_________________________________________________________________
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
& P E N S I O N L A W
Vol. 5, No. 12: June 17, 2004
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Publisher: LSN Employment, Labor, Compensation & Pension Journals
a division of
Social Science Electronic Publishing, Inc. (SSEP)
and Social Science Research Network (SSRN)
Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2004. All rights reserved.
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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
"Secret Compensation"
North Carolina Law Review, Vol. 82, No. 835, 2004
IMAN ANABTAWI
University of California, Los Angeles
School of Law
WORKING PAPERS
"Earnings Manipulation and Managerial Investment Decisions:
Evidence from Sponsored Pension Plans"
DANIEL B. BERGSTRESSER
Massachusetts Institute of Technology (MIT)
Department of Economics
MIHIR A. DESAI
Harvard University
Finance Unit
National Bureau of Economic Research (NBER)
JOSHUA RAUH
Massachusetts Institute of Technology (MIT)
Department of Economics
"What Do CEOs Bargain For? An Empirical Study of Key Legal
Components of CEO Employment Contracts"
STEWART JON SCHWAB
Cornell Law School
RANDALL S. THOMAS
Vanderbilt University School of Law
"Pay without Performance: The Unfulfilled Promise of Executive
Compensation, Part II: Power and Pay"
LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
JESSE M. FRIED
University of California, Berkeley
School of Law (Boalt Hall)
"Pay without Performance: The Unfulfilled Promise of Executive
Compensation, Part III: The Decoupling of Pay from Performance"
LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
JESSE M. FRIED
University of California, Berkeley
School of Law (Boalt Hall)
"Pay without Performance: The Unfulfilled Promise of Executive
Compensation, Part IV: Going Forward"
LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
JESSE M. FRIED
University of California, Berkeley
School of Law (Boalt Hall)
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EDITORIAL POLICIES
To provide the broadest coverage of research in Employee
Benefits, Compensation & Pension Law we do not referee working
papers. We accept abstracts of working papers in Employee
Benefits, Compensation & Pension Law whose topics suit the
coverage of the journal and which are part of the worldwide
scholarly discourse.
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Secret Compensation"
North Carolina Law Review, Vol. 82, No. 835, 2004
BY: IMAN ANABTAWI
University of California, Los Angeles
School of Law
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=527704
Paper ID: UCLA School of Law, Law-Econ Research Paper No. 04-9
Contact: IMAN ANABTAWI
Email: Mailto:Anabtawi@law.ucla.edu
Postal: University of California, Los Angeles
School of Law
405 Hilgard Avenue
Box 951476
Los Angeles, CA 90095-1476 UNITED STATES
ABSTRACT:
Compensation is the principal means by which companies in the
United States seek to motivate managers to act in the best
interests of shareholders. The emphasis on stock options as a
component of executive pay in the United States also, however,
encourages opportunistic behavior by managers. Exercise prices
of executive stock options are typically established as the
company's stock price on the date the options are granted.
Managers can therefore enhance the value of their option awards
by timing grant dates to precede the release of favorable
corporate news. In fact, evidence suggests that they do so.
There has been considerable uncertainty over whether such
behavior constitutes insider trading. This Article attributes
such uncertainty to gaps in current law. In particular, insider
trading doctrine easily handles open-market transactions, but it
does a poor job of addressing situations in which managers deal
with their own corporations, such as in the case of executive
stock option grants. In these circumstances, numerous questions
arise, including whether the corporation or its shareholders
have been deceived. Drawing on current doctrine and the purposes
of the insider trading laws, this Article suggests that both
executives and boards of directors have at least some disclosure
obligations to shareholders regarding the compensatory element
of favorably timed grants. Moreover, it may well be that such
grants are subject to the same "disclose or abstain" rule
applicable in the traditional insider trading context.
