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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. 3, No. 7: April 11, 2002
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Publisher: LSN Employment, Labor, Compensation, and Pension
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Topic of This Issue:
Executive Compensation
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NEW and FORTHCOMING ARTICLES
"The Metamorphosis of 'Germany Inc.': The Case of Executive Pay"
American Journal of Comparative Law, Vol. 49, No. 3, 2001
BRIAN R. CHEFFINS
Faculty of Law, University of Cambridge
"An Empirical Examination of the Role of the CEO and the
Compensation Committee in Structuring Executive Pay"
Journal of Banking and Finance, Forthcoming
RONALD CRAIG ANDERSON
American University
Kogod School of Business
JOHN BIZJAK
Portland State University
"Should Shareholders Have a Greater Say over Executive Pay?:
Learning from the US Experience"
Journal of Corporate Law Studies, Vol. 1, Part 2, December
2001
BRIAN R. CHEFFINS
Faculty of Law, University of Cambridge
RANDALL S. THOMAS
Vanderbilt University School of Law
"Has Pay for Performance Gone Awry? Views from a Corporate
Governance Forum"
Research Dialogue, Vol. 68, July 2001
STUART L. GILLAN
Teachers Insurance and Annuity Association,
TIAA-CREF Institute
WORKING PAPERS
"Executive Compensation: Six Questions that Need Answering"
JOHN MARON ABOWD
Cornell University
School of Industrial and Labor Relations
National Bureau of Economic Research (NBER)
DAVID S. KAPLAN
U.S. Department of Labor, Bureau of Labor
Statistics
"Executive Compensation in America: Optimal Contracting or
Extraction of Rents?"
LUCIAN ARYE BEBCHUK
Harvard Law School
JESSE M. FRIED
University of California at Berkeley School of Law
DAVID I. WALKER
Harvard Law School
Ropes & Gray
"Merger Activity and Executive Pay"
SOURAFEL GIRMA
University of Nottingham
Department of Economics
STEVE THOMPSON
University of Leicester
Department of Economics
PETER WRIGHT
University of Nottingham
Department of Economics
Centre for Economic Policy Research (CEPR)
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"The Metamorphosis of 'Germany Inc.': The Case of Executive Pay"
American Journal of Comparative Law, Vol. 49, No. 3, 2001
BY: BRIAN R. CHEFFINS
Faculty of Law, University of Cambridge
Contact: BRIAN R. CHEFFINS
Email: Mailto:brc21@cam.ac.uk
Postal: Faculty of Law, University of Cambridge
10 West Road
Cambridge CB3 9DZ, UNITED KINGDOM
Phone: + 44 1223 330084
Fax: + 44 1223 330055
ABSTRACT:
The German system of corporate governance differs considerably
from its counterparts in the United States and the United
Kingdom. There is anecdotal evidence, however, that suggests
market forces are serving to destabilize traditional structures
in Germany and are causing some form of convergence along
"Anglo-American" lines. One by-product of this trend could be
that German companies will adopt an increasingly Anglo-American
approach when they deal with managerial remuneration issues.
This paper examines the implications of such a trend.
If shareholder-oriented Anglo-American corporate governance
patterns become well-established in Germany, German executives
will likely earn more than they do at present, though future
increases in pay will be partly conditional upon corporate
performance. An increasingly globalized market for executive
talent will reinforce the momentum for change. Various factors
could delay the process (e.g., tax policy, interest group
hostility, regulation) but these seem to be diminishing in
importance.
If the Anglo-American approach to executive pay becomes
influential in German companies, issues that have been
controversial in the US and the UK likely will capture attention
in Germany. For instance, there will be debate about disclosure
regulation and the role that board committees and shareholders
should play in the setting of managerial remuneration policy. It
remains an open question, though, whether it will be beneficial
for German companies to change radically their approach to
executive pay.
JEL Classification: G30, J33, J38
______________________________
"An Empirical Examination of the Role of the CEO and the
Compensation Committee in Structuring Executive Pay"
Journal of Banking and Finance, Forthcoming
BY: RONALD CRAIG ANDERSON
American University
Kogod School of Business
JOHN BIZJAK
Portland State University
Contact: RONALD CRAIG ANDERSON
Email: Mailto:randers@american.edu
Postal: American University
Kogod School of Business
4400 Massachusetts Avenue NW
Washington, DC 20016 UNITED STATES
Phone: 202-885-2199
Fax: 202-885-1946
Co-Auth: JOHN BIZJAK
Email: Mailto:johnb@sba.pdx.edu
Postal: Portland State University
Department of Finance
PO Box 751
Portland, OR 97207-0751 UNITED STATES
ABSTRACT:
Motivated by the potential for opportunistic behavior in pay
decisions, recent SEC and IRS regulations essentially preclude
inside directors from serving on a firm's compensation
committee. We examine whether greater compensation committee
independence promotes shareholder interests and whether the
CEO's presence on the compensation committee leads to
opportunistic pay structure. We find little evidence that
greater committee independence affects executive pay. Moreover,
committees consisting of insiders or the CEO do not award
excessive pay or lower overall incentives. For example, we find
no evidence that pay decreases or total incentives increase when
CEOs come off the compensation committee. Our results suggest
that regulations governing committee structure may not reduce
levels of pay or achieve efficiencies in incentive contracts.
