Highest Paid Executives Research Articles

Corporate Tax Breaks and Executive Compensation

I analyze the effect of two corporate tax breaks, bonus depreciation and the Domestic Production Activities Deduction (DPAD), on executive compensation in publicly traded US firms. I find both tax breaks significantly increase executive compensation. For every dollar a firm benefits from the tax breaks, compensation of the firm’s top five highest-paid executives increases by $0.17 to $0.25. The tax breaks increase compensation primarily in firms with weaker governance structures, suggesting the compensation response is driven by executive rent extraction. (JEL D22, G34, H25, M12, M52)

How executive remuneration responds to guidance: evidence from the Australian banking industry

AbstractThis study investigates whether executive remuneration responds to regulatory guidance. Using an exogenous shock in the form of a regulatory guideline issued by the Australian Prudential Regulation Authority to the Australian banking industry, we analyse whether remuneration is more aligned to prudent risk‐taking since the guideline was published. We find that remuneration to both chief executive officers and the top five highest paid executives was adjusted to be more consistent with the guideline from its first year of operation. These findings are robust to the introduction of the Two Strikes Rule as an alternative explanation.

Is Textual Tone Informative or Inflated for Firm’s Future Value? Evidence from Chinese Listed Firms

Using a sample of listed firms from 2012 to 2017 in the A-share markets of Shanghai Stock Exchange, we examine how textual tone influences a firm’s future value based on a total of 4694 annual reports. We find that the tone of the Management Discussion and Analysis (MD&A) sends a signal of managers’ expectations of the firm and generates a long-term effect on market responses. We show that firms with more optimistic MD&A tone tend to present higher firm value. We further discover that such impact is weakened for the firms with higher-paid executives and more independent directors. Our empirical results are robust to a battery of checks.

Does Corporate Culture Add Value? Evidence from the Harvey Weinstein Scandal and the #MeToo Movement

During the Harvey Weinstein and #MeToo events, firms with a non-sexist corporate culture, proxied by having women among the five highest paid executives, earn excess returns of 1.6%. Returns for firms with female executives are substantially higher in industries with few women in executive positions, and for firms headquartered in states with a high level of sexism or gender pay gap. Firms in industries with many female executives or headquartered in less sexist states also earn positive abnormal returns, irrespective of whether they have female leaders themselves. Firms without female top executives exhibit improvements in gender diversity after the Weinstein/#MeToo events. Our evidence attests to the value of having a non-sexist culture.

The Effect of Local Tournament Incentives on Firms' Performance, Risk-Taking Decisions, and Financial Reporting Decisions

ABSTRACT This study documents the existence of local employment preferences for corporate executives and examines how the compensation of executives' local peers affects their own performance, risk-taking decisions, and financial reporting decisions. We find that external hires of new CEOs (CFOs) are five (eight) times more likely to be from local firms than non-local firms. We also find that local tournament incentives—as proxied by the pay gap between an executive and higher-paid executives in the area—are associated with stronger performance, greater risk taking, and more financial misreporting. We find consistent results using a difference-in-differences analysis that exploits plausibly exogenous variation in local tournament incentives caused by the sudden death of a local CEO. Our findings are consistent with executives taking actions to compete for a promotion to a nearby firm with higher pay.

The Effect of Local Tournament Incentives on Firmss Performance, Risk-Taking Decisions, and Financial Reporting Decisions

This study documents the existence of local employment preferences for corporate executives and examines how the compensation of executives’ local peers affects their own performance, risk-taking decisions, and financial reporting decisions. We find that external hires of new CEOs (CFOs) are five (eight) times more likely to be from local firms than non-local firms. We also find that local tournament incentives—as proxied by the pay gap between an executive and higher-paid executives in the area—are associated with stronger performance, greater risk taking, and more financial misreporting. We find consistent results using a difference-in-difference analysis that exploits plausibly exogenous variation in local tournament incentives caused by the sudden death of a local CEO. Our findings are consistent with executives taking actions to compete for a promotion to a nearby firm with higher pay. In addition, we find the effect of local tournament incentives is larger when local mobility is greater and executives’ local preferences are stronger.

