Changes In Executive Compensation Research Articles

Media and social media sentiment and CEO pay cuts

PurposeThis study investigates the relationship between media and social media sentiment and the likelihood of CEO pay cuts. The purpose is to examine whether and how these pay cuts influence market reactions. The study aims to provide insights into how external sentiment affects corporate decision-making and market perceptions, particularly in the context of CEO compensation.Design/methodology/approachUsing a sample of 6,331 firm-year observations from 2015 to 2021, this paper employs quantitative analysis to assess the association between media and social media sentiment and CEO pay cuts. We utilise company DEF14A SEC filings to identify CEO pay cut dates and capture traditional media and Twitter sentiment 30-days prior to these filing dates.FindingsWe find a negative association between media and social media sentiment and CEO pay cuts, indicating that firms facing more negative sentiment are more likely to engage in pay cuts. We find evidence that CEO pay cuts are negatively correlated with market reactions, suggesting markets generally do not seem to favour decisions to cut CEO pay. This relationship, however, is complex and influenced by multiple factors, including the nature of sentiment and the specific components of CEO compensation.Research limitations/implicationsThe study faces limitations in identifying the varying degrees of pay cuts and their motivations. Additionally, the content of news articles and Twitter posts used to measure sentiment was not specifically identified, which may affect the accuracy of sentiment measurement.Practical implicationsThis research offers valuable insights for managers and corporate decision-makers, highlighting the potential impact of public sentiment on critical executive compensation decisions.Social implicationsThe study underscores the influence of media and social media in shaping public opinion and driving corporate actions, highlighting the growing intersection between social perceptions and corporate governance. This has broader implications for how firms engage with media platforms and manage their public image, particularly in the realm of executive compensation.Originality/valueWe are the first to study the impact of media and social media sentiment on CEO compensation decisions and market reactions. By employing DEF14A filings as event dates for market reaction studies, we offer a novel approach to analysing the impact of executive compensation changes on market behaviour.

Are federal single audit reports of internal control weaknesses a useful tool for evaluating management? The case of charter schools

PurposeThe authors examine whether reports of internal control weaknesses (ICWs) under federal single audit (FSA) guidelines are a useful tool for evaluating non-profit (NP) management, using a unique nationwide sample of NP charter schools. While prior research focuses on external stakeholder reactions to reported ICWs, little if any research addresses the utility of these reports for internal users. The authors fill this gap in the literature, finding evidence suggesting that NP charter school decision-makers use internal control (IC) reports when setting executive compensation – awarding lower pay increases when deficiencies are reported.Design/methodology/approachThe authors regress executive compensation changes on reported ICWs and likely determinants of NP compensation, including organization size, growth, liquidity and management performance, using a sample of 173 school/year observations representing 113 unique schools for the years 2012–2015.FindingsThe authors find a negative relationship with executive pay increases subsequent to reports of initial and repeated IC deficiencies, indicating that lower than average pay increases are awarded subsequent to reports of ICWs.Research limitations/implicationsInterpretation of the authors' results is subject to several limitations, including the possibility of omitted variable bias and the authors' sample, though it comprises all available data for the sample period, and is relatively small and may be considered exploratory in nature. Further, charter schools represent a unique public/private partnership in the educational sector, and the results may not be generalizable to other NPs. Future research could explore the relationship between reported IC deficiencies and governance in other, broader NP sectors.Practical implicationsThe authors' findings are useful to NP organization boards of directors as they consider what factors to evaluate in their chief executive officer (CEO) compensation decisions. In addition to other criteria, inclusion of IC effectiveness in the CEO reward system is prudent, especially in today's environment of increasingly important information security and IC matters. The results suggest such information is being included. This previously undocumented use is also of particular value to regulators when weighing the costs and benefits of mandating single audits for smaller NPs, who are otherwise unlikely to obtain information on the organization's IC environment.Social implicationsThese findings may help inform the debate regarding NP charter schools, a fast-growing, economically significant and highly controversial sector in public education. Charters are predominantly funded by state and local taxes. As such, the quality of governance in NP charter schools is of interest to a wide range of stakeholders including parents, regulators and the public at large.Originality/valueWhile prior research on ICWs and NPs focuses on external stakeholder reactions to reported ICWs, little if any research addresses the utility of these reports for internal users, especially in relatively smaller organizations. The research leverages the existence of charter schools, which are independent but present nationwide, providing a suitable sample of like organizations. Further, no extant research to the authors' knowledge examines the relationship of NP executive compensation and reported ICWs – a topic previously addressed in the for-profit (FP) literature.