Keywords: Corporate Finance, Corporate Governance, Regulation,
Business Law
JEL Classification: G3, K2
______________________________
"Should Shareholders Have a Greater Say over Executive Pay?:
Learning from the US Experience"
Journal of Corporate Law Studies, Vol. 1, Part 2, December
2001
BY: BRIAN R. CHEFFINS
Faculty of Law, University of Cambridge
RANDALL S. THOMAS
Vanderbilt University School of Law
Paper ID: Vanderbilt Law, Joe C. Davis Research Paper No. 01-6
Contact: BRIAN R. CHEFFINS
Email: Mailto:brc21@cam.ac.uk
Postal: Faculty of Law, University of Cambridge
10 West Road
Cambridge CB3 9DZ, UNITED KINGDOM
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 UNITED STATES
ABSTRACT:
Executive pay arrangements in Britain's publicly quoted
companies have been subjected to much critisism in recent years.
Proposals that shareholders should have a greater direct say
over managerial remuneration have been a by-product of the
concerns expressed. Debate on this point, however, has been
largely speculative. This is because there is little evidence
available in the United Kingdom 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, where empirical work indicates that
shareholder voting only operates as a potential check when pay
arrangements deviate far from the norm. In a British context,
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: G30, J33, J38, K22
______________________________
"Has Pay for Performance Gone Awry? Views from a Corporate
Governance Forum"
Research Dialogue, Vol. 68, July 2001
BY: STUART L. GILLAN
Teachers Insurance and Annuity Association,
TIAA-CREF Institute
Contact: STUART L. GILLAN
Email: Mailto:SGillan@tiaa-cref.org
Postal: Teachers Insurance and Annuity Association, TIAA-CREF
Institute
24th Floor
730 Third Avenue
New York, NY 10017-3206 UNITED STATES
Phone: 212-490-9000 x1651
Fax: 212-916-6088
Note: This is a description of the paper and not the actual
abstract.
ABSTRACT:
Some of the most controversial governance-related issues that
have arisen in recent years involve executive and employee
compensation. Investors, the press, and the public have
expressed concern over (1) escalating executive pay packages and
(2) the growing use of stock options. This article discusses the
issues raised by participants at a Corporate Governance Forum,
Executive Compensation, Stock Options, and the Role of the Board
of Directors, hosted by the TIAA-CREF Institute on April 5,
2001. The Forum brought together a diverse group, including
corporate officers and directors, academic and other
researchers, compensation consultants, corporate human resources
personnel, institutional investors, regulators, and other
practitioners, and provided an opportunity for an open exchange
of views among groups that do not often meet together.
Participants discussed current trends in compensation practice,
the accounting for stock-based compensation, the appropriate use
of stock options and alternatives to standard at-the-money
options. They also reviewed and debated the role of shareholders
in approving compensation plans, and the importance of the board
of directors and board compensation committee in determining
compensation policy.
The article attempts to provide an overview of the comments
and observations of both panel members and the audience. The
article first provides a primer on stock options and related
compensation issues, then generally follows the order of the
conference sessions: (1) Executive Compensation and Executive
Stock Options, (2) the General Use of Stock Options and Dilution
Issues, and (3) the Role of the Board of Directors and the
Compensation Committee. Necessarily, there is some overlap
within each of the three broad topics. This article is not a
transcript of the Forum, a comprehensive background on
compensation programs, or a statement of best practices as it
relates to compensation policies. Rather, the goal is simply to
share some of the insights and information presented at the
conference with a broader audience.
Keywords: Governance; Compensation; Stock options; Boards of
directors
JEL Classification: G32, J33
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Executive Compensation: Six Questions that Need Answering"
BY: JOHN MARON ABOWD
Cornell University
School of Industrial and Labor Relations
National Bureau of Economic Research (NBER)
DAVID S. KAPLAN
U.S. Department of Labor, Bureau of Labor
Statistics
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=165134
Paper ID: NBER Working Paper No. W7124
Date: May 1999
Contact: JOHN MARON ABOWD
Email: Mailto:john_abowd@cornell.edu
Postal: Cornell University
School of Industrial and Labor Relations
Johnson Graduate School of Management
Ithaca, NY 14853-3901 UNITED STATES
Phone: 607-255-8024
Fax: 607-255-4496
Co-Auth: DAVID S. KAPLAN
Email: Mailto:kaplan_d@bls.gov
Postal: U.S. Department of Labor, Bureau of Labor Statistics
Room 4945
2 Massachusetts Avenue, NE
Washington, DC 20212 UNITED STATES
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
In this article, we focus on how recent research advances can be
used to address the following six questions: (1) How much does
executive compensation cost the firm? (2) How much is executive
compensation worth to the recipient? (3) How well does executive
compensation work? (4) What are the effects of executive
compensation? (5) How much executive compensation is enough? (6)
Could executive compensation be improved? We stress the formal
link between executive pay and performance that is provided by
stock options and equivalent forms of long term compensation. We
compare executive compensation in 12 OECD countries for the
period from 1984-1996. There are good reasons why the answers to
the first two questions are different. Executive compensation
research should be very careful to distinguish the concepts of
employer cost and the value to the executive. Agency theory
remains the only viable candidate for answering the question
about how executive compensation works but the empirical
research to date cannot explain very much about the structure of
the optimal contract. For this reason, it is also hard to answer
the questions about the effects of executive compensation and
the adequacy of the amounts of executive compensation, although
it is clear that companies can provide both too little and too
much contingent compensation, in the context of agency theory.
