We find that social capital, as captured by secular norms and social networks surrounding corporate headquarters, is negatively associated with levels of CEO compensation. This relation holds in a ...range of robustness tests including those that address omitted variable bias and reverse causality. Additionally, social capital reduces the likelihood that firms make opportunistic option grant awards that unduly favor CEOs, including lucky awards, backdated awards, and unscheduled awards. Social capital also lessens the accretive effect of CEO power on CEO compensation. These findings indicate that social capital mitigates agency problems by restraining managerial rent extraction in CEO compensation.
We investigate the economic role of proxy advisors (PAs) in the context of mandatory "say on pay" votes, a novel and complex item requiring significant firm-specific analysis. PAs are more likely to ...issue an Against recommendation at firms with poor performance and higher levels of CEO pay and do not appear to follow a "one-size-fits-all" approach. PAs' recommendations are the key determinant of voting outcome but the sensitivity of shareholder votes to these recommendations varies with the institutional ownership structure, and the rationale behind the recommendation, suggesting that at least some shareholders do not blindly follow these recommendations. More than half of the firms respond to the adverse shareholder vote triggered by a negative recommendation by engaging with investors and making changes to their compensation plan. However, we find no market reaction to the announcement of such changes, even when material enough to result in a favorable recommendation and vote the following year. Our findings suggest that, rather than identifying and promoting superior compensation practices, PAs' key economic role is processing a substantial amount of executive pay information on behalf of institutional investors, hence reducing their cost of making informed voting decisions. Our findings contribute to the literature on shareholder voting and the related policy debate.
We provide new evidence that the subjective “look of competence” rather than beauty is important for CEO selection and compensation. Our experiments, studying the facial traits of CEOs using nearly ...2,000 subjects, link facial characteristics to both CEO compensation and performance. In one experiment, we use pairs of photographs and find that subjects rate CEO faces as appearing more “competent” than non-CEO faces. Another experiment matches CEOs from large firms against CEOs from smaller firms and finds large-firm CEOs look more competent. In a third experiment, subjects numerically score the facial traits of CEOs. We find competent looks are priced into CEO compensation, more so than attractiveness. Our evidence suggests this premium has a behavioral origin. First, we find no evidence that the premium is associated with superior performance. Second, we separately analyze inside and outside CEO hires and find that the competence compensation premium is driven by outside hires—the situation where first impressions are likely to be more important.
This paper was accepted by Lauren Cohen, finance
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Fulfilling one's all-things-considered duty sometimes requires violating pro tanto duties. According to W. D. Ross and Robert Nozick, the pro tanto-duty-violating, wrong-making features of acts in ...these cases can leave 'traces' of wrongfulness that require specific responses: feeling compunction for the wrongfulness and/or providing compensation to the negatively affected person. Failure to respond in the appropriate way to lingering wrong-making features can itself be wrongful. Unfortunately, criteria for determining when traces remain are largely lacking. In this piece, I argue for three necessary conditions for the existence of a trace: 'The Non-Consequentialist Duty Condition,' 'The Identity Condition,' and 'The Ratio Condition.'
Building on two sources of exogenous shocks to analyst coverage (broker closures and mergers), we explore the causal effects of analyst coverage on mitigating managerial expropriation of outside ...shareholders. We find that as a firm experiences an exogenous decrease in analyst coverage, shareholders value internal cash holdings less, its CEO receives higher excess compensation, its management is more likely to make value-destroying acquisitions, and its managers are more likely to engage in earnings management activities. Importantly, we find that most of these effects are mainly driven by the firms with smaller initial analyst coverage and less product market competition. We further find that after exogenous brokerage exits, a CEO׳s total and excess compensation become less sensitive to firm performance in firms with low initial analyst coverage. These findings are consistent with the monitoring hypothesis, specifically that financial analysts play an important governance role in scrutinizing management behavior, and the market is pricing an increase in expected agency problems after the loss in analyst coverage.
This paper analyzes the effects of expanded compensation disclosures on manager pay. For identification, I use the introduction of the Compensation Discussion and Analysis (CD&A) in the 2007 proxy ...season, a significant expansion in required compensation disclosures, to compare manager pay at firms with and without the disclosure in a difference-in-differences analysis. These disclosures are associated with increasing pay, contrary to the conventional wisdom that pay disclosures reduce pay levels via better shareholder monitoring. I hypothesize that enhanced ex ante disclosures of incentive plans reduce boards’ flexibility to make ex post adjustments or to use subjectivity and pressure boards toward more formulaic plans. Both effects impose higher payout risk on managers, leading to increased pay levels. Consistent with this hypothesis, the CD&A introduction is associated with lower likelihood to earn variable cash pay, greater use of formula-based pay, and higher pay at firms with more volatile measures of performance.
We examine the impact of overconfidence on compensation structure. Our findings support the exploitation hypothesis: firms offer incentive-heavy compensation contracts to overconfident Chief ...Executive Officers (CEOs) to exploit their positively biased views of firm prospects. Overconfident CEOs receive more option-intensive compensation and this relation increases with CEO bargaining power. Exogenous shocks (Sarbanes-Oxley Act of 2002 (SOX) and Financial Accounting Standard (FAS) 123R) provide additional support for the findings. Overconfident non-CEO executives also receive more incentive-based pay, independent of CEO overconfidence, buttressing the notion that firms tailor compensation contracts to individual behavioral traits such as overconfidence.
Given CEOs’ substantial equity portfolios, much recent literature on CEO incentives regards cash-based bonus plans as largely irrelevant, begging the question of why nearly all CEO compensation plans ...include such bonuses. We develop a new measure of bonus plan incentives and show that performance sensitivities are much greater than prior estimates. We also test hypotheses regarding the role of bonuses in providing executives with individualized and team incentives. We find little evidence supporting the individualized incentives hypotheses but find consistent evidence that bonus plans appear to be used to encourage mutual monitoring and to facilitate coordination across the top management team as a whole.
We investigate the impact of a firm’s compensation consultant choice on executive compensation by examining shifts in consultant choice stemming from a 2009 U.S. Securities Exchange Commission ...requirement that firms disclose fees paid to compensation consultants for both consulting and other services. We show that the disclosure rule change acted as a separating device distinguishing firms likely to have used compensation consultants to extract rents from shareholders from firms that were likely to have used consultants to optimally set pay. We conclude that not all multiservice consultants are conflicted, while not all specialist consultants are guardians of shareholder value. Our study provides a more nuanced view of the association between compensation consultant choices and executive pay.
This paper was accepted by Shiva Rajgopal, accounting.
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