The Mismeasure of Mammon: Uses and Abuses of Executive Pay Data

On April 7, 2016, the Wall Street Journal ran an article headlined “CEO pay shrank most since financial crisis,” while on May 27, 2016, a similar New York Times story declared “Top CEO pay fell – yes, fell – in 2015.” Unfortunately, both the Journal and the Times mismeasured the actual take-home pay of each and every one of these CEOs in 2014 and 2015. The reason for this mismeasure is that both articles relied on “fair value” estimates of the stock-based pay of these CEOs as reported in the Summary Compensation Table of the definitive proxy statement (Form DEF 14A) that each publicly listed company files annually with the U.S. Securities and Exchange Commission (SEC). Yet the very same proxy statements also report the actual realized gains of these CEOs in the Option Exercises and Stock Vested Table. It is the realized gains on stock-based pay, not fair-value estimates, that enter into the total compensation that a CEO actually takes home and reports as income in his or her income-tax return.Moreover, including actual realized gains instead of estimated fair value of stock– based pay in the measure of total executive compensation can make a big difference. In 2015 the average total compensation of the 500 highest-paid executives named on corporate proxy statements based on actual realized gains was $32.6 million, with 82 percent coming from stock-based pay. But average total compensation of the 500 highest paid based on estimated fair value was $17.1 million, with 62 percent attributable to stock- based pay. The excess of total actual realized-gains compensation over total estimated fair-value compensation was greatest in those years when the stock market was booming.Why would the Wall Street Journal and the New York Times report estimates of executive pay when they could be reporting the CEOs’ actual pay? In this paper, we answer this question by explaining the origins of the “fair value” estimates of stock-based pay and how the obsession with these estimates by the SEC, relying on the business-run Financial Accounting Standards Board (FASB), has relegated to statistical obscurity executives’ readily available, accurate, and actual realized gains from stock-based pay. We use Standard & Poor’s ExecuComp database to document that a) stock-based pay, in the forms of realized gains from stock options and stock awards, dominates both the size of and the changes over time in the total compensation of the highest-paid senior executives; and b) the fair-value estimates of stock-based pay tend to understate, often substantially, the realized gains from stock-based pay that these executives actually receive.An irony is that even critics of excessive executive pay, most notably the AFL-CIO on its Executive Paywatch website, use the fair-value estimates when the actual CEO compensation numbers would reveal a much larger ratio of CEO pay to the earnings of the average worker. Indeed, as we discuss in the conclusion to this paper, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, this mismeasure of executive pay has become institutionalized in U.S. government policy in the SEC’s Pay Ratio Disclosure Rule, which beginning in 2017 requires every company to publish the ratio of CEO to median-worker pay. Under this rule, the SEC requires companies to use the fair-value measure of CEO pay. The Pay Ratio Disclosure Rule is supposed to provide the public with a company-level indicator of income inequality. Instead it will tend to underestimate inequality, substituting fictitious estimates for actual known amounts of income that CEOs put into their bank accounts and declare in their income-tax returns.

General Counsel Prominence and Corporate Tax Policy

ABSTRACTPrior research provides evidence that individual executives have a significant effect on firm-level tax policy. Further research has shown that having a corporate general counsel (GC) in a firm's top management team (top five highest-paid executives) significantly affects a firm's accounting and disclosure practices. In this paper, we examine the role of the GC in corporate tax policy. Specifically, we use the ascension of the corporate GC to top management as the identifying event in which the role and influence of the corporate GC becomes more salient. We find strong evidence that GC ascension to top management is associated with an increase in tax aggressiveness, as evidenced by greater book-tax differences and a higher likelihood of engaging in tax shelter activities.Data Availability: Data are obtained from public sources identified in the paper.

