Changes In CEO Compensation Research Articles

Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform

ABSTRACTBeginning in 2018, U.S. public firms were required to report the ratio of the chief executive officer's (CEO) compensation to their median employee's compensation in the annual proxy statement. Exploiting the staggered reporting of pay ratios, we find little evidence that total CEO compensation changes in response to pay ratio disclosure reform. However, we do find that boards significantly adjust the mix of compensation awarded by reducing the sensitivity of CEO pay to equity price changes, particularly when the CEO is likely to garner media scrutiny, and by reducing reliance on stock‐based and other compensation components that are most susceptible to media coverage surrounding the pay ratio disclosure. Firms ultimately disclosing higher pay ratios garner more media coverage around the filing of their proxy statement, and more negative‐toned coverage in the subsequent month. Finally, we find evidence that greater pay disparity is associated with greater selling activity by retail investors and more negative say‐on‐pay votes following pay ratio reform, consistent with a broad set of investors responding to public scrutiny resulting from pay ratio disclosures.

Evidence from 1992 to 2019 on the dynamics of managerial authority and CEO remuneration during company crises

We investigate the dynamics of two governance constructs, management influence over the board of directors and CEO remuneration, in enterprises in crisis from 1992 to 2019. Data reveal a strong trend of improving governance over time, which confounds the conclusion concerning the impact of distress on governance. Using a bias-corrected matching estimator to control for secular trends, we find that distressed businesses cut management board appointments and CEO compensation, deepen managerial incentive alignment, and increase CEO turnover. The performance-related component of CEO remuneration accounts for the majority of changes in CEO compensation in troubled businesses, which is consistent with the "shareholder value" perspective on CEO compensation.

CEO Compensation Changes Following Acquisitions

CEO Compensation Changes Following Acquisitions

Changes in CEO Compensation after the Tax Cuts & Jobs Act and the Impact of Corporate Governance: Initial Evidence

The 2017 Tax Cuts and Jobs Act (TCJA) expanded the impact of IRC Section 162(m) by disallowing deductions for any compensation over $1 million paid to top executives. Under prior law, qualified performance-based pay was exempt from the $1 million cap. We examine whether TCJA affected firms’ CEO compensation decisions in the first year following enactment. Using a difference-in-difference design, we find little evidence that CEO salaries increase more at tax-sensitive firms in the year after the TCJA. We also find that the change in total compensation is not different between our treatment and control groups. Additional analyses using different definitions of treatment and control groups confirm these results. We also examine whether firms’ reactions to the TCJA vary based on CEO strength and broader corporate governance measures. We find that weaker CEOs with little influence over the board or compensation committee members received smaller increases to compensation after TCJA, but changes to executive compensation do not vary with broader corporate governance measures. Taken together, our results provide a first glimpse of firms’ changes to CEO compensation after the TCJA.

Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform

Beginning in 2018, U.S. public firms were required to report the ratio of the chief executive officer’s (CEO) compensation to their median employee’s compensation in the annual proxy statement. We find little evidence that total CEO compensation changes in response to pay ratio disclosure reform. However, we do find that boards are willing to adjust the mix of total compensation by reducing the amount of CEO pay at risk, particularly when the CEO is subject to additional scrutiny via media coverage. These results are robust to three separate identification strategies that exploit: staggered implementation across fiscal year-ends, pay ratio disclosure exemptions, and compensation outcomes for other executives within the firm. Consistent with popular press coverage playing a role in influencing firm responses to the standard, firms disclosing higher pay ratios garner more compensation-related media coverage around the filing of their annual proxy statements and display negative abnormal returns around proxy filings in the presence of elevated media coverage. Finally, we find evidence that greater pay disparity is associated with more negative say-on-pay votes and declines in employee productivity following pay ratio reform.

Director and CEO pay reciprocity and CEO board membership

This study examines the relation between changes in non-executive director compensation and changes in CEO compensation. Consistent with norms of reciprocity, we report a positive relationship between changes in director pay and change in CEO pay for those firms where the CEO is also a board member. The results support the view that when a CEO who is also a board member validates increases in director pay, directors respond in kind, approving increases in CEO pay. This reciprocity does not benefit shareholders by improving subsequent firm value. We report that excess change in CEO and director compensation reduces subsequent change in firm value for firms where the CEO is a board member.

