CEO Compensation Structure Research Articles

Short Selling Bans and Limits to Regulatory Arbitrage in a Multi-Market Setting

We evaluate the role of foreign short-sale restrictions in muting the full return-response following negative earnings surprises for stocks cross-listed in unbanned markets. We update the global timeline of short-sale restrictions until the COVID-19 crisis period. Instead of regulatory price arbitrage, we surprisingly observe cross-border reach of bans manifested in a delayed price response, accompanied by a reduction in short interest and failures to deliver. Nonetheless, large profit opportunities result in price arbitrage and full return-response. Analysis of earnings management practices and CEO compensation structure reinforces the role of the profit opportunity in moderating the effects of short-sale restrictions.

Executive compensation structure and earnings management: evidence from Australian listed firms in the period of governance reform

Executive compensation incentive is a key factor in inducing management of earnings in firms. Using a sample of 3,326 firm-year observations covering 2000 to 2006 fiscal years, the analysis shows that in Australia managers who receive higher salary tend to engage in less earnings management whereas managers who receive more incentive payments tend to engage in more earnings management. Moreover, Australian firms are committed to a gradual increase in the incentive payments in responding to the regulation reform known as CLERP 9. Subsequently, executives who receive more option grants are more likely to engage in earnings management. These findings will have implications for regulators who intend to improve both the efficacy of CEO compensation structure and financial reporting quality.

CEO Pay Sensitivity (Delta and Vega) and Corporate Social Responsibility

We use CEO pay sensitivity to stock performance (delta) and stock volatility (vega) to provide empirical evidence that CEO compensation structure influences firm Corporate Social Responsibility (CSR) performance. We find that delta has no significant effect on CSR, while vega has a strong, causal relationship with CSR. Our findings suggest that CEOs do not view CSR as value enhancing, but as a way to increase their own compensation through vega. Firms that want to improve their social performance should consider vega as an important compensation incentive for executives.

Does executive compensation reflect corporate productivity?

AbstractRecent 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.

Payout policy decisions: the effect of compensation structures

ABSTRACTThis study examines the relation between CEO compensation structures and corporate payout policies from 2008 to 2015. The literature focuses on equity-based compensation, and few studies emphasize debt-based compensation. These two types of compensation structures have different features and thus induce managers to choose different payout policies. Using total payouts, dividends, and repurchases as three proxies for corporate payouts, we find that the relation between CEO equity-based compensation structures and total payouts is statistically trivial. However, when we break down corporate payout policies into dividend payouts and share repurchases, we find that CEOs with large options holdings decrease dividend payments and increase share repurchases. We also find that CEOs with large inside debt holdings pay more dividends to shareholders, but we find no significant effect on repurchase payouts. Our findings suggest that ignoring compensation types may veil their differing effects on corporate payout decisions.

The role of business strategy and CEO compensation structure in driving corporate social responsibility: Linkage towards a sustainable development perspective

AbstractThis study extends prior studies by analyzing how business strategies affect corporate social responsibility (CSR) engagement. Studies in the business strategy and compensation literature further investigate whether firms have superior CSR if they tend to align their compensation with their company's overall strategy. This tendency would tend to encourage firms to make their investment decisions on the basis of a long‐term sustainability development perspective. The data consist of a broad cross‐section of companies and industries in the United States for the 2003–2012 period. To avoid a potential endogenous effect, a two‐stage instrumental variables regression is also adopted in this study. It is found that the prospector business strategy has a strong positive association with CSR. In addition, CEOs with short‐term compensation have less incentive to invest in CSR if their firms adopt a defender strategy. The opposite is true for the prospector group, suggesting that sometimes, misfits may also produce good CSR outcomes.

The effect of financial reporting quality on CEO compensation structure: Evidence from accounting comparability

This study examines the effect of accounting comparability on the design of CEO compensation structure. After controlling for firm-specific attributes, we find that accounting comparability is positively associated with CEO equity-based compensation intensity and pay-performance sensitivity. This suggests that the improved comparability increases the usefulness of equity-based compensation and a firm is willing to offer more equity-based compensation contracts to CEOs and increase their pay-performance sensitivity. Further, we find that the impact of comparability on the CEO’s compensation contract increases with information asymmetry, which is consistent with the notion that accounting comparability is a quality of financial reporting that facilitates the use of equity-based compensation in a poor information environment. Our analysis also reveals that the effect of accounting comparability on CEO compensation structure is greater when a firm’s corporate governance is strong, consistent with the complementary relation between comparability and the exiting corporate governance in determining CEO compensation schemes. Overall, our evidence suggests that firms utilize more equity-based compensation as a proportion of total compensation under greater accounting comparability and enhance the alignment between equity-based compensation and firm performance.