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W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Earnings Manipulation and Managerial Investment Decisions:
Evidence from Sponsored Pension Plans"
BY: DANIEL B. BERGSTRESSER
Massachusetts Institute of Technology (MIT)
Department of Economics
MIHIR A. DESAI
Harvard University
Finance Unit
National Bureau of Economic Research (NBER)
JOSHUA RAUH
Massachusetts Institute of Technology (MIT)
Department of Economics
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=551681
Date: May 2004
Contact: MIHIR A. DESAI
Email: Mailto:mdesai@hbs.edu
Postal: Harvard University
Finance Unit
Boston, MA 02163 UNITED STATES
Phone: 617-495-6693
Fax: 617-496-6592
Co-Auth: DANIEL B. BERGSTRESSER
Email: Mailto:dberg@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
Co-Auth: JOSHUA RAUH
Email: Mailto:rauh@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
ABSTRACT:
Managers appear to manipulate firm earnings when they
characterize pension assets to capital markets and alter
investment decisions to justify, and capitalize on, these
manipulations. We construct a measure of the sensitivity of
reported earnings to the assumed long-term rate of return on
pension assets. Managers are more aggressive with assumed
long-term rates of return when their assumptions have a greater
impact on reported earnings. Managers also increase assumed
rates of return as they prepare to acquire other firms and as
they exercise stock options, further confirming the
opportunistic nature of these increases. Decisions about assumed
rates of return, in turn, influence asset allocation within
pension plans. Instrumental variables results suggest that a 25
basis point increase in the assumed rate of return is associated
with a 5% increase in equity allocation. Taken together, these
results suggest that earnings manipulation arising from
managerial motivations influences significant managerial
investment decisions.
JEL Classification: M41, M52, G23, G30, G11
______________________________
"What Do CEOs Bargain For? An Empirical Study of Key Legal
Components of CEO Employment Contracts"
BY: STEWART JON SCHWAB
Cornell Law School
RANDALL S. THOMAS
Vanderbilt University School of Law
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=529923
Paper ID: Vanderbilt Law and Economics Research Paper No. 04-12
Date: April 9, 2004
Contact: STEWART JON SCHWAB
Email: Mailto:sjs15@cornell.edu
Postal: Cornell Law School
#108
Myron Taylor Hall
Ithaca, NY 14853 UNITED STATES
Phone: 607.255.8584
Fax: 607-255-7193
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
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:
In this paper, we examine the key legal characteristics of 375
employment contracts between some of the largest 1500 public
corporations and their Chief Executive Officers. We look at the
actual language of these contracts, asking whether and in what
ways CEO contracts differ from what are thought of as standard
employment contract features for other workers. Our data provide
some empirical answers to several common assertions or
speculations about CEO contracts, and shed light on whether
these contracts are negotiated solely to suit the preferences of
CEOs or have provisions that insure that the employers'
interests are also safeguarded.
After giving an overview of the general characteristics of a
CEO employment contract, and the process by which they are
negotiated, we focus on five contracting issues: (1) the term
"just cause" that defines when an executive can be terminated
involuntarily with penalties; (2) the "good reason" termination
clauses in the contract that permit an executive to leave
voluntarily without financial penalties; (3) the non-competition
clauses in the contract; (4) the use of arbitration clauses as a
method of resolving contractual disputes; and (5) the
contractual restrictions, if any, on the CEO selling stock
options. We also discuss some of the less-well known economic
terms of these contracts, including their length and the level
of perquisites given to CEOs.
JEL Classification: K2, K22, G30, G34, J30
______________________________
"Pay without Performance: The Unfulfilled Promise of Executive
Compensation, Part II: Power and Pay"
BY: LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
JESSE M. FRIED
University of California, Berkeley
School of Law (Boalt Hall)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=537810
Date: February 2004
Contact: LUCIAN ARYE BEBCHUK
Email: Mailto:bebchuk@law.harvard.edu
Postal: Harvard Law School
1563 Massachusetts Avenue
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, Berkeley
School of Law (Boalt Hall)
Boalt Hall
Berkeley, CA 94720-7200 UNITED STATES
ABSTRACT:
This paper contains a draft of Part II of our forthcoming book,
Pay without Performance: The Unfulfilled Promise of Executive
Compensation (Harvard University Press, 2004). The book provides
a detailed account of how structural flaws in corporate
governance have enabled managers to influence their own pay and
produced widespread distortions in pay arrangements. The book
also examines how these flaws and distortions can best be
addressed.
