pay.     

Changes in CEO compensation structure and the impact on firm performance following CEO turnover

We document changes in compensation structure following CEO turnover and relate them to future performance. Compared to outgoing CEOs, incoming CEOs derive a significantly greater percentage of their compensation from option grants and new stock grants. The voluntary turnover sample shows similar changes in compensation structure while the forced turnover sample results suggest that new stock grants drive the significant increase in incentive compensation following turnover. Post-turnover performance is positively associated with new stock grants as a percentage of total compensation in the full sample and when analyzing forced and voluntary turnovers separately. We find limited evidence that future operating income is positively associated with option grants following forced turnover. Post-turnover improvement in operating income is positively associated with an increase in new stock grants for the incoming relative to the outgoing CEO.

CEO薪酬与企业业绩互动效应的实证检验

本文利用逐步回归和路径分析方法 ,检验了我国上市公司CEO薪酬的激励制约机制和激励制约效果。结果发现 :(1)决定CEO薪酬增长的因素主要是营业利润率变动 ,决定CEO薪酬下降的因素则主要是总资产净利率变动 ,这表明在我国上市公司的CEO薪酬层面已体现了一定的激励制约机制 ;(2 )增加CEO薪酬对提高企业的规模和股东财富均有一定的促进作用 ,但降低CEO薪酬却不仅不能提高企业规模和股东财富 ,反而会对其产生一定的负面影响 ,这不仅说明CEO薪酬也具有“工资刚性”特征 ,而且说明我国上市公司的CEO薪酬也仅有单方面的激励效果 ,而没有预期的制约效果 ;(3)无论是增加或降低CEO薪酬 ,CEO均不存在盈余管理或利润操纵的机会主义行为 ,这表明CEO进行盈余管理或利润操纵的动机不应该是为了增加其公开性薪酬 ,而应该是居于除公开性薪酬以外的其他目的。     

Does the one man show pay? Theory and evidence on the dual CEO revisited

Contrary to the view expressed in several countries and the corresponding pressure exerted by shareholder activists and regulators to separate the titles of CEO and Board Chairman, this study proposes that there is an optimal board composition for each firm, which varies across firms and over time. A review of the extant empirical evidence reveals that most prior studies bypass this notion which raises serious implications for related empirical studies. In addition, this study documents striking differences in leadership structures between the US and the UK and calls for further research in an international context.     

Shareholder say on pay and CEO compensation: three strikes and the board is out

From 2011 in Australia, if over 25% of shareholders vote against a non‐binding remuneration resolution, firms are awarded a ‘strike’. We examine 237 firms that receive a strike relative to matched firms, and find no association with any measure of CEO pay. However, we do find that strike firms have higher book‐to‐market and leverage ratios, suggesting that the remuneration vote is not used to target excessive pay. We also find that firms respond to a strike by decreasing the discretionary bonus component of CEO pay by 57.10% more than non‐strike firms and increasing their remuneration disclosure by 10.95%.     

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 Relationship between Shareholder Return and CEO Pay over a CEO's Full Period of Service

The author reports the findings of his examination of the relationship between CEO pay and performance, as measured by shareholder returns, using measures of compensation and returns that span a CEO's full period of service. Unlike studies that look at annual measures of CEO pay and stock returns—which are distorted by the widespread use of options and the arbitrary effects of when CEOs choose to exercise their options—the author finds a statistically significant connection between total compensation and shareholder return measured over full periods of service for 521 S&P 500 CEOs. Indeed, after one adjusts for differences in the length of a CEO's service, shareholder return is arguably the most important determinant of variation in the amount paid CEOs over their complete tenures. Besides answering the legion of critics of CEO pay, the author's analysis refutes the claim that bull markets are the main force driving executive pay by demonstrating that the increases in career pay attributable to increases in shareholder returns are almost exactly offset by reductions in pay when the Value‐Weighted (S&P 500) Index increases by the same amount. In other words, CEOs’ cumulative career pay is effectively driven by the extent to which their stock returns outperform the broad market. The analysis also casts doubt on the popular claim that the link between CEO pay and corporate size provides incentives to undertake even value‐reducing acquisitions to boost size. As the author's analysis shows, the estimated losses in career CEO pay associated with even small declines in shareholder returns are likely to be offset by the pay increases attributable to size.     

