_________________________________________________________________
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. 7, No. 4: February 24, 2006
_________________________________________________________________
Publisher: Employment, Labor, Compensation & Pension Law Journals
a division of
Social Science Electronic Publishing, Inc. (SSEP)
and Social Science Research Network (SSRN)
Editor: PAMELA J. PERUN
Urban Institute
Copyright: SSEP, Inc. 2006. All rights reserved.
Leading Social Science Research Delivered To Your Desktop
http://www.SSRN.Com/
___________________________________________________________
Topic of This Issue:
Severance Pay
___________________________________________________________
SEARCHING THE SSRN ELECTRONIC LIBRARY
To search the entire SSRN eLibrary, please visit:
http://papers.ssrn.com/
To browse all abstracts published in this journal, please visit:
http://www.ssrn.com/link/benefits-compensation-pension-law.html
To ensure delivery of this journal, please add LSN@SSRN.com to
your email contact list.
REDISTRIBUTION
Individual and professional subscriptions to the journal are for
single users. It is a violation of copyright to redistribute
this document electronically or otherwise without the explicit
permission of Social Science Electronic Publishing, Inc.
Site licenses for organizations are available by contacting
Mailto:Site@SSRN.Com
SIGN OFF
SUBSCRIPTION MANAGEMENT
You can change your journal subscriptions by going to the SSRN
User HeadQuarters. Please enter the email address where you
received this email in the "Your Email Address" field and
click "Submit". Click on your name on the next screen, and your
User ID and Password will be emailed to you. Once you have
successfully logged in, you will be able to change your journal
subscriptions. If you have questions or problems with this
process, please email UserSupport@SSRN.com or call 877-SSRNHelp
(toll free 877.777.6435).
ALIGNMENT
If this document is misaligned, please set type face to a
non-proportional font such as Courier 10.
PAPER DOWNLOADS
If you need assistance downloading papers from our web site,
please contact Mailto:Support@SSRN.Com
T A B L E of C O N T E N T S
_________________________________________________________________
WORKING PAPERS
"Benefit Generosity in Voluntary Severance Plans: The U.S.
Experience"
DONALD O. PARSONS
George Washington University
"Keeping the Board in the Dark: CEO Compensation and
Entrenchment"
ROMAN INDERST
London School of Economics & Political Science
(LSE)
Centre for Economic Policy Research (CEPR)
HOLGER M. MUELLER
New York University - Stern School of Business
Centre for Economic Policy Research (CEPR)
"Trends in Severance Pay Coverage in the United States,
1980-2001"
JOHN BISHOW
Government of the United States of America
Bureau of Labor Statistics
DONALD O. PARSONS
George Washington University
"Contractual Employment Protection and the Scarring Risk of
Unemployment"
ELKE J. JAHN
Government of the Federal Republic of Germany
Institute for Employment Research (IAB)
Institute for the Study of Labor (IZA)
University of Erlangen-Nuernberg
Department of Economics
THOMAS WAGNER
University of Applied Sciences Nurnberg
"Optimal Severance Payment: Theory and Practice"
BYEONGJU JEONG
CERGE-EI, Center For Econ Research & Grad
Education, and Econ Institute, Prague
NEW and FORTHCOMING ARTICLES
"Executive Pensions (Earlier Circulated as Putting Executive
Pensions on the Radar Screen)"
Journal of Corporation Law, 2005
LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
ROBERT J. JACKSON
Harvard University
John M. Olin Center for Law, Economics, and
Business
"The New Tax Law Regulating Deferred Compensation and Quitting
for Good Reason"
Tax Notes, Vol. 110, No. 4, January 30, 2006
DAVID E. GORDON
Clark Consulting
Pearl Meyer & Partners
S S R N I N F O R M A T I O N
_________________________________________________________________
* Partners in Publishing
* Administrative Information
- Missing issues & change of address
- Solicitation of abstracts
* Directors
* Subscription to SSRN Journals
_________________________________________________________________
ACQUIRING PAPERS
Download papers directly from the included web address or contact
the author or other contact person directly. Provide an address
to which the author or other contact person can send a paper
copy and mention that you saw the abstract in SSRN. Some of
SSRN's Partners in Publishing require a subscription or charge a
fee for electronic downloads.
