Bidder CEO and Other Executive Compensation in UK M&As

This paper investigates the impact of M&As on bidder (CEO and other) executive compensation employing a unique sample of 100 completed bids in the UK over the 1998–2001 period. Our findings indicate that less independent and larger boards award CEOs significantly higher bonuses and salary following M&A completion both for the full sample and for the UK and US sub‐samples. UK CEOs and executives are rewarded more for the effort exerted in accomplishing intra ‐ industry or large mergers than for diversifying or small mergers and their cash pay is unaffected by other measures of their managerial skill or performance. US bidders are rewarded at higher levels than their UK counterparts and their remuneration is related only to measures of CEO dominance over the board of directors. Overall our findings offer support for the managerial power rather than the agency theory perspective on managerial compensation.     

Value creation around merger waves: The role of managerial compensation

This paper examines the relation between executive compensation and value creation in merger waves. The sensitivity of CEO wealth to firm risk increases the likelihood of out-of-wave merger transactions but has no influence on in-wave merger frequency. CEOs with compensation linked to firm risk have better out-of-wave merger performance in comparison to in-wave mergers. We also present evidence that cross-sectional acquirer return dispersion is greater for in-wave acquisitions. Our results suggest that the underperformance of acquiring firms during merger waves can be attributed in part to ineffective compensation incentives, and appropriate managerial incentives can create value, particularly in non-wave periods.     

Ceo Compensation And The Transformation Of Banking

We examine the compensation strategies of commercial bank holding companies (BHCs) during 1992–2000. In particular, we analyze whether CEO compensation is more closely tied to the presence of growth options and to risk than is revealed in earlier research. We also examine whether BHC entry into investment banking has influenced compensation policies. Our evidence shows a stronger link between growth options and CEO compensation in the 1990s than observed in earlier studies and that pay‐for‐performance sensitivities are substantially larger for BHCs that have entered the underwriting business. We also find that BHC leverage and variability in returns have positive effects on CEO incentive pay. Finally, we find some evidence supporting the hypothesis that pay‐for‐performance sensitivities decline generally at BHCs as return variability increases, as agency theory predicts.     

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.     

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.     

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.     

Optimal CEO Compensation with Search: Theory and Empirical Evidence

We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs’ and firms’ outside options and captures contracting externalities. We show that the optimal pay‐to‐performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay‐to‐performance sensitivity depends positively on a firm's idiosyncratic risk and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results.     

CEO pay incentives and risk-taking: Evidence from bank acquisitions

We analyze how the structure of executive compensation affects the risk choices made by bank CEOs. For a sample of acquiring U.S. banks, we employ the Merton distance to default model to show that CEOs with higher pay-risk sensitivity engage in risk-inducing mergers. Our findings are driven by two types of acquisitions: acquisitions completed during the last decade (after bank deregulation had expanded banks' risk-taking opportunities) and acquisitions completed by the largest banks in our sample (where shareholders benefit from ‘too big to fail’ support by regulators and gain most from shifting risk to other stakeholders). Our results control for CEO pay-performance sensitivity and offer evidence consistent with a causal link between financial stability and the risk-taking incentives embedded in the executive compensation contracts at banks.     

Duration of Executive Compensation

Extensive discussions on the inefficiencies of “short‐termism” in executive compensation notwithstanding, little is known empirically about the extent of such short‐termism. We develop a novel measure of executive pay duration that reflects the vesting periods of different pay components, thereby quantifying the extent to which compensation is short‐term. We calculate pay duration in various industries and document its correlation with firm characteristics. Pay duration is longer in firms with more growth opportunities, more long‐term assets, greater R&D intensity, lower risk, and better recent stock performance. Longer CEO pay duration is negatively related to the extent of earnings‐increasing accruals.     

Auditor independence, executive pay and firm performance

This paper investigates whether compensation committees actively intervene to adjust accounting performance‐based incentive schemes for the real, or perceived, reduced earnings credibility signalled by the purchase of non‐audit services. Using a nonlinear, two‐stage least‐squares method that accounts for the simultaneity of executive pay, firm performance and non‐audit fees, we find a significant negative relationship between non‐audit fees and the sensitivity of chief executive officer (CEO) pay to firm performance. Point estimates suggest that the reduced weight applied to accounting performance lowers the incentive component of executive pay between roughly 5 and 8 per cent for the CEO of the ‘average firm’.     