How Does CEO Career Origin Influence Firm’s Risk-Taking?

Does CEO career origin matter for corporate risk-taking? Is the level of corporate risk-taking determined by firm characteristics or by CEO personal/compensation characteristics? Using 3,006 CEO turnover data between 1992 and 2010, we find that outsider CEOs make more risky investment decisions than insider CEOs. After controlling for compensation sensitivity variables, we find that outsider CEOs are more risk-taking than insider CEOs. The board of directors may hire outsider CEOs because of the risk-taking reason. Our results also suggest that the CEO compensation structure difference is not the reason why outsider CEOs take more risk than insider CEOs.

Do Credit Unions have Distinct Objectives? Evidence from Executive Compensation Structures

Credit unions compete directly with commercial banks in markets for consumer financial services yet receive an exemption from federal corporate income tax. Commercial banks claim that credit unions are no different than banks and that the credit union tax exemption represents an unfair competitive advantage. Credit unions counter that while they offer similar products and services, they differ from commercial banks in terms of structure and mission, given their not-for-profit, cooperative status. In this paper, we test for substantive differences in the objective functions of commercial banks and nonprofit credit unions by comparing CEO compensation structures. Drawing on the relevant principal-agent literature, we provide several arguments to support the hypotheses that credit union boards of directors establish lower-powered incentive contracts with their CEOs relative to similarly sized commercial banks, and offer lower total compensation. We find that credit union CEOs receive approximately two-and-a-half times less performance-based compensation relative to CEOs of similarly sized community banks. Bank CEOs also earn approximately 15% to 20% more total compensation on average. The results are generally robust to controlling for CEO- and board-level characteristics, local economic conditions, and institution-level indicators of size, growth, complexity, liquidity and risk. The findings suggest important differences in incentive structures and objectives between banks and credit unions.

Examining the Immediate Effects of Recent Tax Law Changes on the Structure of Executive Compensation

As part of the “Tax Cuts and Jobs Act” (TCJA), Congress repealed a long-standing exception that allowed companies to deduct executives’ qualified performance-based compensation in excess of $1 million. The reason for the change was to reverse a shift in executive compensation away from cash compensation and towards performance pay, which Congress believed led executives to focus on short-term results rather than the long-term success of the company. The purpose of this study is to test the efficacy of this provision as part of the TCJA. Across a battery of tests, including a difference-in-differences design that exploits the staggered time-series implementation of the deduction limit, we find little evidence that the average firm changed the level or structure of CEO compensation after the TCJA as Congress intended. Overall, our findings suggest this change was ineffectual as enacted. Our results have implications for future policymakers who endeavor to adjust pay inequality or managerial myopia through tax laws targeted at executive compensation.

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This study examines the effect of accounting comparability on the design of CEO compensation structure. After controlling for firm-specific attributes, we find that accounting comparability is positively associated with CEO equity-based compensation intensity and pay-performance sensitivity. This suggests that the improved comparability increases the usefulness of equity-based compensation and a firm is willing to offer more equity-based compensation contracts to CEOs and increase their pay-performance sensitivity. Further, we find that the impact of comparability on the CEO’s compensation contract increases with information asymmetry, which is consistent with the notion that accounting comparability is a quality of financial reporting that facilitates the use of equity-based compensation in a poor information environment. Our analysis also reveals that the effect of accounting comparability on CEO compensation structure is greater when a firm’s corporate governance is strong, consistent with the complementary relation between comparability and the exiting corporate governance in determining CEO compensation schemes. Overall, our evidence suggests that firms utilize more equity-based compensation as a proportion of total compensation under greater accounting comparability and enhance the alignment between equity-based compensation and firm performance.