Part II of the book shows how an understanding of the role of
managerial power can help explain executive compensation
practices. We provide a framework for assessing whether pay
arrangements are a product of managerial influence. We discuss
managers' interest in camouflaging the amount and the
performance-insensitivity of their pay. Applying our framework,
we discuss how managerial influence can help explain, among
other things, the evidence on the relationship between
managerial pay and managerial power; the use of retirement
benefits and other compensation arrangements to provide stealth
compensation; and the ability of departing managers to obtain
more than their contractual entitlement.
Other parts of the book are also available on the SSRN:
Part I: The Official View and its Limits, is available at
http://ssrn.com/abstract=537783.
Part III: The Decoupling of Pay from Performance, is available
at http://ssrn.com/abstract=546105.
Part IV: Going Forward, is available at
http://ssrn.com/abstract=546107.
JEL Classification: D23, G32, G34, G38, J33, J44, K22, M14
______________________________
"Pay without Performance: The Unfulfilled Promise of Executive
Compensation, Part III: The Decoupling of Pay from Performance"
BY: LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
JESSE M. FRIED
University of California, Berkeley
School of Law (Boalt Hall)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=546105
Date: February 2004
Contact: LUCIAN ARYE BEBCHUK
Email: Mailto:bebchuk@law.harvard.edu
Postal: Harvard Law School
1563 Massachusetts Avenue
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, Berkeley
School of Law (Boalt Hall)
Boalt Hall
Berkeley, CA 94720-7200 UNITED STATES
ABSTRACT:
This paper contains a draft of Part III of our forthcoming book,
Pay without Performance: The Unfulfilled Promise of Executive
Compensation (Harvard University Press, September 2004). The
book provides a detailed account of how structural flaws in
corporate governance have enabled managers to influence their
own pay and produced widespread distortions in pay arrangements.
The book also examines how these flaws and distortions can best
be addressed.
Part III of the book examines how managerial influence has
operated to reduce the performance-sensitivity of executive pay.
Among other things, we examine the structure of non-equity
compensation, the design of conventional option plans, the use
of restricted stock grants, and managers' freedom to unload
options and shares.
Other parts of the book are also available on the SSRN:
Part I: The Official View and its Limits, is available at
http://ssrn.com/abstract=537783.
Part II: Power and Pay, is available at
http://ssrn.com/abstract=537810.
Part IV: Going Forward, is available at
http://ssrn.com/abstract=546107.
JEL Classification: D23, G32, G34, G38, J33, J44, K22, M14
______________________________
"Pay without Performance: The Unfulfilled Promise of Executive
Compensation, Part IV: Going Forward"
BY: LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
JESSE M. FRIED
University of California, Berkeley
School of Law (Boalt Hall)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=546107
Date: February 2004
Contact: LUCIAN ARYE BEBCHUK
Email: Mailto:bebchuk@law.harvard.edu
Postal: Harvard Law School
1563 Massachusetts Avenue
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, Berkeley
School of Law (Boalt Hall)
Boalt Hall
Berkeley, CA 94720-7200 UNITED STATES
ABSTRACT:
This paper contains a draft of Part IV and the bibliography of
our forthcoming book, Pay without Performance: The Unfulfilled
Promise of Executive Compensation (Harvard University Press,
September 2004). The book provides a detailed account of how
structural flaws in corporate governance have enabled managers
to influence their own pay and have produced widespread
distortions in pay arrangements. The book also examines how
these flaws and distortions can best be addressed.
Part IV of the book discusses how executive compensation - and
corporate governance more generally - can be improved. We
examine the extent to which pay arrangements can be improved by
adopting board process rules, imposing shareholder approval
requirements, and making pay more transparent. We conclude that
problems with compensation arrangements cannot be fully
addressed without ensuring that directors focus on shareholder
interests and operate at arm's length from the executives whose
compensation they set. To achieve this result, we argue, it is
not sufficient to make directors independent of executives as
recent reforms has sought to do; it is also necessary to make
directors dependent on shareholders by changing the legal
arrangements that insulate boards from shareholders.
Other parts of the book are also available on the SSRN:
Part I: The Official View and its Limits, is available at
http://ssrn.com/abstract=537783.
Part II: Power and Pay, is available at
http://ssrn.com/abstract=537810.
Part III: The Decoupling of Pay from Performance, is available
at http://ssrn.com/abstract=546105.