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Executive Compensation (executive + compensation)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	95%

Distribution within Business, Economics, Finance and Accounting

General & Introductory Finance & Investments	26%

Selected Abstracts

GOLF TOURNAMENTS AND CEO PAY,UNRAVELING THE MYSTERIES OF EXECUTIVE COMPENSATION

JOURNAL OF APPLIED CORPORATE FINANCE, Issue 3 2001
John Martin
Leading financial economists and activist institutional investors have long argued that the proper alignment of manager and shareholder interests requires the use of performance based compensation. Partly in response to these pressures, and in combination with a change in the tax code that encourages performance-based pay, corporate boards have dramatically increased their use of stock grants and executive stock options. Combine this development with the longest bull market in U.S. financial history, and the result is unprecedented levels of CEO pay at the close of the 20th century. This review of executive compensation reveals that the economic theory of tournaments may provide a rationale for the pattern, if not the level, of executive pay. Specifically it finds that the total compensation of the five highestpaid executives in a cross-section of new and old-economy firms is very similar to the pattern of payouts to players in a golf tournament. The author also reports that recent studies show a significant increase in the pay-for-performance correlation throughout the 1990s. But whether that correlation is as high as it should be, and whether current levels of CEO pay are socially "optimal," are questions that remain unanswered. [source]

Board Structure and Executive Compensation in the Public Sector: New Zealand Evidence

FINANCIAL ACCOUNTABILITY & MANAGEMENT, Issue 4 2005
Steven F. Cahan
We provide evidence on the relation between board structure and CEO compensation in public sector corporations in New Zealand. Using a sample of 80 New Zealand public sector companies, we find that similar to private sector studies, CEO compensation is related to board size, whether the CEO sits on the board, and director quality. We also find that a composite measure of board structure is significant. We conclude that, similar to the private sector, board structure is important in constraining CEO pay. Moreover, our results suggest that private sector-style board can be effective in a public sector context. [source]

Pay Without Performance: Overview of the Issues

JOURNAL OF APPLIED CORPORATE FINANCE, Issue 4 2005
Lucian A. Bebchuk
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; 2)improvements in pay practices, including greater use of "indexed" stock and options to limit "windfalls," tougher limits on executives' freedom to sell shares, and greater use of "clawback" provisions in bonus plans that would force executives to return pay for performance that proves to be temporary; and 3)improvements in board accountability to shareholders, including limits on the use of staggered boards and granting shareholders the right to nominate directors and propose changes to governance arrangements in the corporate charter. [source]

Insurer Reserve Error and Executive Compensation

JOURNAL OF RISK AND INSURANCE, Issue 2 2010
David L. Eckles
This article investigates incentives of insurance firm managers to manipulate loss reserves in order to maximize their compensation. We find that managers who receive bonuses that are likely capped or no bonuses tend to over-reserve for current-year incurred losses. However, managers who receive bonuses that are likely not capped tend to under-reserve for current-year incurred losses. We also find that managers who exercise stock options tend to under-reserve in the current period. [source]

Wealth and Executive Compensation

THE JOURNAL OF FINANCE, Issue 1 2006
BO BECKER
ABSTRACT Using new data on the wealth of Swedish CEOs, I show that higher wealth CEOs receive stronger incentives. Since high wealth (excluding own-firm holdings) implies low absolute risk aversion, this is consistent with a risk aversion explanation. To examine whether wealth is likely to proxy for power, I use lagged wealth (typically measured before the CEO was hired), and the results remain for one of two incentive measures. Also, the wealth,incentive result is not stronger for CEOs likely to face limited owner oversight. Finally, wealth is unrelated to pay levels, and is hence unlikely to proxy for skill. [source]

Institutional Investors and Executive Compensation

THE JOURNAL OF FINANCE, Issue 6 2003
Jay C. Hartzell
We find that institutional ownership concentration is positively related to the pay-for-performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry, investment opportunities, and performance. These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers. Additionally, we find that clientele effects exist among institutions for firms with certain compensation structures, suggesting that institutions also influence compensation structures through their preferences. [source]

Is CEO Pay Really Inefficient?

EUROPEAN FINANCIAL MANAGEMENT, Issue 3 2009
A Survey of New Optimal Contracting Theories
D2; D3; G34; J3 Abstract Bebchuk and Fried (2004) argue that executive compensation is set by CEOs themselves rather than boards on behalf of shareholders, since many features of observed pay packages may appear inconsistent with standard optimal contracting theories. However, it may be that simple models do not capture several complexities of real-life settings. This article surveys recent theories that extend traditional frameworks to incorporate these dimensions, and show that the above features can be fully consistent with efficiency. For example, optimal contracting theories can explain the recent rapid increase in pay, the low level of incentives and their negative scaling with firm size, pay-for-luck, the widespread use of options (as opposed to stock), severance pay and debt compensation, and the insensitivity of incentives to risk. [source]

Social Networks and Corporate Governance

EUROPEAN FINANCIAL MANAGEMENT, Issue 4 2008
Avanidhar Subrahmanyam
G30; G34 Abstract We analyse frameworks that link corporate governance and firm values to governing boards' social networks and innovations in technology. Because agents create social networks with individuals with whom they share commonalities along the dimensions of social status and income, among other attributes, CEOs may participate in board members' social networks, which interferes with the quality of governance. At the same time, social connections with members of a board can allow for better evaluation of the members' abilities. Thus, in choosing whether to have board members with social ties to management, one must trade off the benefit of members successfully identifying high ability CEOs against the cost of inadequate monitoring due to social connections. Further, technologies like the Internet and electronic mail that reduce the extent of face-to-face networking cause agents to seek satisfaction of their social needs at the workplace, which exacerbates the impact of social networks on governance. The predictions of our model are consistent with recent episodes that appear to signify inadequate monitoring of corporate disclosures as well as with high levels of executive compensation. Additionally, empirical tests support the model's key implication that there is better governance and lower executive compensation in firms where networks are less likely to form. [source]