We suggest two fertile areas for research regarding the
improvement of executive compensation.
JEL Classification: J33, G30
______________________________
"Executive Compensation in America: Optimal Contracting or
Extraction of Rents?"
BY: LUCIAN ARYE BEBCHUK
Harvard Law School
JESSE M. FRIED
University of California at Berkeley School of Law
DAVID I. WALKER
Harvard Law School
Ropes & Gray
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=297005
Paper ID: CEPR Discussion Paper No. 3112
Date: December 2001
Contact: LUCIAN ARYE BEBCHUK
Email: Mailto:bebchuk@law.harvard.edu
Postal: Harvard Law School
1545 Mass. Ave.
Cambridge, MA 02138 UNITED STATES
Phone: 617-495-3138
Fax: 617-496-3119
Co-Auth: JESSE M. FRIED
Email: Mailto:friedj@mail.law.berkeley.edu
Postal: University of California at Berkeley School of Law
Boalt Hall
Berkeley, CA 94720-7200 UNITED STATES
Co-Auth: DAVID I. WALKER
Email: Mailto:dwalker@law.harvard.edu
Postal: Harvard Law School
Langdell 175E
Cambridge, MA 02138 UNITED STATES
Paper Requests:
Contact CEPR Discussion papers, 90-98 Goswell Road, London EC1V
7RR, UK. Phone:(44 20)7878 2900. Fax:(44 20) 7878 2999.
Mailto:orders@cepr.org Fee: 5 (British Pound Sterling) /US $5 /8
euros per paper. Payment in advance is requested. Postage and
packing additional.
ABSTRACT:
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
US 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.
Keywords: Executive compensation, stock options, corporate
governance, private benefits of control, agency costs, rent
extraction
JEL Classification: D23, G32, G34, G38, J33, J44, K22
______________________________
"Merger Activity and Executive Pay"
BY: SOURAFEL GIRMA
University of Nottingham
Department of Economics
STEVE THOMPSON
University of Leicester
Department of Economics
PETER WRIGHT
University of Nottingham
Department of Economics
Centre for Economic Policy Research (CEPR)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=306822
Paper ID: CEPR Discussion Paper No. 3255
Date: March 2002
Contact: SOURAFEL GIRMA
Email: Mailto:sourafel.girma@nottingham.ac.uk
Postal: University of Nottingham
Department of Economics
School of Management and Finance
University Park
Nottingham NG7 1AZ, UNITED KINGDOM
Phone: +44 115 951 4733
Fax: +44 115 951 4159
Co-Auth: STEVE THOMPSON
Email: Mailto:st38@le.ac.uk
Postal: University of Leicester
Department of Economics
Leicester LE1 7RH, UNITED KINGDOM
Co-Auth: PETER WRIGHT
Email: Mailto:Peter.Wright@nottingham.ac.uk
Postal: University of Nottingham
Department of Economics
University Park
Nottingham NG7 1AZ, UNITED KINGDOM
Paper Requests:
Contact CEPR Discussion papers, 90-98 Goswell Road, London EC1V
7RR, UK. Phone:(44 20)7878 2900. Fax:(44 20) 7878 2999.
Mailto:orders@cepr.org Fee: 5 (British Pound Sterling) /US $5 /8
euros per paper. Payment in advance is requested. Postage and
packing additional.
ABSTRACT:
This Paper examines the impact of mergers and acquisitions on
the remuneration of the CEOs in a large unbalanced panel of UK
firms, over the period 1981-96. We find significant and
substantial executive pay increases in excess of those generated
by the growth in firm size consequent upon the merger. This is
consistent with the view that mergers reveal information about
the quality of management that is useful to the firm's
remuneration committee. Executive pay is, however, nine times
more sensitive to internal growth than to growth as a result of
acquisition. Furthermore, there is some evidence that hostile
transactions generate smaller pay effects than friendly deals,
probably because they are followed, at some remove, by
size-reducing divestments. When mergers are distinguished by
their impact on shareholder wealth we find that CEOs engaging in
'bad' (ie wealth-reducing) acquisitions experience significantly
lower remuneration than their counterparts whose deals meet with
market approval. This result suggests that
shareholder-principals have at least some success in penalising
managers for unwarranted empire-building mergers.