How Executive Compensation Changes In Response to Personal Income Tax Shocks (or Who Pays the CEO’s Income Taxes?)

We study the effects of personal income tax on executive compensation. Using a difference-in-differences approach based on large shocks to personal income tax rates, we find CEOs receive higher pay two years after tax increases. The higher tax burden drives CEOs to sell stock of their firms for liquidity reasons. Accordingly, boards increase equity-based pay to strengthen incentives. Pay raises after tax increases are negatively associated with CEO turnover, while the lack of a pay raise leads to lower firm performance. The effect of personal income tax on compensation is asymmetric; CEOs do not receive pay cuts following tax cuts.

Troubled Asset Relief Program and earnings informativeness

PurposeThe purpose of this paper is to examine restrictions placed by the Troubled Asset Relief Program (TARP) on executive compensation during the financial crisis. Since it remains unclear if TARP restored public confidence in financial institutions, the authors also analyze what effect such regulations had on investors’ confidence in the information provided by earning with respect to executive compensation during this critical period.Design/methodology/approachTo test the assertions, the authors employ an Earnings Response Coefficient model, which captures the association between firms’ earnings surprise (ES) and perceived earnings informativeness. The authors implement both a long- and short-window test to obtain a better understanding of the effects of TARP on financial institutions’ earnings informativeness. The authors use the long-window approach to gather evidence about whether and how financial institutions’ ES are absorbed into security prices conditional on both their participation in TARP and their compliance with TARP’s compensation restrictions. The authors attempt to establish a stronger causal link by also using a short-window approach.FindingsThe authors find that firms paying their CEOs above the TARP threshold show higher earnings informativeness. Financial institutions that paid their CEOs above the TARP threshold achieved better performance during their participation in TARP. The authors also find that a decrease in total compensation while participating in TARP is associated with improved earnings informativeness. Lastly, separating total compensation into its cash and stock-based components, the authors find that firms improve earnings informativeness when they increase (decrease) cash (performance) compensation during TARP. However, overall earnings informativeness decreases during and after TARP relative to the pre-TARP period.Practical implicationsThe research suggests that executive compensation incentives affect earnings informativeness and that tradeoffs are made between direct and indirect costs in retaining executives. The results have implications for policy makers, investors and researchers because the results allow policy makers and regulators to improve on how they design and implement accounting, market and finance regulations and reforms. Investors may potentially use the results when evaluating firm experiencing financial and, in some case, political distress. It also helps firms and offering optimal compensation contracts to create proper incentives for executives and ensure that managerial actions result in successful firm performance.Social implicationsThe study shows how firms react to changing regulations that affect executive compensation and earning informativeness. The results of the study allow regulators to potentially design more effective regulations by targeting certain aspects of firms’ operation such excessive risk-taking behavior and rent extraction opportunities.Originality/valueThere are very few studies that deal with how firms react to regulation that affect executive compensation. The authors provide evidence regarding what effect TARP and its compensation restrictions had on financial institutions’ earnings informativeness. The evidence in the study will further regulators’ understanding of whether TARP improved investors’ confidence in financial institutions. The paper also contributes to the understanding in how changes in executive compensation in times of high political scrutiny affect investors’ perceptions of firm performance.