Do common inherited beliefs and values influence CEO pay?

We use the ethnicity of CEOs across 31 countries as a proxy for their common inherited beliefs and values and find an ethnicity effect in CEO variable pay. We find that the ethnicity effect in variable pay is not driven by the ethnicity effects in corporate policy decisions, and that changes in CEO compensation are significantly larger when CEOs are replaced with a person from a different ethnicity. Our estimated ethnicity effect captures the future time reference and religion of CEOs’ ancestors. Finally, we find an ethnicity effect in performance-firing sensitivities (i.e., the sensitivity to being fired due to poor performance).

Stock ownership guidelines for CEOs: Do they (not) meet expectations?

Abstract This paper examines the determinants and the effects of CEO stock ownership guideline adoption, differentiating Not-meet/Meet adopters – those setting the guideline above/below the CEO’s stock ownership at the time of adoption. While Meet adoption is mainly determined by factors related to stakeholder management, we find that Not-meet adoption is associated with factors related to both incentive alignment and stakeholder management. CEO ownership increases and CEO incentive alignment improves for Not-meet firms. But CEO ownership and incentives are unchanged for Meet firms following guideline adoption. We find no evidence that CEO compensation changes abnormally after adoption. Not-meet firms have larger improvement in operating performance and better stock performance than Meet firms. We provide evidence that the motives and the effects of guideline adoption depend on the level of the ownership restriction relative to the CEO’s ownership at the time of adoption.

Inherited Identity and CEO Compensation

We expect that common inherited beliefs and values of economic agents guide their behavior and determine their preferences regarding monetary rewards. We use the ethnicity of CEOs across 31 countries as a proxy for their common inherited beliefs and values and find that ethnicity is significantly associated with the level and form of CEO compensation. While we find an ethnicity effect in corporate policy decisions, our documented ethnicity effects in compensation is not a manifestation of the effect of ethnicity on corporate policy decisions. Importantly, we find that changes in CEO compensation are significantly larger when CEOs are replaced with a person from a different ethnicity. Further, we provide evidence that ethnicity captures two innate characteristics expected to shape pay preferences, namely future time reference and religious culture of economic incentives. Finally, negative deviations from ethnicity pay preferences are associated with lower future firm performance.

Disentangling CEO compensation: A simultaneous examination of time, industry, and firm‐level effects

AbstractDespite decades of research, how CEO compensation is determined remains an enigma. Drawing on agency, managerial hegemony, and institutional theoretical perspectives, we use hierarchical linear modelling—a multilevel analytic technique—to examine how firm‐, industry‐, and time‐level effects drive CEO compensation in US corporations. Results show that while cash salary is mostly driven by firm‐specific factors, equity‐based compensation responds to time‐level effects with firm‐ and industry‐level effects playing a marginal role. We argue that such evidence is consistent with the institutionalization of the CEO compensation determination process through the widespread adoption of benchmark peer‐group comparisons. Such practices underlie economy‐wide changes in CEO compensation that are increasingly disconnected from other fundamental firm‐ or industry‐specific factors. Copyright © 2015 ASAC. Published by John Wiley & Sons, Ltd.

Managerial Power and CEO Compensation in Financially Distressed Firms

We study the dynamics of managerial influence and Chief Executive Officers' (CEOs) compensation over the course of financial distress during 1992 to 2012. Using a matching estimator to identify suitable controls, we find that under distress firms reduce managerial board appointments, intensify board monitoring, and increase CEO turnover. They also pay considerably less to their CEOs, even to new CEOs from outside the firms. Against the backdrop of secular improvements in corporate governance, the effects on managerial influence and CEO compensation become smaller and larger, respectively, after 2002. Distressed firms cut CEO compensation and escalate board monitoring before reducing managerial board appointments. Financial distress does not seem to materially affect CEO compensation unrelated to firm performance, even among the firms that have high managerial influence before distress and substantially curtail the influence thereafter. A panel vector autoregression and impulse-response analysis shows prominent lead-lag relations between CEO compensation and managerial influence, suggesting that the CEO compensation changes are not necessarily due to the board structure changes.

