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Executive Compensation

Paper Session

Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Seaport G
Hosted By: American Finance Association
  • Chair: Efraim Benmelech, Northwestern University

Do Informative Stock Prices Simplify Executive Compensation?

Benjamin Bennett
,
Ohio State University
Gerald Garvey
,
BlackRock
Todd Milbourn
,
Washington University-St. Louis
Zexi Wang
,
Lancaster University

Abstract

We study the effects of stock price informativeness (SPI) on compensation complexity. Using textual analysis of SEC proxy statements to construct compensation complexity measures, we find informative stock prices reduce pay complexity. Using mutual fund redemption as an exogenous decrease in SPI, we find when fund flow pressure is high (SPI is low), CEO pay is more complex and links more with long-term stock performance, short-term accounting performance, and peer firm performance. Compensation complexity leads to more excess pay, more perquisite pay, and lower future ROA. Shareholders show concerns about complex pay and require more frequent Say-on-Pay votes.

CEO Marketability, Employment Opportunities, and Compensation: Evidence from Compensation Peer Citations

Daewoung Choi
,
Louisiana State University-Shreveport
David Cicero
,
Auburn University
Shawn Mobbs
,
University of Alabama

Abstract

We present evidence that the 2006 compensation-peer disclosure rule increased executive labor market efficiency by revealing information about executives’ outside opportunities. Difference-in-differences tests provide evidence of increased CEO mobility and compensation levels after the rule was enacted. Executives of firms with more peer citations – especially from larger firms – are more likely to leave for better positions or to receive compensation increases. Highly-cited firms are more likely to increase equity-based compensation, which helps with executive retention. These results are noteworthy since the intent of the rule was to limit opportunistic benchmarking to justify higher compensation.

Why Are CEOs of Public Firms Paid More Than CEOs of Private Firms? Evidence from the Effect of Board Reforms on CEO Compensation

Kee-Hong Bae
,
York University
Sadok El Ghoul
,
University of Alberta
Jisok Kang
,
John Carroll University
Albert Tsang
,
York University

Abstract

CEOs of public firms earn more than their counterparts in similar private firms. This can either be because rent extraction is easier in public firms than in private firms or because managing a public firm requires additional legal and institutional responsibilities than does managing an otherwise similar private firm. Using corporate board reform events from 29 countries, we find that board reforms toward greater board diligence for public firms increases CEO pay significantly more for public firms than for private firms, which are not subject to those reforms. Following board reforms, CEO pay increases more for public firms that are subject to higher scrutiny, such as larger firms and firms that are followed by more analysts and institutional investors. These results are consistent with the efficient contracting view of CEO compensation but inconsistent with the rent extraction view.
Discussant(s)
Filippo Mezzanotti
,
Northwestern University
Kai Li
,
University of British Columbia
Carola Frydman
,
Northwestern University
JEL Classifications
  • G3 - Corporate Finance and Governance