The Role of The Media in Corporate Governance: Evidence From Shareholder Proposals

This paper examines the role played by the media in the shareholder proposal process. We find a positive relation between media coverage and the likelihood to be targeted by governance proposals. The effect is mostly concentrated in proposals submitted by non-institutional shareholders and driven by negative news. Negative media coverage is also associated with the success of proposals and changes in executive compensation and board turnover. Instrumental variable analysis and tests exploiting local newspaper closures suggest that the relationship between media coverage and shareholder proposals is causal. Our results shed light on a new channel through which the media can play a corporate governance role.

Mergers and executive compensation changes: Evidence from African markets

This study examines the impact of mergers and acquisition deals on various executive pay schemes and factors that drive these pay rise in Africa from 2002 to 2016. We find that executives of African acquiring firms are rewarded significantly for carrying out successful M&A deals in the year of merger. Besides, pay rise is strongly impacted by the size of the deal across all various forms of executive pay. We also find that pay increases are high for executives who acquire private targets but no evidence was found to support the impact of domestic acquisitions. South African executives are rewarded more based on the market perception of the deal quality. Increase in compensation is not affected by industry classification, diversification and international operation, cross-listing and mode of payment, although there is evidence of the influence of equity mode of payment for the South African market. Further, we distinctively examine the impact of corporate governance factors on pay rise and observe that firms with larger outside board of directors’ representation negatively determine executive total pay and there is no evidence that CEO’s age and gender influence executive pay. However, the experience of the CEO has a very high positive influence on the level of compensation for only South African firms.

Earnings Management Over Time

We study a sample of U.S. firms from 1990 to 2012 and investigate how changes in their operating environment impacted their tendency to manage reported earnings. We also study which methods firms use to manage earnings over time, and the relationships among such choices. We detect shifts in earnings management that we associate with significant tax, regulatory, and economic changes over our sample period. Changes in executive compensation are important in explaining some of these shifts. We also find that the relationships between different forms of earnings management vary over time and are more complex than prior research would suggest.

Corporate Litigation and Changes in Executive Compensation and Reputation

Corporate Litigation and Changes in Executive Compensation and Reputation

Compensation and Board Structure: Evidence From the Insurance Industry

ABSTRACT 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. INTRODUCTION A long-standing proposition in organizational economics is that more diffuse ownership reduces incentives to monitor managers and limit managerial perquisite consumption (Berle and Means, 1932). However, dysfunctional managerial incentives can be controlled through an array of governance mechanisms. In this article, we focus on two such mechanisms--board structure and pay-for-performance compensation. Our analysis provides evidence on the monitoring role of the board of directors as well as the effectiveness of pay-for-performance compensation. Importantly, it identifies a positive association between pay-for-performance sensitivity and board structure in mutual insurance companies, consistent with the hypothesis that these two policies are complements. Others have analyzed these control mechanisms. Fama (1980) argues that monitoring by independent directors helps reduce contracting costs that arise between owners and managers. Rosenstein and Wyatt (1990) provide evidence of the importance of independent directors by documenting significantly positive stock returns at the announcement of the appointment of outside directors but returns that are indistinguishable from zero for announcements of inside-director appointments. (1) There also is substantial empirical research that examines the argument by Holmstrom (1979) and Shavell (1979) that tying pay to performance helps reduce contracting costs. This research documents a positive relation between changes in executive compensation and both accounting- and market-based performance measures. (2) Yet these control mechanisms typically are analyzed in isolation--even though they are endogenous and theory suggests important interactions in their selection. Holmstrom and Milgrom (1991) argue that organizational choices represent the selection of an organizational system. In their model, activities compete for an executive's attention and there is a tendency for the levels of incentives provided for the different activities to be complementary in the severity of the contracting problem. They suggest that a critical aspect of organizational analysis is to explain how various policy choices are intertwined, and they derive sufficient conditions for policy choices to be correlated across firms. But we argue that because ownership concentration varies substantially across most populations of common stock companies, the conditions necessary to ensure that policies will be correlated in the cross-section are usually violated. (3) Our data allow us to control for variation in ownership concentration; it is from the insurance industry--an industry with a large contingent of mutual companies. Unlike stock companies, where ownership concentration varies widely, mutuals are diffusely owned. The more limited variation in ownership concentration within this population of companies increases the likelihood of identifying the hypothesized complementary relation between board structure and pay-for-performance compensation. Our mutual insurance company data also control another potential problem. Mutual ownership rights are inalienable; hence, control mechanisms that require alienable ownership rights (like executive stock options) are infeasible. …