The Effect of Labor Market Demand on U.S. CEO Pay Since 1980

This paper shows that the rise in U.S. chief executive officer (CEO) pay from 1980 to 2003 is only partially explained by competition for profit‐producing talent in the labor market. This conclusion is obtained by removing unintended data biases from tests of the only theoretical model in the literature that relates labor market competition (measured by large firm size) to CEO pay level. When the biases are removed or minimized, no more than 33% of the 600+ percentage rise in large‐firm CEO pay since 1980 is explained by a corresponding increase in large firm size.     

CEO Horizon,Optimal Pay Duration,and the Escalation of Short‐Termism

This paper studies optimal contracts when managers manipulate their performance measure at the expense of firm value. Optimal contracts defer compensation. The manager's incentives vest over time at an increasing rate, and compensation becomes very sensitive to short‐term performance. This generates an endogenous horizon problem whereby managers intensify performance manipulation in their final years in office. Contracts are designed to encourage effort while minimizing the adverse effects of manipulation. We characterize the optimal mix of short‐ and long‐term compensation along the manager's tenure, the optimal vesting period of incentive pay, and the dynamics of short‐termism over the CEO's tenure.     

Baylor University Roundtable on The Corporate Mission, CEO Pay, and Improving the Dialogue with Investors

A small group of academics and practitioners discusses four major controversies in the theory and practice of corporate finance:

• • What is the social purpose of the public corporation? Should corporate managements aim to maximize the profitability and value of their companies, or should they instead try to balance the interests of their shareholders against those of “stakeholder” groups, such as employees, customers, and local communities?
• • Should corporate executives consider ending the common practice of earnings guidance? Are there other ways of shifting the focus of the public dialogue between management and investors away from near-term earnings and toward longer-run corporate strategies, policies, and goals? And can companies influence the kinds of investors who buy their shares?
• • Are U.S. CEOs overpaid? What role have equity ownership and financial incentives played in the past performance of U.S. companies? And are there ways of improving the design of U.S. executive pay?
• • Can the principles of corporate governance and financial management at the core of the private equity model—notably, equity incentives, high leverage, and active participation by large investors—be used to increase the values of U.S. public companies?

     

What's good for you is good for me: The effect of CEO inside debt on the cost of equity

We find an overall negative relation between CEO inside debt holdings and the cost of equity capital. Such a negative relation holds in an instrumental-variable analysis, a test using changes in variables due to CEO turnover events, a test using seasoned equity offering (SEO) underpricing as an alternate cost of equity measure, and a difference-in-differences test based on the implementation of Internal Revenue Code Section 409A Final Regulations. Additionally, the negative relation between inside debt and the cost of equity capital is nonlinear, suggesting the existence of optimal inside debt compensation that can minimize cost of capital. The negative relation is less pronounced in firms with pre-funded executive pension plans and in firms that provide executives with the pension lump-sum option. We also provide evidence that inside debt lowers the cost of equity more for excessively levered firms. Collectively, these findings suggest that shareholders value the beneficial role of CEO debt-like compensation in constraining excessive managerial risk taking.     

The impact of executive pay on the disclosure of alternative earnings per share figures

This paper investigates the motives for disclosing an alternative earnings per share (EPS) figure. In particular, we extend prior findings for the UK (Choi, Lin, Walker & Young, 2007) by highlighting the role of managerial contracting in the alternative EPS disclosure choice. We examine a specific contractual setting where management is especially sensitive to reported earnings numbers, i.e., when EPS performance targets exist in the managerial remuneration package. Our analysis suggests that the choice to disclose an alternative EPS figure is positively related to firms where the vesting of executive share options (ESOs) is contingent on the achievement of growth in EPS. Our results remain significant after testing for selection bias, direction of causality and after matching firms on variables prior literature identifies as influential in the choice of an EPS target as a performance criterion in executive remuneration.     

