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  • 100% CEO Compensation December 2010
    Carola Frydman, Dirk Jenter

    This paper surveys the recent literature on CEO compensation. The rapid rise in CEO pay over the past 30 years has sparked an intense debate about the nature of the pay-setting process. Many view the high level of CEO compensation as the result of powerful managers setting their own pay. Others interpret high pay as the result of optimal contracting in a competitive market for managerial talent. We describe and discuss the empirical evidence on the evolution of CEO pay and on the relationship between pay and firm performance since the 1930s. Our review suggests that both managerial power and competitive market forces are important determinants of CEO pay, but that neither approach is fully consistent with the available evidence. We briefly discuss promising directions for future research.

    CEO COMPENSATION Carola Frydman Dirk Jenter WORKING PAPER 16585 NBER WORKING PAPER SERIES CEO COMPENSATION Carola Frydman Dirk Jenter Working Paper 16585 https://www.nber.org/papers/w16585 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2010 We thank Jeffrey Coles, Alex Edmans, Eitan Goldman, Todd Milbourn, Kevin J. Murphy, Stew Myers, David...

    /papers/w16585

  • 99% Executive Compensation: A Survey of Theory and Evidence July 2017
    Alex Edmans, Xavier Gabaix, Dirk Jenter

    This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -- shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research.

    ...CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -- shareholder value maximization by boards, rent extraction by executives, and institutional factors such...

    /papers/w23596

  • 99% Why Has CEO Pay Increased So Much? July 2006
    Xavier Gabaix, Augustin Landier

    This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO%u2019s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.

    ...CEO PAY INCREASED SO MUCH? Xavier Gabaix Augustin Landier Working Paper 12365 https://www.nber.org/papers/w12365 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2006 xgabaix@princeton.edu , alandier@stern.nyu.edu . We thank Hae Jin Chung, Sean Klein and Chen Zhao for excellent research assistance. For helpful comments, we thank Daron Acemoglu, Lucian Bebchuk...

    /papers/w12365

  • 99% Microsoft Word - FM_June30_08StLouis.doc
    fferri

    ...on pay”) at the annual general meeting. Based on a large sample of UK firms over the period from 2000 to 2005, we find no evidence of a change in the level and growth rate of CEO pay after the adoption of say on pay. However, we document an increase in the sensitivity of CEO cash and total compensation to negative operating performance, particularly in firms with excessive compensation in the...

    /conferences/2008/si2008/CL/ferri.pdf

  • 99% Risk and the CEO Market: Why Do Some Large Firms Hire Highly-Paid, Low-Talent CEOs? May 2010
    Alex Edmans, Xavier Gabaix

    This paper presents a market equilibrium model of CEO assignment, pay and incentives under risk aversion and heterogeneous moral hazard. Each of the three outcomes can be summarized by a single closed-form equation. In assignment models without moral hazard, allocation depends only on firm size and the equilibrium is efficient. Here, talent assignment is distorted by the agency problem as firms involving higher risk or disutility choose less talented CEOs. Such firms also pay higher salaries in the cross-section, but economy-wide increases in risk or the disutility of being a CEO (e.g. due to regulation) do not affect pay. The strength of incentives depends only on the disutility of effort and is independent of risk and risk aversion. If the CEO affects the volatility as well as mean of firm returns, incentives rise and are increasing in risk and risk aversion. We calibrate the efficiency losses from various forms of poor corporate governance, such as failures in monitoring and inefficiencies in CEO assignment. The losses from misallocation of talent are orders of magnitude higher than from inefficient risk-sharing.

    ...AND THE CEO MARKET: :+<'2620(/$5*(),506+,5( HIGHLY-PAID, LOW-TALENT CEOS? Alex Edmans Xavier Gabaix WORKING PAPER 15987 NBER WORKING PAPER SERIES RISK AND THE CEO MARKET: WHY DO SOME LARGE FIRMS HIRE HIGHLY-PAID, LOW-TALENT CEOS? Alex Edmans Xavier Gabaix Working Paper 15987 https://www.nber.org/papers/w15987...