Exploring Changes in Management Compensation Structure in Canada: Evidence on the Consequences of Requiring Options Expensing

Existing research findings are mixed on whether increased executive stock option (ESO) use is due to favorable accounting treatment enabling earnings management (EM) and opportunism, or to efforts to improve pay for performance. We use archival data to investigate executive compensation changes in 215 Canadian companies for the years surrounding the amendment to Handbook Section 3870, which requires expensing of ESOs. We find that while ESO use was reduced, ESOs still dominate share-based compensation. Of the opportunism and EM antecedents examined, only political visibility is significant. The substitution rate of RSUs for ESOs is more equal post-amendment, in keeping with firms being more willing to use RSUs once ESOs had to be expensed. However, the pay for performance relationship has not improved post-amendment, even for firms who most reduced ESO use. Unlike U.S. studies, our results overall provide little support for opportunism or EM being a key driver of increased ESO use prior to the amendment.

CEO Incentives—It's Not How Much You Pay, But How*

In this 1990 Harvard Business Review classic, the authors begin by correcting a number of widespread misconceptions: Contrary to headlines at the time, top executives at the end of the 1980s were not receiving record salaries and bonuses. Instead they were catching up to real levels of pay that prevailed during the 1930s and had dropped sharply since then. Annual changes in executive compensation during the 1970s and 1980s were largely unrelated to changes in corporate performance, with CEO total compensation varying by only about $3 with every $1,000 change in shareholder wealth. (And the variability of total CEO pay was no higher than that of the compensation of hourly and salaried employees.) With respect to pay for performance, U.S. compensation practices in the '70s and '80s were getting worse rather than better over time. The percentage of stock ownership by CEOs in large public companies was ten times greater in the 1930s than in the 1980s. And during the previous 15 years (1975‐1989), CEO holdings as a fraction of value had actually fallen. With the aim of reversing these trends, the authors offered three recommendations: Substantial equity ownership by CEOs. Structuring of cash compensation to provide big rewards for outstanding performance and meaningful penalties for poor performance. Increased threat of dismissal for poor performance. Since publication of this article in 1990, the first and third of these goals have largely been accomplished (while the second has proved more elusive).

Changes in executive compensation following an environmental shift: the role of top management team turnover

AbstractIn this study we examine the changes in executive compensation at the top management team (TMT) level following an environmental shift. Using the context of deregulation in the airline industry, we find that: (1) a dramatic environmental change that heightens managerial discretion leads to greater pay level and performance sensitivity of TMT compensation; and (2) the greater the magnitude of turnover among TMT members following the environmental shift, the greater the compensation change. Copyright © 2007 John Wiley & Sons, Ltd.

Can the agency costs of debt and equity explain the changes in executive compensation during the 1990s?

Contracting theory predicts that greater equity-related compensation will decrease the agency problems of equity but may exacerbate the agency problems of debt. We present evidence that the agency costs of debt may have declined during the 1990s. Specifically, changes in the financial characteristics of our sample firms suggest that underinvestment, asset substitution, and financial distress became less likely. Furthermore, agency costs of equity increased during the 1990s, primarily because firms became more difficult to monitor. Together, the findings provide an explanation for why more firms used option-based compensation in the latter 1990s, and why the proportion of options in compensation structure increased throughout the decade of the 1990s.