Institutional shareholding as a corporate governance mechanism that drives ceo pay

We explore the effect of institutional directors on CEO pay (total, fixed and variable compensation). We delve particularly into the impact of pressure-sensitive and pressure-resistant institutional directors, who respectively represent institutional investors who maintain and investors who do not maintain a business relationship with the firm whose board they serve on. Focusing on CEO total pay, the findings show that institutional and pressure-resistant directors on boards behave similarly, affecting CEO total pay in a nonlinear way: as the presence of institutional and pressure-resistant directors on boards increases, the monitoring hypothesis prevails, and subsequently, better corporate governance decreases CEO total pay. However, when their presence on boards exceeds a critical point, the entrenchment hypothesis holds, thereby leading to an increase in CEO total pay. Contrary to our predictions, pressure-sensitive directors do not affect CEO total pay. Regarding the CEO's compensation structure (fixed and variable), the results suggest that institutional and pressure-resistant directors increase fixed compensation and reduce variable pay, while pressure-sensitive directors affect neither fixed nor variable compensation. This evidence supports the view that institutional directors should be considered as a heterogeneous collective.

CEO compensation and government ownership

AbstractResearch Question/IssueDespite the benefits of privatization (i.e., divestiture of government‐owned enterprises), governments still own substantial stakes in economically important firms. Given public concern about excessive compensation and frequent government responses, this paper compares the level and structure of CEO compensation in privatized firms, including those still partially owned by governments, to firms never owned by the government.Research Findings/InsightsUsing a multinational sample of firms, we find that privatized firms have lower total CEO compensation than private firms never owned by governments. CEO equity‐linked wealth in privatized firms is less sensitive to stock performance, and equity compensation is negatively related to government ownership stakes. Privatized companies engage in less risk‐taking than nonprivatized companies, suggesting that government risk aversion could explain differences in CEO compensation.Theoretical/Academic ImplicationsThis study finds that the role government ownership plays in the level and structure of executive compensation is broadly consistent with pay regulations governments periodically impose. It provides empirical support for the argument that government owners are risk‐averse and associated with lower equity‐linked executive pay, which discourages CEO risk‐taking.Practitioner/Policy ImplicationsThis study encourages corporate boards to consider the degree of government involvement in their firms when setting CEO compensation packages and policies. Government concerns about excessive compensation may require boards to find other ways to incentivize CEOs, particularly given the weaker governance linked to state‐influenced firms. Additionally, governments should analyze their influences on CEO compensation, and how these can affect performance, when considering their ownership stakes in public companies.

Say-on-Pay Voting and CEO Compensation Structure

I examine how the structure of CEO compensation affects Say-on-Pay (SOP) voting and how SOP outcomes influence subsequent changes to compensation structure. I find that voting dissent decreases as the percent of performance sensitive compensation including equity and non-equity incentive increases. Additionally, investors vote more favorably when equity comes in the form of performance-vested equity or stock options as opposed to time-vested restricted stock. Subsequent to higher levels of voting dissent, however, I do not find that firms make changes to align compensation structure with investor preferences for more performance sensitive compensation as expressed through prior voting. Instead, I find that firms with greater SOP voting dissent in the prior year tend to increase performance-vested equity and decrease stock options in CEO compensation. A 20% increase in votes “Against” in the prior year SOP vote is associated with a 3.9% increase in performance-vested equity as a percent of total compensation and a 2.3% decrease in stock options. These results demonstrate that, while SOP voting is influencing compensation structure, it is not clear that these changes are resulting in more performance sensitive compensation.

Corporate Payout Policy and CEO Compensation Structure

This paper examines how corporate payout policy is affected by CEO compensation structure using data from more than 1,600 firms during 1992-2006. Specifically, it studies the effects of CEO compensation structure, firm characteristics, and dividend payout policies on dividend type and relative dividend size.It finds CEO salary is positively associated with cash dividends, share repurchases, and relative dividend size whereas CEO salary (compared to bonus) as a percentage of total compensation has negative effects on cash dividends and share repurchases. It also discovers CEO stock awards as a percentage of total compensation are positively associated with share repurchases and CEO option awards are negatively related to cash dividends.In addition, this paper shows larger firms and firms with more free cash flow distribute more cash dividends and share repurchases. On the other hand, firms with higher leverage ratio and more investment opportunities prefer to save earnings for future re-investment projects. Finally, it show dividend payout policy (either cash dividends or share repurchases) increases relative dividend size. The results of this study suggest that CEO compensation components affect CEOs’ dividend payout decisions: when CEOs’ stock award increases, they prefer to use share repurchases; when CEOs’ option award increases, they prefer not to use cash dividends.