    /papers/w15987

  • 99% Pay, Performance, and Turnover of Bank CEOs February 1990
    Jason R. Barro, Robert J. Barro

    We studied the relation of CEO pay and turnover to performance and characteristics of companies in a new data set that covers large commercial banks over the period 1982-87. For newly hired CEOs, the elasticity of pay with respect to assets is about one-third. As experience increases, the correlation between compensation and assets diminishes for about four years and then rises back to its initial value. We interpret these findings along the lines of Rosen's matching model, allowing for adjustments of compensation and bank assets and for possible dismissal of the CEO. For continuing CEOs, the change in compensation depends on performance as measured by stock and accounting returns. The sensitivity of pay to performance diminishes with experience, and there is no indication that stock or accounting returns are filtered for aggregate returns. Logit regressions relate the probability of CEO departure to age and performance. The relevant measure of performance in this context is stock returns filtered for average returns of banks in the same year and geographical region.

    ...1990 . PAY, PERFORMANCE, AND TURNOVER OF BANK CEOs ABSTRACT We studied the relation of CEO pay and turnover to performance and characteristics of companies in a new data set that covers large commercial banks over the period 1982-87. For newly hired CEOs, the elasticity of pay with respect to assets is about one-third. As experience increases, the correlation between compensation and assets...

    /papers/w3262

  • 99% CEO Pay and the rise of Relative Performance Contracts: A Question of Governance? July 2016
    Brian Bell, John Van Reenen

    Would moving to relative performance contracts improve the alignment between CEO pay and performance? To address this we exploit the large rise in relative performance awards and the share of equity pay in the UK over the last two decades. Using new employer-employee matched datasets we find that the CEO pay-performance relationship remains asymmetric: pay responds more to increases in shareholders’ return performance than to decreases. Further, this asymmetry is stronger when governance appears weak. Second, there is substantial “pay-for-luck” as remuneration increases with random positive shocks, even when the CEO has equity awards that explicitly condition on firm performance relative to peer firms in the same sector. A reason why relative performance pay fails to deal with pay for luck is that CEOs who fail to meet the terms of their past performance awards are able to obtain more generous new equity rewards in the future. Moreover, this “compensation effect” is stronger when the firm has weak corporate governance. These findings suggest that reforms to the formal structure of CEO pay contracts are unlikely to align incentives in the absence of strong shareholder governance.

    ...CEO PAY AND THE RISE OF RELATIVE PERFORMANCE CONTRACTS: A QUESTION OF GOVERNANCE? Brian Bell John Van Reenen Working Paper 22407 https://www.nber.org/papers/w22407 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 July 2016 We thank Towers Watson for providing some of the data, although the views expressed are those of the authors and not Towers Watson. We have...

    /papers/w22407

  • 99% The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies April 2003
    Raghuram Rajan, Julie Wulf

    Using a detailed database of managerial job descriptions, reporting relationships, and compensation structures in over 300 large U.S. firms we find that the number of positions reporting directly to the CEO has gone up significantly over time. We also find that the number of levels between the lowest managers with profit center responsibility (division heads) and the CEO has decreased and more of these managers are reporting directly to the CEO. Moreover, more of these managers are being appointed officers of the company. It does not seem that divisional heads are handling larger tasks making them important enough to report directly. Instead, our findings suggest that layers of intervening management are being eliminated and the CEO is coming into direct contact with more managers in the organization, even while managerial responsibility is being extended downwards. Consistent with this, we find that the elimination of the intermediate position of Chief Operating Officer accounts for a significant part (but certainly not all) of the increase in CEO reports. It is also accompanied with greater authority being given to divisional managers. The structure of pay is also different in flatter organizations. Pay and long term incentives are becoming more like that in a partnership. Salary and bonus at lower levels are lower than in comparable positions in a tall organization, but the pay differential is steeper to the top. At the same time, employees in flatter organizations seem to have more long term pay incentives like stock and stock options offered to them. Drawing on theories, we offer some conjectures to explain these patterns.

    ...the CEO has decreased and more of these managers are reporting directly to the CEO. Moreover, more of these managers are being appointed officers of the comp any. It does not seem that divisional heads are handling larger tasks making them important enough to report directly. Instead, our findings suggest that layers of intervening management are bei ng eliminated and the CEO is coming into...

