Employment mobility and pay for sector performance

We argue that executives' employment mobility significantly affects their pay for sector performance. In particular, as executives' outside employment options increase with social connections we hypothesize that better-connected executives receive greater pay for sector performance. Supportive of our hypothesis, we find that pay for sector performance is more pronounced when executives are better connected, both within and across industries. Further, intra-industry connections have a stronger effect when enforceability of non-compete agreements is weaker. While the prior literature finds that social networks impact the level of CEO pay through an information channel, our findings suggest that social networks also impact pay for sector performance through an outside employment options channel.     

The effect of supplier industry competition on pay-for-performance incentive intensity

We examine how supplier industry competition affects CEO incentive intensity in procuring firms. Using Bureau of Economic Analysis data to compute a weighted supplier industry competition measure, we predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to that of the firm's own industry competition previously documented and is robust to alternative measures of supplier competition and to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm's benefit. Our findings are economically important as suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).     

Information-based stock trading and managerial incentives: evidence from China's stock market

This paper uses stock price informativeness, or information-based stock trading, to help explain the pay–performance sensitivity (PPS) of chief executive officer (CEO) compensation in China's listed firms. We argue that higher stock price informativeness, which we measure by the probability of informed trading, helps and encourages shareholders to incentivize the top management team based on stock market performance. The regression results support our argument and show that a higher level of stock price informativeness is associated with higher CEO PPSs. Moreover, the impact of stock price informativeness on CEO incentives is stronger for privately controlled listed firms than it is for state-controlled listed firms. The results also hold when information asymmetry is approximated by the accuracy and dispersion of the earnings forecasts made by financial analysts.     

CEO prior uncertainty and pay–performance sensitivity

A CEO's pay–performance sensitivity (PPS) is higher in the first year of their tenure than in the following years. I explain this finding with reference to chief executive officer (CEO) prior uncertainty: Because of information asymmetry and/or uncertainty about the quality of the match between a CEO and a firm, first-year compensation is often arranged to depend largely on performance. Consistent with this explanation, CEOs with higher prior uncertainty exhibit higher first-year PPS. Also, PPS is higher for outsider CEOs than insider CEOs. Among outsider CEOs, first-year PPS is lower for former executives of large public firms. An insider CEO's service time in a firm before becoming the CEO reduces first-year PPS.     

Overemployment,executive pay-for-performance sensitivity and economic consequences: Evidence from China

Using a sample of state-owned enterprises (SOEs) listed on the Shanghai and Shenzhen Stock Exchanges during the 1999–2009 period, we investigate the effects of overemployment on executives’ pay-for-performance sensitivity (PPS) and analyze how the behavior of firms with high/low PPS affects the number of surplus employees. We find the existence of a redundant workforce significantly weakens PPS and the role of accounting measures in performance assessment. In contrast to prior literature, we find that higher PPS is associated with a stronger incentive to lay off redundant employees and to limit future employee numbers. We also find that weaker government intervention strengthens managerial control over the future size of the workforce. Finally, our findings suggest that a heavier government policy burden on SOEs leads to lower tax rates and more government gains.     

Are more able CEOs getting more compensated? Evidence from the pay-for-performance sensitivity of equity-based incentives

This study investigates whether the managerial ability of a chief executive officer (CEO) is associated with the CEO's pay-for-performance sensitivity (PPS) of the equity-based compensation. We predict that more talented CEOs receive a higher PPS of equity incentives. Using the managerial ability score (Demerjian, Lev, & McVay, 2012) and PPS measures of options and stocks (Core & Guay, 1999), we find that a CEO's PPS of the equity-based compensation is significantly increasing in the CEO's ability. We also find that the association between managerial ability and the PPS of stock incentives is more evident for small firms. Furthermore, our results show that high ability CEOs are associated with a steeper PPS of option incentives, especially when they are not near retirement. Together, our findings suggest that firms generally incorporate the relative efficiency factor of CEO's ability in designing the CEO's equity-based compensation contracts, and thus the cross-sectional variation in the CEO's PPS is positively influenced by the CEO's ability.Data availability: Data used in this study are available from public sources identified in the study.     

Search,product market competition and CEO pay

We develop a market equilibrium model to show how search frictions in the CEO market, agency conflicts and product market characteristics interact to affect CEO market tightness, firm size and CEO incentive pay. The theory generates novel implications that link firms' product markets with CEO markets. Different determinants of competition—the entry cost, product substitutability, and market size—have contrasting effects on CEO market tightness, CEO pay and firm size. We also derive new predictions for the impact of product market risk on firm size and CEO incentive compensation. We show empirical support for several cross-sectional hypotheses derived from the theory for how CEO pay, CEO incentives, firm size and market tightness vary with product market characteristics.     

