Executive Compensation

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E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                  A N D   P E N S I O N   L A W
                Vol. 2, No. 20: November 1, 2001
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               Urban Institute
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                      Topic of This Issue:
                     Executive Compensation
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES

"Litigating Challenges to Executive Pay: An Exercise in
Futility?"
      Forthcoming in Washington University Law Quarterly
     RANDALL S. THOMAS
        Vanderbilt University School of Law
     KENNETH J. MARTIN
        New Mexico State University
        Department of Finance

"Executive Compensation and Executive Contributions to Corporate
PACs"
      Advances in Financial Economics, Vol. 6, 2001
     KATHLEEN A. FARRELL
        University of Nebraska-Lincoln
     PHILIP HERSCH
        Wichita State University
        Department of Economics
     JEFFRY NETTER
        University of Georgia
        Department of Banking and Finance

WORKING PAPERS

"Raids, Rewards, and Reputations in the Market for CEO Talent"
     CHARLES J. HADLOCK
        Michigan State University
        Eli Broad College of Business
     C. EDWARD FEE
        Michigan State University
        Department of Finance

"Has the Use of Peer Groups Contributed to Higher Levels of
Executive Compensation?"
     JOHN M. BIZJAK
        Portland State University
     MICHAEL L. LEMMON
        University of Utah
        David Eccles School of Business
     LALITHA NAVEEN
        Arizona State University
        Department of Finance

"Should Shareholders have a Greater Say over Executive Pay?:
Learning from the US Experience"
     BRIAN R. CHEFFINS
        Faculty of Law, University of Cambridge
     RANDALL S. THOMAS
        Vanderbilt University School of Law

"Executive Equity Compensation and Incentives: A Survey"
     WAYNE R. GUAY
        University of Pennsylvania
     JOHN E. CORE
        University of Pennsylvania
     DAVID F. LARCKER
        University of Pennsylvania

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Benefits, Compensation and Pension Law we do not referee working
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________

"Litigating Challenges to Executive Pay: An Exercise in
Futility?"
Forthcoming in Washington University Law Quarterly

      BY: RANDALL S. THOMAS
              Vanderbilt University School of Law
           KENNETH J. MARTIN
              New Mexico State University
              Department of Finance

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=268148

Paper ID: Vanderbilt Law, Joe C. Davis Research Paper No. 01-4

Contact: RANDALL S. THOMAS
   Email: Mailto:randall.thomas@law.vanderbilt.edu
Postal: Vanderbilt University School of Law
           131 21st Avenue South
           Nashville, TN 37203-1181 USA
   Phone: 615-343-3814
     Fax: 615-322-6631
Co-Auth: KENNETH J. MARTIN
   Email: Mailto:kjmartin@nmsu.edu
Postal: New Mexico State University
           Department of Finance
           College of Business Administration & Economics
           Las Cruces, NM 88003 USA

Paper Requests:
Contact Janis Stewart, Research Paper Series Program, Vanderbilt
University Law School, 131 21st Avenue South, Nashville, TN
37203. Phone:(615) 322-0028. Fax:(615) 322-6631.
Mailto:Janis.Stewart@law.vanderbilt.edu

ABSTRACT:
This paper is an empirical analysis of plaintiffs' success rates
in executive compensation litigation. Using data from publicly
available files, this study examines a sample of 124 cases where
shareholders have challenged executive compensation levels and
practices at public and closely held corporations. This data set
shows that shareholders are successful in at least some stage of
this litigation in a significant percentage of these cases.

Our most robust result is that plaintiffs win a greater
percentage of the time in compensation cases against closely
held companies than against publicly held companies. This result
is consistent for every stage of these cases - motions to
dismiss, motions for summary judgment, trial and appeal. We also
find that, on average, plaintiffs fare better in compensation
cases in courtrooms outside of Delaware than in Delaware.
However, once we control for the different composition of the
Delaware Courts' caseload, these differences disappear and the
overall success rates in executive compensation litigation are
surprisingly similar.

When we look at the procedural and substantive claims being
made in the cases, we find some other interesting results.
Demand futility is a significant barrier to getting such suits
off the ground. Plaintiffs lose on a motion to dismiss for
failure to make demand about half the time. In Delaware, motions
to dismiss for failure to make demand are much more frequently
raised since the Delaware Supreme Court's decisions in Aronson
v. Lewis, although plaintiffs today seem to succeed in
overcoming them a greater percentage of the time.

The picture is more complicated with respect to the
substantive claims made in these cases. Plaintiffs average about
30% success in maintaining duty of care claims at the various
stages of these suits with slightly higher success rates in
non-Delaware cases. However, since the Delaware Supreme Court's
decision in Smith v. Van Gorkom, the number of these claims has
increased and their likelihood of success at least at some stage
of the litigation appears to have increased. With waste claims,
plaintiffs succeed about 40% of the time, while for duty of
loyalty claims, they win about 35% of the time. Plaintiffs are
consistently more successful at close corporations than at
public corporations for both types of claims.