An Empirical Test of the Effect of Outrage Costs on CEO Compensation Level

Managerial power theory predicts that increased disclosure about CEO compensation will limit or even decrease CEO compensation through increased outrage costs. Empirical testing of this key conjecture by using data from a mandatory disclosure setting is difficult as any change in CEO compensation after mandatory disclosure can be attributed to the fact that CEO compensation did not reflect the underlying economic determinants. By using data from a voluntary disclosure environment, this study develops a cleaner test of the effect of disclosure on CEO compensation level. In line with managerial power theory, we expect a decrease in compensation levels for CEOs who are in the upper part of the compensation distribution. For CEOs who are in the lower part of the compensation distribution, we expect that increased disclosure will instigate social comparison processes, leading to an increase in compensation levels. To test our theory, we use data from Belgian listed firms as the introduction of a corporate governance code in 2005 can be considered as a shock with respect to disclosure of CEO compensation for Belgian listed firms. Consistent with our theory, we find a dual effect of disclosing CEO compensation in which the influence of disclosure on CEO compensation is driven by the difference between the compensation of the CEO and the average (or median) compensation of the reference group. First, disclosure has the intended effect, since CEOs who are in the upper part of the compensation distribution are faced with a decrease in compensation. Second, disclosure of CEO compensation also leads to an unintended effect since compensation levels of CEOs who are below the average (or median) of the peer group increase through increased social comparison. This paper thus provides a more nuanced view on the claim of managerial power theory that ‘sunlight is the best disinfectant’.

Pay Equity and Top Management Turnover Following CEO Succession

Prior research has shown that CEO succession is often followed by an increase in turnover rates among non-CEO executives. However, the social mechanism that explains why CEO succession tends to trigger non-CEO turnover has not been well understood. Addressing this gap, the present study integrates three largely separate literatures—CEO succession, executive compensation, and executive turnover—to elucidate the relationship between CEO succession and subsequent non-CEO turnover. Drawing on the pay equity theory, the model predicts that the perception of pay inequity created by the changes in CEO compensation following CEO succession contributes to the increased turnover among the non-CEO executives. The theory also predicts that the effect of pay inequity is stronger when the successor CEO is chosen from those who are perceived to be similar to the existing non-CEO executives (e.g., inside CEOs) than when the successor is perceived to be different from the non-CEOs (e.g., outside CEOs). Data from nearly 3,000 United States executives suggest that the widening pay gap between the new CEO and the incumbent non-CEO executives increases turnover rates among the non-CEO executives. This effect is greater for inside CEO succession than for outside CEO succession.

Do Changes in Wealth Inequality Help Explain CEO Compensation Inequality? A Study Using the Pareto Distribution

Over the past twenty years there has been a dramatic increase in both CEO pay and the wealth of the richest Americans. We hypothesize that the increase in CEO pay is due to the same economy-wide factors that have increased the asset value of the wealthiest Americans. We test this hypothesis by estimating Pareto distributions for both CEO compensation and the Forbes 400 list of the wealthiest Americans and then comparing the behavior of these distributions over time. We find that the Forbes 400 distribution changes little over time, while CEO compensation changes significantly. We find no evidence for the hypothesis that these two distributions move together.

The timing of changes in CEO compensation from cash bonus to equity-based compensation: Determinants and performance consequences

This study examines the determinants and performance consequences of changes in CEO compensation structure. The study uses the unique setting when Australian companies have changed from cash bonus to equity-based compensation. While most US CEOs receive some form of equity-based compensation, Australian CEOs have not always been paid equity-based compensation. According to efficient contracting theories, we argue that the change to equity-based compensation is driven by changes in firm characteristics and by the occurrence of CEO turnover, the latter of which provides a less costly opportunity for such change. Our results are consistent with the above arguments. We also document a significant negative association between changes in compensation structure and subsequent firm performance in the following year, even after controlling for CEO turnover and poor governance environments. Overall, our results suggest that the initial change to equity-based compensation is part of an error learning process made by firms that leads them towards efficient CEO compensation contracts.

CEO Pay, Managerial Power, and SFAS 123(R)

ABSTRACTThis study presents evidence that option expensing, whether voluntary under SFAS 123 or mandatory under SFAS 123(R), is associated with changes in CEO compensation that are beneficial to shareholders. I find that the reporting benefits of aggregate-employee option grants under SFAS 123 are associated with the change in the mix of CEO option grants and stock grants that occurs after SFAS 123(R), suggesting that reporting benefits of option grants may have influenced some CEO compensation decisions. Additionally, I find that the reduction in CEO pay after SFAS 123(R) is greater when shareholders have more power to act in their own best interest and when there is evidence of pre-expensing CEO compensation rents. The findings suggest that SFAS 123 may have encouraged inefficient, CEO-preferential pay practices and that SFAS 123(R) may have contributed to a reduction in CEO compensation inefficiencies.Data Availability: All data are publicly available.

