Managerial Power Hypothesis Research Articles

Not so Lucky Any More: CEO Compensation in Financially Distressed Firms

There is a debate on whether executive pay reflects rent extraction due to or is the result of arms-length bargaining in a principal-agent framework. In this paper we offer a test of the managerial power hypothesis by empirically examining the CEO compensation of U.S. public companies that were ever in financial distress between 1992 and 2005. Using a bias-corrected matching estimator that estimates the causal effects of financial distress, we find that, for the distressed firms, CEO turnover rates increase markedly and their CEOs, both incumbents and successors, experience significant reductions in total compensation. The bulk of the reduction in total compensation derives from the decline in value of stock option grants, which we argue is due to a change in the opportunistic timing of option grants. We define grants as those with grant prices below or at the lowest stock price of the grant month, and we find that the proportion of lucky grants for financially distressed firms is higher before insolvency and lower upon and after insolvency, while the proportion for similar but solvent firms remains stable throughout the period. We interpret this evidence as consistent with a decrease in managerial power induced by a tightening in the outrage constraint due to the episode of financial distress.

Pay Without Performance and the Managerial Power Hypothesis: A Comment

Executive compensation and corporate governance problems need to be seen in a larger historical context than is commonly done. The proximate causes of corporate scandals and executive pay problems have been identified, but the real drivers have not. A need for corporate restructuring, which emerged already in the 1970s, led to the remarkable rise in shareholder influence and the relentless pursuit for shareholder value. It placed exceptional demands on boards and led to extreme pay schemes that appear to have served the restructuring purposes well, but had unintended and unfortunate side-effects. In contemplating pay and governance reforms, it is essential to keep in mind the longer chain of events to avoid naive corrective measures that do not take into account the information and incentive constraints under which the various constituents and bodies in the larger governance system, especially the boards and shareholders, operate. Some of the recent advice on executive compensation seems very misguided in a longer historical perspective as is the push for extensive shareholder intervention rights.

The managerial power impact on compensation – some further evidence

The aim of this paper is to test the managerial power hypothesis more rigorously than in previous studies by: testing it against the compensating wage differentials explanation, using both cross-sectional and longitudinal data, and adopting two alternative measures of managerial power; a frequently used indirect one, and a more direct power indicator. The results of analysis show that despite introducing individual characteristics, when using two or three alternative measures of managerial power and when estimating the managerial compensation model on cross-sectional as well as longitudinal data (the later allowing me to cater for unobserved heterogeneity), the power variables continue to obtain positive and statistically significant co-efficient estimates.