______________________________

"Executive Compensation and Executive Contributions to Corporate
PACs"
Advances in Financial Economics, Vol. 6, 2001

      BY: KATHLEEN A. FARRELL
              University of Nebraska-Lincoln
           PHILIP HERSCH
              Wichita State University
              Department of Economics
           JEFFRY NETTER
              University of Georgia
              Department of Banking and Finance

Contact: JEFFRY NETTER
   Email: Mailto:jnetter@terry.uga.edu
Postal: University of Georgia
           Department of Banking and Finance
           456 Brooks Hall
           Athens, GA 30602-6250 USA
   Phone: 706-542-3654
Co-Auth: KATHLEEN A. FARRELL
   Email: Mailto:kfarrell@unlnotes.unl.edu
Postal: University of Nebraska-Lincoln
           238 CBA
           Lincoln, NE 68588-0490 USA
Co-Auth: PHILIP HERSCH
   Email: Mailto:PLHersch@twsuvm.uc.twsu.edu
Postal: Wichita State University
           Department of Economics
           Wichita, KS 67260-0078 USA

ABSTRACT:
This paper estimates the determinants of the contributions made
by top executives to their firm's Political Action Committee
(PAC). We find that executive's personal PAC contributions
(proxy for the interest of the firm) are positively related to
their shareholdings, income and option holdings (proxies for the
interests of the executive). Contributions are also higher for
CEOs and board members. This is direct evidence that the
structure of the contracts between the firm and management,
especially compensation, aligns manager's personal behavior with
the interests of the firm.

Keywords: Executive compensation, political contribution

JEL Classification: D72, G34, J33
______________________________

W O R K I N G P A P E R Abstracts
_________________________________________________________________

"Raids, Rewards, and Reputations in the Market for CEO Talent"

      BY: CHARLES J. HADLOCK
              Michigan State University
              Eli Broad College of Business
           C. EDWARD FEE
              Michigan State University
              Department of Finance

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=262734

Paper ID: AFA 2002 Atlanta Meetings

Contact: CHARLES J. HADLOCK
   Email: Mailto:hadlock@pilot.msu.edu
Postal: Michigan State University
           Eli Broad College of Business
           East Lansing, MI 48824-1121 USA
   Phone: 517-353-2257
     Fax: 517-432-1080
Co-Auth: C. EDWARD FEE
   Email: Mailto:fee@pilot.msu.edu
Postal: Michigan State University
           Department of Finance
           The Eli Broad College of Business
           315 Eppley Center
           East Lansing, MI 48824-1122 USA

ABSTRACT:
We examine the basic hypothesis that the market for managerial
talent rewards managers from firms with superior stock price
performance. We identify a set of outside CEO hires in a set of
large publicly traded firms and investigate the stock price
performance of the prior employers of these executives. Using
5-year buy-and-hold returns as our basic performance measure, we
find that the prior employers of our sample executives did, on
average, exhibit superior performance compared to a variety of
benchmarks. A conditional logit analysis confirms that superior
firm performance increases the likelihood that an executive will
get an outside CEO job. Our results are most pronounced for
executives who jump immediately from their prior employer to the
new employer (raids) and for executives who were more highly
ranked at their prior employer.

We also examine compensation contracts and find that
executives are typically awarded large initial hiring grants
composed of stock options, restricted stock, and cash signing
bonuses. These grants are highly correlated with the value of
the unvested option and restricted stock position the executive
leaves behind at his old employer. The evidence also suggests
that these grants are positively related to prior firm
performance, even after controlling for the forfeited position
at the prior employer.

We interpret our findings as providing substantial support for
the basic hypothesis that superior stock price performance
enhances an executive's external labor market opportunities. In
our view this is an interesting and important finding, as it
supports the basic assumption underlying a large class of models
concerning executive decision making and contracting in the
presence of career concerns.

Keywords: Career concerns, Outside CEOs, Performance
measurement, Managerial labor market, Executive compensation

JEL Classification: G32, G34, J33, J41
______________________________

"Has the Use of Peer Groups Contributed to Higher Levels of
Executive Compensation?"

      BY: JOHN M. BIZJAK
              Portland State University
           MICHAEL L. LEMMON
              University of Utah
              David Eccles School of Business
           LALITHA NAVEEN
              Arizona State University
              Department of Finance

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=252544

Date: November 15, 2000

Contact: JOHN M. BIZJAK
   Email: Mailto:johnb@sba.pdx.edu
Postal: Portland State University
           Department of Finance
           PO Box 751
           Portland, OR 97207-0751 USA
   Phone: 503-725-3727
     Fax: 503-725-5850
Co-Auth: MICHAEL L. LEMMON
   Email: Mailto:finmll@business.utah.edu
Postal: University of Utah
           David Eccles School of Business
           Dept. of Finance, Room 109
           1645 E Campus Center Dr
           Salt Lake City, UT 84112-9303 USA
Co-Auth: LALITHA NAVEEN
   Email: Mailto:lalitha@asu.edu
Postal: Arizona State University
           Department of Finance
           PO Box 873906
           Tempe, AZ 85287-3906 USA