    /papers/w9633

  • 99% How has CEO Turnover Changed? Increasingly Performance Sensitive Boards and Increasingly Uneasy CEOs August 2006
    Steven N. Kaplan, Bernadette Minton

    We study CEO turnover - both internal (board driven) and external (through takeover and bankruptcy) - from 1992 to 2005 for a sample of large U.S. companies. Annual CEO turnover is higher than that estimated in previous studies over earlier periods. Turnover is 14.9% from 1992 to 2005, implying an average tenure as CEO of less than seven years. In the more recent period since 1998, total CEO turnover increases to 16.5%, implying an average tenure of just over six years. Internal turnover is significantly related to three components of firm performance - performance relative to industry, industry performance relative to the overall market, and the performance of the overall stock market. Also in the more recent period since 1998, the relation of internal turnover to performance is more strongly related to all three measures of performance in the contemporaneous year. External turnover is not significantly related to any of the measures of stock performance over the entire sample period, nor over the two sub-periods. We discuss the implications of these findings for various issues in corporate governance.

    ...HOW HAS CEO TURNOVER CHANGED? INCREASINGLY PERFORMANCE SENSITIVE BOARDS AND INCREASINGLY UNEASY CEOS Steven N. Kaplan Bernadette A. Minton Working Paper 12465 https://www.nber.org/papers/w12465 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August 2006 This research has been supported by the Center for Research in Security Prices, by the Lynde and Harry Bradley...

    /papers/w12465

  • 99% Firm Expansion and CEO Pay December 2005
    Lucian Bebchuk, Yaniv Grinstein

    We study the extent to which decisions to expand firm size are associated with increases in subsequent CEO compensation. Controlling for past stock performance, we find a positive correlation between CEO compensation and the CEO's past decisions to increase firm size. This correlation is economically meaningful; for example, other things being equal, CEOs who in the preceding three years were in the top quartile in terms of expanding by increasing the number of shares outstanding receive compensation that is higher by one-third than the compensation of CEOs belonging to the bottom quartile. We also find that stock returns are correlated with subsequent CEO pay only to the extent that they contribute to expanding firm size; only the component of past stock returns not distributed as dividends is correlated with subsequent CEO pay. Finally, we find an asymmetry between increases and decreases in size: while increases in firm size are followed by higher CEO pay, decreases in firm size are not followed by reduction in such pay. The association we find between CEOs' compensation and firm-expanding decisions undertaken earlier during their service could provide CEOs with incentives to expand firm size.

    ...AND CEO PAY Lucian Bebchuk Yaniv Grinstein Working Paper 11886 https://www.nber.org/papers/w11886 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2005 We are grateful to Arturo Bris, John Core, Cliff Holderness, Lu Zhang, and participants in workshops at Harvard University, University of Rochester, and the NBER for helpful comments and discussions. For...

    /papers/w11886

  • 99% Executive Compensation: A Modern Primer April 2015
    Alex Edmans, Xavier Gabaix

    This article studies traditional and modern theories of executive compensation, bringing them together under a unifying framework. We analyze assignment models of the level of pay, and static and dynamic moral hazard models of incentives, and compare their predictions to empirical findings. We make two broad points. First, traditional optimal contracting theories find it difficult to explain the data, suggesting that compensation results from "rent extraction" by CEOs. In contrast, more modern theories that arguably better capture the CEO setting do deliver predictions consistent with observed practices, suggesting that these practices need not be inefficient. Second, seemingly innocuous features of the modeling setup, often made for tractability or convenience, can lead to significant differences in the model's implications and conclusions on the efficiency of observed practices. We close by highlighting apparent inefficiencies in executive compensation and additional directions for future research.

    ...pay, and static and dynamic moral hazard models of incentives, and compare their predictions to empirical findings. We make two broad points. First, traditional optimal contracting theories find it difficult to explain the data, suggesting that compensation results from "rent extraction" by CEOs. In contrast, more modern theories that arguably better capture the CEO setting do deliver predictions...

    /papers/w21131

  • 99% Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence July 1991
    Robert Gibbons, Kevin J. Murphy

    This paper studies career concerns -- concerns about the effects of current performance on future compensation -- and describes how optimal incentive contracts are affected when career concerns are taken into account. Career concerns arise frequently: they occur whenever the market uses a worker's current output to update its belief about the worker's ability and competition then forces future wages (or wage contracts) to reflect these updated beliefs. Career concerns are stronger when a worker is further from retirement, because a longer prospective career increases the return to changing the market's belief. In the presence of career concerns, the optimal compensation contract optimizes total incentives -- the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest when a worker is close to retirement. We find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance.