Optimal Incentive Contracts for Loss-Averse Managers: Stock Options versus Restricted Stock Grants

FINANCIAL REVIEW, Issue 4 2006
Anna Dodonova
G39; M52 Abstract This paper provides an explanation for the widespread use of stock option grants in executive compensation. It shows that the optimal incentive contract for loss-averse managers must contain a substantial portion of stock options even when it should consist exclusively of stock grants for "classical" risk-averse managers. The paper also provides an explanation for the drastic increase in the risk-adjusted level of CEO compensations over the past two decades and argues that more option-based compensation should be used in firms with higher cash flow volatility and in industries with a higher degree of heterogeneity among firms. [source]

The Subjective Valuation of Indexed Stock Options and Their Incentive Effects

FINANCIAL REVIEW, Issue 2 2006
A. Louis Calvet
G13; G12; J33; J32 Abstract We analyze the potential role of indexed stock options in future pay-for-performance executive compensation contracts. We present a unified framework for index-linked stock options, discuss their incentive effects, argue that indexation schemes based on the capital-asset pricing model (CAPM) are the most suitable for executive compensation, and derive a subjective pricing model for the class of CAPM-based indexed stock options. Contrary to earlier work, executives would not be motivated to take on investment projects with high idiosyncratic risk once their lack of wealth diversification and degree of risk aversion are factored into the analysis. [source]

Determinants of executive compensation in privately held firms

ACCOUNTING & FINANCE, Issue 3 2010
Jesper Banghøj
M52; Compensation and Compensation Methods and Their Effects Abstract We examine what determines executive compensation in privately held firms. Our study is motivated by the fact that most studies in this area rely on data from publicly traded firms. Further, the few studies that are based on data from privately held firms only examine a limited number of determinants of executive compensation. Our findings indicate that the pay-to-performance relation is weak. Board size and ownership concentration are the only corporate governance characteristics that explain variations in executive compensation. Executive characteristics like skills, title and educational attainment all explain variations in executive compensation. Contrary to our expectations, we do not find a stronger pay-to-performance relation in firms with better designed bonus plans. [source]

Does accounting conservatism pay?

ACCOUNTING & FINANCE, Issue 1 2010
Raghavan J. Iyengar
C21; J33; M41 Abstract 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. [source]

Dividend payout and executive compensation: theory and evidence

ACCOUNTING & FINANCE, Issue 4 2008
Nalinaksha Bhattacharyya
G35; J38 Abstract Bhattacharyya (2007) develops a model in which compensation contracts motivate high-quality managers to retain and invest firm earnings, while low-quality managers are motivated to distribute income to shareholders. In equilibrium, the model shows that there is a positive (negative) relationship between the earnings retention ratio (dividend payout ratio) and managerial compensation. Results of tests of US data show that executive compensation is positively (negatively) associated with earnings retention (dividend payout). Our results indicate that corporate dividend policy is perhaps best understood by considering the payout ratio (dividends divided by earnings), rather than the level of cash dividends alone. [source]

Compensation and Board Structure: Evidence From the Insurance Industry

JOURNAL OF RISK AND INSURANCE, Issue 2 2010
David Mayers
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. [source]

Family ownership, corporate governance, and top executive compensation

MANAGERIAL AND DECISION ECONOMICS, Issue 7 2006
Suwina Cheng
In this study we investigate how top management pay is determined in a family firm environment where even listed firms are effectively controlled by a single individual or a single family. Using data from Hong Kong, we find that executive directors' pay is reduced if the directors have substantial stockholdings. Moreover, pay is related to profits but not to stock returns. Our results are consistent with external blockholders and independent non-executive directors persuading firms to base top management compensation on a firm's profitability. Copyright © 2006 John Wiley & Sons, Ltd. [source]

Institutional Investors and Executive Compensation

Does explicit contracting effectively link CEO compensation to environmental performance?,

BUSINESS STRATEGY AND THE ENVIRONMENT, Issue 5 2008
James J. Cordeiro
Abstract Empirical research in the area of corporate sustainability highlights potential conflicts between corporate financial performance and environmental performance. In such a situation, agency theory arguments applied to the corporate environmental context predict that top management compensation should be explicitly linked to environmental performance in order to bring about proper alignment of organizational environmental goals and management incentives. We test this proposition for a sample of 207 Standard & Poor 500 firms in the US in 1996 who explicitly report in Investor Responsibility Research Council (IRRC) surveys the presence or absence of a contractual link between environmental performance and executive compensation. We find that only in firms with an explicit linkage between environmental performance and executive contracts is there is any evidence of a significant impact of firm-level environmental performance on CEO compensation levels. However, even this impact is not very impressive since (a) it holds only for IRRC compliance and spill indices and does not hold for IRRC toxic emission indices, and (b) even the effects for compliance and spill indices do not hold relative to industry levels of these indices. Copyright © 2008 John Wiley & Sons, Ltd and ERP Environment. [source]