ABSTRACT:
We present new evidence about the role that institutional
features of compensation practices play in the recent rise in
CEO pay. Specifically, we examine the use of peer groups and
competitive benchmarking in structuring compensation. We find
that most firms use peer groups and competitive benchmarking to
set levels of salaries, bonuses and option awards. The typical
peer firm is one of similar size and in the same industry. This
practice is important because most firms attempt to keep
compensation at or above the median level of the peer group. We
find that competitive benchmarking has had a nontrival effect on
compensation levels for both the CEO and other executives in the
firm. For example, CEOs who are paid below the median in total
pay of their size and industry peers receive raises that are
twice as large relative to the raises received by CEO who are
paid above the median of their peers. Moreover, these raises are
not only larger in percentage terms but larger in absolute
dollar terms. Importantly, these differences in pay practices
remain even after controlling for economic factors that have
previously been documented to affect compensation levels (e.g.,
performance, size, and industry). In fact, we observe large pay
increases for executives paid below the median of the peer
group, even when these firms have, on average, worse accounting
and stock-price performance than peer firms. Our study suggests
that pay levels and the recent growing levels of executive
salaries are a result of not only economic factors, but also
political and institutional characteristics of the pay process.

Keywords: Compensation, peer groups, compensation committees,
CEO pay

JEL Classification: G30, G34, J31, J33
______________________________

"Should Shareholders have a Greater Say over Executive Pay?:
Learning from the US Experience"

      BY: BRIAN R. CHEFFINS
              Faculty of Law, University of Cambridge
           RANDALL S. THOMAS
              Vanderbilt University School of Law

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=268992

Paper ID: Vanderbilt Law, Joe C. Davis Research Paper No. 01-6
Date: 2001

Contact: BRIAN R. CHEFFINS
   Email: Mailto:brc21@cam.ac.uk
Postal: Faculty of Law, University of Cambridge
           10 West Road
           Cambridge CB3 9DZ,    UK
   Phone: + 44 1223 330084
     Fax: + 44 1223 330055
Co-Auth: RANDALL S. THOMAS
   Email: Mailto:randall.thomas@law.vanderbilt.edu
Postal: Vanderbilt University School of Law
           131 21st Avenue South
           Nashville, TN 37203-1181 USA

ABSTRACT:
Executive pay arrangements in Britain's publicly quoted
companies have been subjected to much criticism in recent years.
Proposals that shareholders should have a greater direct say
over managerial remuneration have been a byproduct of the
concerns expressed. Debate on this point, however, has been
largely speculative. This is because there is little evidence
available in the UK indicating how shareholders would exercise
any new powers they might be given. This paper addresses the
evidentiary gap by drawing upon the experience in the United
States, which offers much potentially valuable data.

In the United States, the two primary circumstances where
shareholders vote on executive pay issues are where a stock
option plan is put forward for approval and where a shareholder
proposal has been made pursuant to US securities laws. Empirical
studies reveal that American investors use the powers they have
in a discerning fashion. At the same time, though, shareholder
voting probably only operates as a potential check when pay
arrangements deviate far from the norm. With respect to Britain,
these findings imply that implementing the shareholder-oriented
reforms that have been canvassed recently would fail to address
fully the concerns raised by critics of executive pay.

JEL Classification: K
______________________________

"Executive Equity Compensation and Incentives: A Survey"

      BY: WAYNE R. GUAY
              University of Pennsylvania
           JOHN E. CORE
              University of Pennsylvania
           DAVID F. LARCKER
              University of Pennsylvania

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=276425

Date: June 2001

Contact: WAYNE R. GUAY
   Email: Mailto:guay@wharton.upenn.edu
Postal: University of Pennsylvania
           Wharton School
           2400 Steinberg-Dietrich Hall
           Philadelphia, PA 19104 USA
   Phone: 215-898-7775
     Fax: 215-573-2054
Co-Auth: JOHN E. CORE
   Email: Mailto:jcore@wharton.upenn.edu
Postal: University of Pennsylvania
           Accounting Department
           3720 Locust Walk
           Philadelphia, PA 19103 USA
Co-Auth: DAVID F. LARCKER
   Email: Mailto:larcker@wharton.upenn.edu
Postal: University of Pennsylvania
           2400 Steinberg-Dietrich Hall
           Philadelphia, PA 19103 USA

ABSTRACT:
Stock and option compensation and the level of managerial equity
incentives are aspects of corporate governance that are
especially controversial to shareholders, institutional
activists, and governmental regulators. Similar to much of the
corporate finance and corporate governance literature, research
on stock-based compensation and incentives has generated not
only useful insights, but also has produced many contradictory
findings. However, not surprisingly, many fundamental questions
remain to be answered. In this survey, we synthesize the broad
literature on equity compensation and executive incentives, and
highlight topics that seem especially appropriate for future
research.