Sink or Swim? Firms' Responses to Underwater Options

We examine changes in executive compensation that firms make in response to underwater options. Using a sample of firms with underwater options in 2000, we estimate that 81 percent of firms take action to respond to them. We examine explanations for the firms' responses. Opponents argue that it rewards poor performance and transfers wealth unjustifiably from shareholders to executives. We find some support for this argument in that firms with weaker governance structures are more likely to reprice underwater options. Alternatively, firms that respond claim they do so to restore incentives, retain executives, and insulate executives from market-wide or industry-wide factors beyond their control. Our results find evidence in support of these arguments in that restoring incentives and retaining executives seem to be the primary drivers of firms' responses.

How sensitive is executive compensation to organizational size?

AbstractPrior empirical research has documented a large cross‐sectional correlation between the level of executive pay and firm size. In contrast, this paper examines the association between percentage changes in executive compensation and percentage changes in organizational size. We analyze compensation and size data for executives at several levels of the corporate hierarchy for a sample of 303 firms. Our results indicate that the correlation between compensation and size is much smaller, although still statistically significant, in changes than in levels. This suggests that changes in an executive's compensation are not primarily driven by changes in organizational size.

Post‐acquisition financial performance and executive compensation

AbstractThis study reports the results of an empirical analysis of post‐acquisition financial performance and changes in executive compensation. A model of the determinants of cash compensation is presented and tested. Firm size, form of acquisition, executive motivation, and financial performance are analyzed for two groups of acquiring firms. Results are compared to a group of non‐acquiring firms. The financial performance measures include accounting and capital market data for a 4‐year period both preceding and following acquisition activity. The results indicate that, on average, firms which engaged in a major acquisition performed poorly in the post‐acquisition period. Top executives of those firms, on average, experienced significant increases in cash compensation. After controlling for size effects, financial performance related strongly to changes in executive compensation for the non‐acquiring firms, but generally did not relate to changes in executive compensation for the acquiring firms.

CEO INCENTIVES — IT'S NOT HOW MUCH YOU PAY, BUT HOW*

In this 1990 Harvard Business Review classic, the authors begin by correcting a number of widespread misconceptions: •Contrary to headlines at the time, top executives at the end of the 1980s were not receiving record salaries and bonuses. Instead they were catching up to real levels of pay that prevailed during the 1930s and had dropped sharply since then. •Annual changes in executive compensation during the 1970s and 1980s were largely unrelated to changes in corporate performance, with CEO total compensation varying by only about $3 with every $1,000 change in shareholder wealth. (And the variability of total CEO pay was no higher than that of the compensation of hourly and salaried employees.) •With respect to pay for performance, U.S. compensation practices in the '70s and '80s were getting worse rather than better over time. The percentage of stock ownership by CEOs in large public companies was ten times greater in the 1930s than in the 1980s. And during the previous 15 years (1975-1989), CEO holdings as a fraction of value had actually fallen. With the aim of reversing these trends, the authors offered three recommendations: •Substantial equity ownership by CEOs. •Structuring of cash compensation to provide big rewards for outstanding performance and meaningful penalties for poor performance. •Increased threat of dismissal for poor performance. Since publication of this article in 1990, the first and third of these goals have largely been accomplished (while the second has proved more elusive).

Introduction: Do Compensation Policies Matter?

Excerpt] The papers in this volume should give the reader a sense of the exciting empirical research that has recently taken place on compensation-related issues. As a set, these papers considerably expand our empirical evidence on the effects of compensation policies. Several papers show that executive compensation is structured in a way that at least implicitly ties executive compensation changes to measures of corporate performance, and —crucially—that doing so leads to improved corporate performance (Leonard, Murphy/ Gibbons, Abowd). Others show that compensation systems that pay workers for performance, in the sense of providing explicit or implicit incentives for high levels of performance, can motivate individuals to increase their effort levels (Ehrenberg/Bognanno, Hamermesh, Asch, Kahn/Sherer). Still others show that high-wage policies do have some of the effects that proponents of efficiency wage theories claim for them (Krueger/ Groshen, Holzer). Finally, one shows that profit-sharing plans appear, at least weakly, to increase employment stability (Chelius/Smith).