Barron's Survey: The World's Best CEOs

We examine the abnormal returns around the publication dates of the Barron World’s Best CEOs issues along with longer-term, risk-adjusted performance. One specific focus of the paper is whether the inclusion in the Barron ’s survey leads to an increase in positive “affect” of the firms as suggested by Statman, Fisher, and Anginer (2008) in the case of Fortune ’s most admired firms. In addition, we explore the effect of the listing on the compensation of CEOs included in the ranking. We find a negative share price response to the release of Barron’s list. The Best CEOs portfolio return is indistinguishable from the S & P 500 on a longer-term basis, and it underperformed against constructed matched samples, with no differences in risk adjusted returns. Profitability did not increase for selected firms in the post-announcement period and no patterns exist in terms of changes in CEO compensation are associated with the CEO’s inclusion in Barron’s list.

Accounting-Based Performance Metrics and Executive Compensation in Nonprofit Organizations

This study examines pay-for-performance relations in the nonprofit setting. Beginning with the premise that nonprofits seek to maximize charitable spending, we examine whether CEO compensation is based on metrics that capture the amount of charitable spending resources generated by the CEO. First, we find that changes in resource-based performance metrics, namely revenue metrics, are positively associated with changes in CEO compensation. Second, consistent with compensation theory, we find stronger pay-for-performance incentive weights for performance metrics that are more congruent with the charitable mission and less noisy as an indicator of resources generated. Finally, we examine whether variations in the incentive weight on net profit are consistent with the cost-benefit tradeoff uniquely faced by nonprofits seeking to balance fiscal health with the fundamental objective of maximal spending toward the mission. We find a significant negative relation between compensation and net profit, on average, suggesting that fulfillment of the nonprofit objective is the dominant force in the aforementioned tradeoff. However, further investigation reveals that this result is driven by traditional nonprofits and that commercial nonprofits place positive incentive weights on net profit. We find that net profit is less negatively incentivized in traditional nonprofits that experienced a net loss in the prior year, that have low expendable net assets, and that do not receive government grants. Overall, our results indicate that nonprofit pay-for-performance systems are fairly sophisticated, with variations in incentive weights that are consistent with compensation theory, but that also reflect the rich and unique institutional features of the nonprofit setting.

Exchange Rate and Macroeconomic Fluctuations as Sources of Luck in CEO Compensation

Exchange rate and other macroeconomic fluctuations can be considered sources of good or bad “luck” for corporate performance. Incentive effects of performance-based compensation for management may be weakened or biased by macroeconomic influences on remuneration depending on the ability of management to adjust operations. We decompose the changes in CEO-compensation to distinguish between (anticipated-and unanticipated) macroeconomic and “intrinsic” sources. Total US CEO-compensation is measured both including options awarded and options exercised. Both depend strongly on variations in macro-factors but the time patterns differ. Allowing for asymmetric effects on compensation we find that current compensation (salary bonus) has the most positive asymmetry.

Earnings Misreporting, the Sarbanes-Oxley Act and Changes in CEO Compensation

This paper examines changes in executive compensations structure following restatements of prior period earnings, and whether the passage of the Sarbanes-Oxley Act (SOX) influences how firms react to accounting misreporting when they modify their CEO compensation contracts. Based on a sample of firms that restated their earnings for the period of 1997-2005 and a sample of matched control firms, we find that restatement firms significantly reduce their equity-based compensation awards to executives in a two-year or three-year period following the restatements, when compared with the control firms. The reduction is especially significant for restatements of a more severe nature. We also find that equity-based compensation has been significantly reduced for both the restatement and the non-restatement firms after the enactment of the SOX. Prior studies indicate the potential link between option-based CEO compensation and the propensity of misreporting. The findings from this study suggest that restatements are associated with subsequent decreases in the option-based components in executive contracts, thus highlighting the long term compensation consequence of earnings restatements for executives.