Pay Disparity, External Pay Alternatives and Turnover of the Second Best Paid Executive

We contribute to the intersection of top executive turnover and compensation research by investigating pay structure implications on turnover, focusing on the second best-paid executive as the one being closest to winning the tournament for the best-paid position. Building on tournament theory and using competing-risks survival regression, we develop and test hypotheses with regard to the effects of pay disparity among a firm’s top executives and external pay alternatives on the exit of the second best-paid executive. For a sample of S&P 500 firms in the 14-year period between 1993 and 2006, we find that comparisons with higher paid executives and external pay alternatives matter for individuals’ decisions whether to stay in or to leave a pay tournament, whereas comparisons to lower paid executives do not.

"Pay Disparity, External Pay Alternatives and Turnover of the Second Best Paid Executive"

We contribute to the intersection of top executive turnover and compensation research by investigating pay structure implications on turnover, focusing on the second best-paid executive as the one being closest to winning the tournament for the best-paid position. Building on tournament theory and using competing-risks survival regression, we develop and test hypotheses with regard to the effects of pay disparity among a firm’s top executives and external pay alternatives on the exit of the second best-paid executive. For a sample of S&P 500 firms in the 14-year period between 1993 and 2006, we find that comparisons with higher paid executives and external pay alternatives matter for individuals’ decisions whether to stay in or to leave a pay tournament, whereas comparisons to lower paid executives do not.

Managerial power theory, tournament theory, and executive pay in China

In this paper, we test two models of executive pay that have not received much attention in research on Chinese listed companies: managerial power theory and tournament theory. We find that structural power (executive share ownership) and prestige power (executive education) are significantly positively related to executive remuneration, and political power (Executive/Party Secretary duality) positively and weakly related to executive remuneration. We also find that executive directors' organization level (as reflected in executive pay level for each of the three highest paid executives) is positively related to executive remuneration and the relationship is convex, and negatively related to the interaction between executive directors' organization level and government ownership. Tournament prize (executive pay) is not related to the number of contestants in the tournament and is negatively related to the interaction term between number of contestants and government ownership. Finally, earnings per share (EPS) as a measure of firm performance is positively related to the pay gap between contestants and negatively related to the interaction term between pay gap and government ownership. We explore the implications of these findings for reforming corporate governance in China.

Media Attention & Executive Pay in the Netherlands

This report is centered around three research questions on newspaper coverage and executive compensation in The Netherlands. 1) How has the coverage developed over the years? 2) How selective are newspapers in their coverage? And 3) What are the influences of newspaper coverage on executive compensation? Based on the articles that have appeared in the period 1998- mid 2009, it can be concluded that the attention by newspapers is not only of the most recent years. Newspapers do not systematically focus on the better or worse performing companies and do also not focus on the higher or highest paid executives. Instead, they focus on the bigger organizations that have received attention in the past. The results furthermore show that the effects of past media attention drives current cash compensation upwards. On the basis of these results it can be expected that the same companies will reappear in newspapers articles in the future, with higher paid executives, despite the media attention they will receive.

The impact of pay on CEO turnover: A test of two perspectives

We investigate the impact of pay on CEO turnover from two perspectives. One is managerial power perspective that focuses on power in the setting of CEO pay. The other is tournament theory that treats CEO pay as a top prize designed to motivate executives to work hard for the top position. Building on research that highlights the impact of power dynamics at the top of the firm on CEO turnover, we propose that managerial power perspective suggests a negative impact of CEO pay on CEO turnover, while tournament theory suggests a positive impact. Using data from a sample of 313 large U.S. companies from 1988 to 1997, we find that both the level of CEO pay and its ratio over the average pay of the firm's four other highest paid executives have a negative impact on CEO turnover.