    ...pay to be completely independent of current performance. Our formal model examines the career concerns that arise from competition among current and prospective employers in an external labor market, but career concerns also arise in internal labor markets, in two ways. First, competition among divisions within a firm (or even among supervisors within the same division) can mimic the competition...

    /papers/w3792

  • 99% Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry December 1994
    Paul L. Joskow, Nancy L. Rose, Catherin D. Wolfram

    This study explores the effect of regulatory and political constraints on the level of CEO compensation for 87 state-regulated electric utilities during 1978-1990. The results suggest that political pressures may constrain top executive pay levels in this industry. First, CEOs of firms operating in regulatory environments characterized by investment banks as relatively `pro-consumer' receive lower compensation than do CEOs of firms in environments ranked as more friendly to investors. Second, CEO pay is lower for utilities with relatively high or rising rates, or a higher proportion of industrial sales, consistent with earlier research that describes political pressures on electricity rates. Finally, attributes of the commission appointment and tenure rules affect CEO compensation in ways consistent with the political constraint hypothesis: for example, pay is lower in states with elected commissioners than in states where commissioners are appointed by the governor, all else equal. Despite apparently effective pressure to constrain pay levels in this sector, however, we find no evidence of related intra-industry variation in the sensitivity of pay to firm financial performance.

    ...pay levels in this industry. First, CEOs of firms operating in regulatory environments characterized by investment banks as relatively "proconsumer" receive lower compensation than do CEOs of firms in environments ranked as more friendly to investors. Second, CEO pay is lower for utilities with relatively high or rising rates, or a higher proportion of industrial sales, consistent with earlier...

    /papers/w4980

  • 99% Executive Compensation in America: Optimal Contracting or Extraction of Rents? December 2001
    Lucian Arye Bebchuk, Jesse M. Fried, David I. Walker

    This paper develops an account of the role and significance of rent extraction in executive compensation. Under the optimal contracting view of executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value by designing an optimal principal-agent contract. Under the alternative rent extraction view that we examine, the board does not operate at arm's length; rather, executives have power to influence their own compensation, and they use their power to extract rents. As a result, executives are paid more than is optimal for shareholders and, to camouflage the extraction of rents, executive compensation might be structured sub-optimally. The presence of rent extraction, we argue, is consistent both with the processes that produce compensation schemes and with the market forces and constraints that companies face. Examining the large body of empirical work on executive compensation, we show that the picture emerging from it is largely compatible with the rent extraction view. Indeed, rent extraction, and the desire to camouflage it, can better explain many puzzling features of compensation patterns and practices. We conclude that extraction of rents might well play a significant role in U.S. executive compensation; and that the significant presence of rent extraction should be taken into account in any examination of the practice and regulation of corporate governance.

    ...pay arrangements are set by a board of directors that aims to maximize shareholder value by designing an optimal principal-agent contract. Under the alternative rent extraction view that we examine, the board does not operate at arm's length; rather, executives have power to influence their own compensation, and they use their power to extract rents. As a result, executives are paid more than is...

    /papers/w8661

  • 99% Growth through Rigidity: An Explanation for the Rise in CEO Pay February 2016
    Kelly Shue, Richard Townsend

    The dramatic rise in CEO compensation during the 1990s and early 2000s is a longstanding puzzle. In this paper, we show that much of the rise can be explained by a tendency of firms to grant the same number of options each year. Number-rigidity implies that the grant-date value of option awards will grow with firm equity returns, which were very high on average during the tech boom. Further, other forms of CEO compensation did not adjust to offset the dramatic growth in the value of option pay. Number-rigidity in options can also explain the increased dispersion in pay, the difference in growth between the US and other countries, and the increased correlation between pay and firm-specific equity returns. We present evidence that number-rigidity arose from a lack of sophistication about option valuation that is akin to money illusion. We show that regulatory changes requiring transparent expensing of the grant-date value of options led to a decline in number-rigidity and helps explain why executive pay increased less with equity returns during the housing boom in the mid-2000s.