A path analysis investigation of the relationships between CEO pay ratios and firm performance mediated by employee satisfaction

We posit that information about CEO pay ratios is important to investors because employees' perceived fairness of their firm’s CEO pay ratio has consequences for firm performance. We use path analysis to examine the association between firm performance and (1) the predicted CEO pay ratio as determined by economic factors (the fair component of CEO pay ratio) and (2) the predicted CEO pay ratio as determined by non-economic factors (the unfair component of CEO pay ratio). We test for the existence and relative importance of direct and indirect paths using two measures of employee satisfaction and two measures of firm performance. We find that pay equity, a larger CEO pay ratio driven by economic factors, is associated with employee contributions to better firm performance. Conversely, we show that pay inequity, a larger CEO pay ratio driven by non-economic factors, is associated with employees' contributions to poorer firm performance. Consistent with the view that managerial entrenchment may amplify the negative effects of the CEO pay ratio, we find that the negative indirect path between pay inequity and firm performance, mediated by employee satisfaction, is more pronounced in firms with entrenched CEOs. Our findings contribute to the accounting compensation literature because they are consistent with CEO pay ratio information having economic consequences.     

The impact of regulation on market risk

While it is crucial to understand the impact of regulatory changes on market risk, the literature does not show how risk responds to expected regulatory changes that are specifically designed to change risk. Our paper fills this gap by providing a detailed study of one such case. Using both a sample of privatized U.K. companies, and U.K. and U.S. control portfolios, between 1993 and 2000, we show (both for the single-factor market model and the three-factor Fama-French model) that the observed changes in market risk are significant and consistent with theory.     

Assessing the impact of export processing zones on economic growth in Ghana

The study examines the impact of free zones exports and investments on economic growth in Ghana. A vector error correction model (VECM) was employed to ascertain the impact of the Free Zones Programme on economic growth in Ghana on a quarterly time series data spanning 1998–2015. The results show that both free zones exports and free zones investments have significant negative relationship with economic growth. Trade openness also has a significant negative relationship with economic growth but insignificant positive relationship with investment and export. The study concludes that the Free Zones Programme has not served its purpose of promoting economic growth in Ghana. It is universally known that the concept of free zones is actually a second best option and as such is not meant be a lasting policy for promoting economic growth. For this reason, given the negative effect the programme has had on economic growth, the Government of Ghana should scrap it and possibly look at opening up the whole country, especially in terms of infrastructure and other incentives for all firms, so that economic activity can freely take place in every corner of the country to realise balanced and more sustainable growth of the economy.     

Media image of the CEO and the impact on auditors' perception of financial reporting reliability and client risk assessments

Regulators and legislators have recently adopted new governance reforms in an attempt to encourage more normative behavior by those in charge of organizations. It should not be surprising, therefore, that the image of the CEO projected by the media has become increasingly salient to decision makers. Still, the impact of CEO image on stakeholders' perceptions and subsequent behavior has received little attention by accounting researchers. In response to this void, we examine the relationship between two important environmental cues: CEO's image as presented in the media and earnings consistency. Our interest is the degree to which these variables influence auditors' perception of the ethics of corporate management, as well as their assessments of the risk of fraudulent financial statements. We document that auditor perceptions are influenced by positive media cues as well as negative cues. These results are inconsistent with auditors exercising professional skepticism which implies no reliance on positive cues, especially “managed media cues”. These results suggest that auditors, similar to others, are not immune to positive media cues about the CEO. This study contributes to the research literature examining factors that affect the perceived reliability of financial information by considering the effect of non-financial information—CEO image.