Corporate performance and CEO compensation in China

This paper examines the compensation of CEOs in China's listed firms. First, we discuss what is known about the setting of CEO compensation and then we go on to examine factors that may help explain variations in the use of performance related pay. In China, listed firms have a dominant or controlling shareholder and we argue that the distinct types of controlling shareholder have different impacts on the use of incentive pay. We find that firms that have a State agency as the major shareholder do not appear to use performance related pay. In contrast, firms that have private blockholders or SOEs as their major shareholders relate the CEO's pay to increases in stockholders' wealth or increases in profitability. However the pay–performance sensitivities for CEOs are low and this raises questions about the effectiveness of firms' incentive systems.     

CEO Compensation and Firm Performance: an Empirical Investigation of UK Panel Data

This paper examines the link between CEO pay and performance employing a unique, hand‐collected panel data set of 390 UK non‐financial firms from the FTSE All Share Index for the period 1999–2005. We include both cash (salary and bonus) and equity‐based (stock options and long‐term incentive plans) components of CEO compensation, and CEO wealth based on share holdings, stock option and stock awards holdings in our analysis. In addition, we control for a comprehensive set of corporate governance variables. The empirical results show that in comparison to the previous findings for US CEOs, pay‐performance elasticity for UK CEOs seems to be lower; pay‐performance elasticity for UK CEOs is 0.075 (0.095) for cash compensation (total direct compensation), indicating that a ten percentage increase in shareholder return corresponds to an increase of 0.75% (0.95%) in cash (total direct) compensation. We also find that both the median share holdings and stock‐based pay‐performance sensitivity are lower for UK CEOs when we compare our findings with the previous findings for US CEOs. Thus, our results suggest that corporate governance reports in the UK, such as the Greenbury Report (1995) that proposed CEO compensation be more closely linked to performance, have not been totally effective. Our findings also indicate that institutional ownership has a positive and significant influence on CEO pay‐performance sensitivity of option grants. Finally, we find that longer CEO tenure is associated with lower pay‐performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure.     

Geopolitical,economic uncertainty and bank risk: Do CEO power and board strength matter?

This study examines whether economic and geopolitical uncertainties affect bank risk. Using a sample of 574 banks from 19 countries for 2009–2020, our findings show that increasing economic and geopolitical uncertainty significantly constrain the bank risk and worsens its stability. Furthermore, we explore whether CEO power and board strength have played a moderate role in mitigating the adverse impact of economic and geopolitical uncertainty on bank risk. The finding shows that CEOs' power and strong boards improve the bank's performance and minimize the adverse effects of economic and geopolitical uncertainty on bank risk. The results are robust to alternative bank risk, economic uncertainty, and geopolitical uncertainty measures and address endogeneity. Additional analyses on bank heterogeneity show that the bank stability of listed, domestic and private-owned banks is more immune to such uncertainty.     

Does executive compensation reflect corporate productivity?

Recent literature has given attention to the effect of CEO-specific productivity on the structure of CEO compensation. Our paper instead focuses on the effect of a different productivity factor—which we call “corporate productivity”—on CEO compensation. In particular, we show that corporate productivity affects the trade-off between incentive and risk in a non-monotonic fashion, which the literature has not yet recognized. Using various empirical proxies for corporate productivity, we show that our results are consistent with the non-monotonic relation and thus contribute to the debates in the incentive-risk trade-off literature. Second, our findings also contribute to the internal capital market literature by exploring the relation between the structure of CEO compensation and excess value.     

Parent-subsidiary dispersion and executive excess perks consumption

We investigate the impact of parent-subsidiary dispersion on the corporate executives' excess perks consumption using comprehensive data of 1784 Chinese listed firms over the 2003–2017 period (i.e., total firm-year observations of 24,976). We argue that firms with greater geographic and institutional environment dispersion are subject to an acute information asymmetry problem, which makes it difficult and costly for shareholders and the public to monitor managerial actions and hence, facilitates managers to consume perks excessively. Consistent with this assertion, we find a positive relationship between parent-subsidiary company dispersion and executives' excess perks consumption. These patterns are not likely to be driven by the firms' endogenous choice and remain robust to various proxies for parent-subsidiary dispersion and executives' excess perks consumption. In addition, our results also show that firms with a greater dispersion between parent and subsidiary companies have higher investor recognition. However, investor recognition does not appear to negatively impact the rate of executives' excess perks consumption, which may explain why executives' excess perks consumption is not mitigated in firms with greater parent-subsidiary dispersion.     

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.     

ECONOMIC POLICY UNCERTAINTY AND BOARD MONITORING: EVIDENCE FROM CEO TURNOVERS

We examine whether economic policy uncertainty (EPU) affects a board's chief executive officer (CEO) replacement decision. We find that high EPU reduces the likelihood of forced CEO turnover. Our results support the idea that performance assessment may be more difficult when uncertainty is high. We provide evidence that succession planning may be important to firms in reducing the effects of EPU, as firms with an identifiable heir apparent are not influenced by high EPU. Likewise, voluntary CEO turnovers are not affected by EPU. Overall, our results provide evidence that boards make personnel decisions in response to external macroeconomic pressures.     