Corporate Governance and Mergers and Acquisitions Performance in Banks: Evidence under the Special Regulatory Environment in Taiwan

In this study, we focus on the relation between bank governance and bank merger results under Taiwan’s special regulatory environment in 2000. Adopting governance variables (executive remuneration, managerial ownership, and board diversity), we find that managerial ownership is positively related to bank merger results and that board size is negatively correlated with bank mergers’ performance. This study supports sound governance mechanisms to prevent banks from pursuing a value-loss merger and acquisition (M&A). Our results offer the insight that internal bank governance structures have a bigger impact on the value effects from bank mergers. Thus, regulators may elevate the performance of bank M&As by enhancing corporate governance codes.     

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.     

Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs

We explore how compensation policies following mergers affect a CEO's incentives to pursue a merger. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. Following a merger, a CEO's pay and overall wealth become insensitive to negative stock performance, but a CEO's wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with stronger boards retain the sensitivity of their CEOs' compensation to poor performance following the merger. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures.     

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.

     

Riding the merger wave: Uncertainty,reduced monitoring,and bad acquisitions

We show that acquisitions initiated during periods of high merger activity (“merger waves”) are accompanied by poorer quality of analysts' forecasts, greater uncertainty, and weaker CEO turnover-performance sensitivity. These conditions imply reduced monitoring and lower penalties for initiating inefficient mergers. Therefore, merger waves may foster agency-driven behavior, which, along with managerial herding, could lead to worse mergers. Consistent with this hypothesis, we find that the average long-term performance of acquisitions initiated during merger waves is significantly worse. We also find that corporate governance of in-wave acquirers is weaker, suggesting that agency problems may be present in merger wave acquisitions.     

Bank stability and managerial compensation

We investigate the relationship between insolvency risk and executive compensation for BHCs over the 1992–2008 period. We employ CEO compensation sensitivity to risk (vega) and pay-share inequality between the CEO and other executives as measures of compensation and employ a system model to account for the endogeneity problem between vega and risk. Five main results are obtained. First, CEO compensation sensitivity to risk of BHCs has risen in response to deregulation to resemble those of the industrial firms. Second, higher vegas lead to greater bank instability. Third, the association between bank stability and managerial compensation is bi-directional; higher vegas induce greater risk and vice versa. Fourth, BHCs in the next to the largest-size group increase CEO vegas the most and have the strongest potential to create instability. Fifth, increased pay-share inequality has effects opposite to those of the increase in vega; greater pay-share inequality is associated with greater stability.     

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.     

Disclosure,shareholder oversight and the pay–performance link

This paper investigates the effect of increased shareholder oversight and disclosure about executive remuneration on the pay–performance relation, while controlling for contemporaneous changes in corporate governance practice. Our sample consists of 240 ASX-listed firms with annual reports available for each year over the period 2001–2009, a period which straddles the timing of regulatory change. We initially document the conjectured improvements in remuneration disclosure and shareholder oversight in the form of the advisory vote on the remuneration report. Following, we find as predicted a general strengthening of the pay–performance relation over the study period, with the increased sensitivity of reported CEO remuneration to firm performance being primarily related to enhanced remuneration disclosure and the non-binding shareholder vote on the remuneration report. Our results lead us to conclude that enhanced oversight over executive remuneration arrangements brought about by regulatory change has positively impacted the executive remuneration process by strengthening the pay–performance relation and making the process appear more accountable.     

Compensation consultants and CEO pay

The study examines the practice of employing multiple compensation consultants. Examining data of a sample of UK companies over the period 2003–2006 we find that CEOs receive higher equity-based pay when firms employ more than one compensation consultant. An increase in the number of compensation consultants is also associated with an increase in CEO equity-based pay, whereas no decline in CEO pay takes place when firms reduce the number of pay consultants. We also observe that the market shares of compensation consultant are positively related to CEO equity-based pay.     

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.