    ...IN CEO PAY Kelly Shue Richard Townsend Working Paper 21975 https://www.nber.org/papers/w21975 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2016 Corresponding author: Kelly Shue, 5807 S. Woodlawn Ave., Chicago, IL 60637, USA, Tel: 773-834-0046, kelly.shue@chicagobooth.edu. We are grateful to William Schwert (the editor), an anonymous referee, Rajesh...

    /papers/w21975

  • 99% gabaix

    ...CEO incentives and total pay in market equilibrium. We embed the traditional principal-agent framework into a competitive assignment model, where managerial talent determines total wages and the size of one’s …rm. This generates quantitative predictions for the optimal level of CEO incentives and their scaling with …rm size. We empirically evaluate the model and show that observed practices...

    /conferences/2007/si2007/CF/gabaix.pdf

  • 99% Executive Pensions December 2005
    Lucian A. Bebchuk, Robert J. Jackson, Jr.

    Because public firms are not required to disclose the monetary value of pension plans in their executive pay disclosures, financial economists have generally analyzed executive pay using figures that do not include the value of such pension plans. This paper presents evidence that omitting the value of pension benefits significantly undermines the accuracy of existing estimates of executive pay, its variability, and its sensitivity to performance companies. Studying the pension arrangements of CEOs of S&P 500, we find that the CEOs' plans had a median actuarial value of $15 million; that the ratio of the executives' pension value to the executives' total compensation (including both equity and non-equity pay) during their service as CEO had a median value of 34%; and that including pension values increased the median percentage of the executives' total compensation composed of salary-like payments during and after their service as CEO from 15% to 39%.

    ...pay, its variability, and its sensitivity to performance companies. Studying the pension arrangements of CEOs of S&P 500, we find that the CEOs' plans had a median actuarial value of $15 million; that the ratio of the executives' pension value to the executives' total compensation (including both equity and non-equity pay) during their service as CEO had a median value of 34%; and that including...

    /papers/w11907

  • 99% Executive Pay and Performance: Evidence from the U.S. Banking Industry April 1994
    R. Glenn Hubbard, Darius Palia

    This paper examines an effect of deregulating the market for corporate control on CEO compensation in the banking industry. Given that each state's banking regulation defines the competitiveness of its corporate control market, we examine the effect of a state's interstate banking regulation on the level and structure of bank CEO compensation. Using panel data on 147 banks over the decade of the 1980s, we find evidence supporting the hypothesis that competitive corporate control markets (i.e., where interstate banking is permitted) require talented managers whose levels of compensation are higher. We also find that the compensation-performance relationship is stronger than for managers in markets where interstate banking is not permitted. Further, CEO turnover increases substantially after deregulation, as does the proportion in performance-related compensation. These results suggest strong evidence of a managerial talent market -- that is, one which matches the level and structure of compensation with the competitiveness of the banking environment.

    ...PAY AND PERFORMANCE: EVIDENCE FROM THE U.S. BANKING INDUSTRY R. Glenn Hubbard Darius Palia Working Paper No. 4704 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 April 1994 We thank Franklin Edwards, Jordi Gali, William Greene, Kevin Hassett, Charles Himmelberg, Michael Jensen, Edward Kane, Frank Lichtenberg, Richard Lyons, Kevin Murphy, Sam Peltzman...

    /papers/w4704

  • 99% Microsoft Word - text8.docx

    ...mandated pay disclosure in 1934. I find that disclosure did not achieve the intended effect of broadly lowering CEO compensation. If anything, and in spite of popular outrage against compensation practices, average CEO compensation increased following disclosure relative to the upper fractiles of the non-CEO labor income distribution. Pay disclosure coincided with compression of the CEO earnings...

    /conferences/2015/OEf15/CEODisclosure.pdf

  • 99% NBER Reporter Online

    ...pay is appropriate for considering whether CEOs are paid for firm performance. Facts about pay Using estimated pay, I look at data from 1993 to 2010 for S&P 500 companies (from S&P’s ExecuComp database). What has happened to average estimated CEO pay (adjusted for inflation) since 2000? Most audiences believe it has increased substantially. In fact, Figure 1 shows that while average CEO pay...

    /reporter/2012number3

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