Executive pensions, compensation leverage, and firm risk

PurposeThe purpose of this paper is to investigate how the structure of both CEO and non-CEO executive compensation affects the overall risk of a firm. The author focuses on the interplay between CEO and non-CEO executive compensation structure.Design/methodology/approachThe author uses a hand-collected pension-database that employs both OLS and two-stage least squares regressions to determine the effects of inside debt on default risk using the distance-to-default framework. The database consists of 8,965 executive-year data points from 272 firms.FindingsThis paper accomplishes three major objectives: first, the author presents a significant extension of Sundaram and Yermack (2007) by including non-CEO executives; the author demonstrates how the differences in inside debt between CEO and non-CEO executives are directly related to firm risk; and that funding these pensions via a Rabbi Trust eliminates most of the risk-shifting effects. Firms with the lowest compensation leverage gap between CEO and non-CEO executives were most likely to observe the agency costs associated with high executive leverage. When compensation leverage structures were substantially different, or the pension was pre-funded, these effects are neutralized.Originality/valueTo the best of the author’s knowledge, the first paper addresses the effects of Rabbi Trusts on risk-shifting behavior between both CEOs and non-CEO executives. Further, the author extends Sundaram and Yermack (2007) using a hand-collected database six times larger than the original paper. By focusing on the “leverage gap” between CEOs and non-CEO executives, the author presents unique evidence that underlines the risk dynamics between CEOs and their boards.

MANAGEMENT COMPENSATION STRUCTURE AND OPERATIONAL DECISIONS

ABSTRACT Firm's long term corporate performance and its corporate governance are strongly associated. Executive compensation and its structure greatly influence corporate decisions. This study finds significant relationship between CEO's compensation structure and the firm's propensity to invest in riskier projects such as capital expenditure, advertisements, and research and development. Results is this paper suggest that more non-cash component, consisting mostly of stock awards and stock options, leads the management to undertake such risky projects. The author argues that such projects improve the outlook of the firm and increases firm's risk at the same time; thereby, increasing the value of the stocks owned by the CEO and options granted to the CEO. Keywords Corporate Governance, Management Compensation

CEO Compensation Structure and the Accuracy of Management Earnings Forecasts

We investigate whether common compensation features can encourage managers to reveal more of their private information. Under the assumption that managers have private knowledge of their firms’ future earnings, we use management forecast accuracy to proxy for the extent to which managers reveal their private information and offer two main findings. First, both the amount of severance pay a manager receives and the convexity of their stock option portfolio (i.e., vega) are positively associated with that manager’s forecast accuracy. This suggests that if shareholders compensate managers in ways that reduce concerns over firm volatility, they are more forthcoming with their private information. Second, these contracting incentives are more strongly associated with forecast accuracy when short-term pressure to conceal private information is higher. Additional analyses suggest that (1) these results are unlikely explained by earnings management activity subsequent to the forecast, (2) managers with these contracting incentives issue less optimistically biased forecasts, and (3) these contracts increase forecast accuracy of both good and bad news. Overall, our results suggest compensation can encourage managers to provide more accurate disclosures, a clear benefit to capital market participants.

Corporate social responsibility and CEO compensation structure

We examine how firms' corporate social responsibility (CSR) performance affects CEO compensation structure. Traditional agency theory suggests that CEOs engage in CSR for their own interests at the expense of shareholders. A competing argument is that CEOs consider firms' social performance as a business strategy to increase firm value and align their interests with those of shareholders. Our results support the latter prediction. We find that a firm's social performance is negatively associated with the proportion of cash-based compensation, while it is positively associated with the proportion of equity-based compensation. These results are robust to the degree of corporate governance, and they are more pronounced for firms with high levels of inside director ownership and long director tenure. Overall, our findings highlight the positive impact of CSR performance on CEO compensation packages, implying that CEOs' fiduciary behavior of engaging in CSR leads to mitigating agency problems and maximizing firm value.

CEO compensation and banks’ risk-taking during pre and post financial crisis periods

This study examines the impact of CEO compensation on banks’ risk during both pre and post-financial crisis periods. Our results suggest a negative relationship between CEO bonuses and banks’ risk in the pre-financial crisis period. Similarly, restricted shares and options granted to CEOs in the post-financial crisis period also appear to decrease banks’ risk. In contrast, we observe a positive influence of the Troubled Asset Relief Program (TARP) on banks’ risk. Our results also show that the length of time to maturity of options influences banks’ risk-taking behavior. Our findings have useful implications for formulating and regulating CEO compensation structure.