Delegation and sensitivity of CEO turnover to firm performance within business groups: Evidence from China

In emerging markets, companies are often organized into corporate groups in which the controlling shareholders control the member firms through stock pyramids and cross-shareholdings. We examine how the incentive for these controlling shareholders to maximize the value of groups results in less delegation of decision rights to the CEO of the member firm and, in turn, how such delegation affects the rate of CEO turnover in response to the financial performance measures reported by member firms. Our results suggest that delegation, measured as the extent to which controlling owners control the board of directors, is negatively associated with the interdependence of member firms. We also find that delegation weakens the sensitivity of the CEO-turnover rate to financial performance measures. These findings extend the literature by providing evidence on how delegation and management-incentive arrangements are jointly determined at the firm level.     

Heterogeneity in the Effect of Managerial Equity Incentives on Firm Value

We document significant heterogeneity in the relation between chief executive officer (CEO) equity incentives and firm value using quantile regression. We show that CEO delta is more effective in the presence of ample investment opportunities, while CEO vega is more beneficial for firms lacking investment opportunities. Further, Tobin's Q increases in CEO delta for more risk‐tolerant firms but increases in CEO vega for more risk‐averse firms. We also observe that higher monitoring intensity after the Sarbanes‐Oxley Act reduces CEO delta's role in compensation. Risk aversion alters the optimal incentive‐value relation, and the nature of this relation also depends on the level of Tobin's Q.     

Understanding the relationship between founder–CEOs and firm performance

We use instrumental variables methods to disentangle the effect of founder–CEOs on performance from the effect of performance on founder–CEO status. Our instruments for founder–CEO status are the proportion of the firm's founders that are dead and the number of people who founded the company. We find strong evidence that founder–CEO status is endogenous in performance regressions and that good performance makes it less likely that the founder retains the CEO title. After factoring out the effect of performance on founder–CEO status, we identify a positive causal effect of founder–CEOs on firm performance that is quantitatively larger than the effect estimated through standard OLS regressions. We also find that founder–CEOs are more likely to relinquish the CEO post after periods of either unusually low or unusually high operating performances. All in all, the results in this paper are consistent with a largely positive view of founder control in large US corporations.     

Are Incentive Contracts Rigged by Powerful CEOs?

We argue that some powerful CEOs induce boards to shift the weight on performance measures toward the better performing measures, thereby rigging incentive pay. A simple model formalizes this intuition and gives an explicit structural form on the rigged incentive portion of CEO wage function. Using U.S. data, we find support for the model's predictions: rigging accounts for at least 10% of the compensation to performance sensitivity and it increases with CEO human capital and firm volatility. Moreover, a firm with rigged incentive pay that is one standard deviation above the mean faces a subsequent decrease of 4.8% in firm value and 7.5% in operating return on assets.     

Do powerful chief executives influence the financial performance of UK firms?

Drawing on a framework from agency theory, we examine the relation between the decision-making power of Chief Executive Officers (CEOs) and the financial performance of 468 United Kingdom (UK) publicly listed companies (plcs) using a dynamic panel data estimation method for the six years 2003–2008. We measure CEO power using a ‘power index’ which captures the extent to which the autonomy of the CEO to make unilateral decisions could influence firms' financial performance. To test for robustness, our analysis is conducted using different measures of financial performance. Our results reveal that, consistent with previous UK research, CEO power, as defined by CEO-Chair duality, CEO-tenure and CEO share ownership, is negatively related to financial performance. We also find that concentrated ownership is inversely related to the performance of UK plcs. CEO's compensation and board structure, however, do not appear to be related to the financial performance of the UK plcs.     

CFO role and CFO compensation: An empirical analysis of their implications

Given concerns over CFO pay, especially incentives, and considering the tension between a CFO’s fiduciary responsibility and being a key member of the firm’s executive team, we examine the determinants and effects of CFO compensation amount, incentive intensity, and proximity to CEO compensation in a sample of European companies (FTE 500, 2005–2009). First, we focus on the CFO role as a determinant of CFO compensation. Like prior work, we proxy for CFO roles by using hand-collected public data on education and past professional experience, but we supplement these proxies with proprietary data to more directly capture the firm-specific nature of the CFO job in term of its similarity with that of the CEO. We thus argue how CFOs can have varied roles characterized by different levels of financial expertise and CEO-likeness, and document that it is this latter aspect that is associated with CFO compensation. Second, we study the effects of CFO compensation design on outcomes in the CFO’s realm related to financial reporting. We find that CFO financial expertise is positively associated with financial reporting quality, while a CFO’s pay long-term incentive intensity and a CFO’s incentive compensation proximity with the CEO are negatively associated with financial reporting quality. Overall, then, our results suggest that CFOs get rewarded for their CEO-likeness, and particularly for their being similar to the CEO in terms of tasks and decision making authority. But it is their financial expertise that is positively related to financial reporting quality. At the same time, using compensation that is more incentive intensive and more similar to that of the CEO appears to be potentially detrimental to the quality of financial reporting. These results are relevant for boards involved in selecting highly expert CFOs, and their compensation committees charged with defining subsequently effective incentive compensation plans for those CFOs.