An exploration into the content of the compensation discussion & analysis document

This paper presents the results of a survey of Compensation Discussion and Analysis (CD&A) documents from 32 publicly listed U.S. companies. Our aim was to probe the extent to which companies are providing investors, through the CD&A, with an easy to understand and complete assessment of the compensation provided to their highest paid executives. Using a detailed content analysis, the results show that while companies are complying somewhat with regulatory requirements, they are failing to meet the intent of the CD&A, which is, to provide completeness, transparency and understanding regarding a firm’s executive compensation. A number of recommendations for change is also proposed.

Business, Knowledge, and Global Growth

Business Week found that only 146 of the 500 highest-paid executives at very large companies had MBAs. A 2002 Stanford study reported that: “What data there are suggest that business schools are not very effective: Neither possessing an MBA degree nor grades earned in courses correlate with career success . . .” And the quote continues: “And, there is little evidence that business school research is influential on management practice, calling into question the professional relevance of management scholarship.”

Long-Term Disability Protection for Executives

Employer-provided group long-term disability insurance typically falls short in covering higher paid executives for several reasons. First, although group plans cover a percentage of salary, they often exclude bonus and other nonsalary compensation. Second, group plans impose maximum benefit limits. Sadly, employers and employees often fail to realize how devastatingly inadequate executive coverage is until disability strikes. Employers can help executives close this gap by sponsoring an optional supplemental long-term disability insurance plan. Under these plans, executives pay for individual supplemental policies that cover nonsalary compensation and have higher dollar limits. The individual policies are noncancelable, include premium discounts unavailable outside of the plan and are portable. Sponsoring a supplemental plan is an increasingly popular way for employers to provide a crucial executive benefit at little or no cost to companies and with little continuing effort required by HR departments.

Non-CEOs as the Highest Paid Executives: Evidence from the Insurance Industry

This article identifies instances where the CEO was not the highest paid corporate executive and presents reasons for this aberrant compensation behavior. The findings suggest that such instances are an exception to the traditional understanding of compensation structures rather than the norm. The study found that the base pay and bonus paid to the CEO who was not the highest paid executive was similar to that paid to the highest paid executive. The difference in compensation can be attributed to long-term compensation and option grants. The study also found that asset growth and revenue growth at companies where the CEO was not the highest paid executive lagged the asset growth and revenue growth of peer institutions.

The Gender Gap in Top Corporate Jobs

Using the ExecuComp data set, which contains information on the five highest-paid executives in each of a large number of U.S. firms for the years 1992–97, the authors examine the gender compensation gap among high-level executives. Women, who represented about 2.5% of the sample, earned about 45% less than men. As much as 75% of this gap can be explained by the fact that women managed smaller companies and were less likely to be CEO, Chair, or company President. The unexplained gap falls to less than 5% with an allowance for the younger average age and lower average seniority of the female executives. These results do not rule out the possibility of discrimination via gender segregation or unequal promotion. Between 1992 and 1997, however, women nearly tripled their participation in the top executive ranks and also strongly improved their relative compensation, mostly by gaining representation in larger corporations.

The Gender Gap in Top Corporate Jobs

This paper studies the gender compensation gap among high-level executives in US corporations. We use the ExecuComp data set that contains information on total compensation for the top five highest paid executives of a large group of US firms over the period 1992-1997. About 2.5% of the executives in the sample are women. These women earn about 45% less than their male counterparts. As much as 75% of this gap can be accounted for by the fact that women manage smaller companies and are less likely to be CEO, Chair, or President of their company. The unexplained gender gap can be reduced to less than 5% when one further accounts for the fact that female executives are younger and have less seniority than male executives. Over the period under study, women have nearly tripled their participation in the top executive ranks and have also strongly improved their relative compensation, mostly by gaining representation into the larger corporations. While the absence of a significant gender gap (once we control for measurable characteristics) implies that women and men who hold similar jobs in firms of similar size received fairly equal treatment in terms of compensation, it does not rule out the possibility of discrimination in terms of gender segregation or promotion.

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

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.