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.
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Benefit Generosity in Voluntary Severance Plans: The U.S.
Experience"
BY: DONALD O. PARSONS
George Washington University
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=877903
Date: December 2005
Contact: DONALD O. PARSONS
Email: Mailto:dopars@gwu.edu
Postal: George Washington University
1922 F Street, NW
Old Main, Suite 208
Washington, DC 20052 UNITED STATES
ABSTRACT:
Mandated severance benefits have been the focus of much
analysis, motivated largely by "firing cost" concerns. Less
attention has been paid to voluntary systems, as in the U.S.,
although theory would suggest that these too induce firing
costs. In a voluntary system, of course, benefit generosity is
likely to be limited, unless firing cost distortions are modest
or job displacement insurance is unusually valuable. Bureau of
Labor Statistics (BLS) surveys indicate that approximately
one-quarter of the U.S. workforce is covered by a severance pay
plan, but the BLS does not systematically collect information on
program generosity. We are instead forced to rely on private
surveys by associations, management consulting firms, and others
for plan descriptions. Although differing in sample and survey
instrument design, these studies reveal remarkable uniformity of
the basic benefit formula over the last half century, with most
plans offering scheduled benefits equal to a specified number of
weekly wage payments for each year of service up to a service or
benefit maximum. This benefit algorithm, similar to those in
many mandated plans worldwide, mimics well-established empirical
regularities in job displacement losses. The benefits however
are modest. The modal private plan offers one week of pay per
year of service for all but the highest levels of management,
perhaps one-fourth of average capital losses from a job
displacement.
JEL Classification: J65, J32, J33
______________________________
"Keeping the Board in the Dark: CEO Compensation and
Entrenchment"
BY: ROMAN INDERST
London School of Economics & Political Science
(LSE)
Centre for Economic Policy Research (CEPR)
HOLGER M. MUELLER
New York University - Stern School of Business
Centre for Economic Policy Research (CEPR)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=872872
Paper ID: CEPR Discussion Paper No. 5315
Date: October 2005
Contact: ROMAN INDERST
Email: Mailto:R.INDERST@LSE.AC.UK
Postal: London School of Economics & Political Science (LSE)
Houghton Street
London WC2A 2AE, UNITED KINGDOM
Phone: +44 20 7955 7291
Fax: +44 20 7831 1840
Co-Auth: HOLGER M. MUELLER
Email: Mailto:HMUELLER@STERN.NYU.EDU
Postal: New York University - Stern School of Business
Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126 UNITED STATES
ABSTRACT:
We study a model in which a CEO can entrench himself by hiding
information from the board that would allow the board to
conclude that he should be replaced. Assuming that even diligent
monitoring by the board cannot fully overcome the information
asymmetry vis-a-vis the CEO, we ask if there is a role for CEO
compensation to mitigate the inefficiency. Our analysis points
to a novel argument for high-powered, non-linear CEO
compensation such as bonus pay or stock options. By shifting the
CEO's compensation into states where the firm's value is
highest, a high-powered compensation scheme makes it as
unattractive as possible for the CEO to entrench himself when he
expects that the firm's future value under his management and
strategy is low. This, in turn, minimizes the severance pay
needed to induce the CEO not to entrench himself, thereby
minimizing the CEO's informational rents. Amongst other things,
our model suggests how deregulation and technological changes in
the 1980s and 1990s might have contributed to the rise in CEO
pay and turnover over the same period.
JEL Classification: G3
______________________________
"Trends in Severance Pay Coverage in the United States,
1980-2001"
BY: JOHN BISHOW
Government of the United States of America
Bureau of Labor Statistics
DONALD O. PARSONS
George Washington University
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=878144
Date: May 2004
Contact: DONALD O. PARSONS
Email: Mailto:dopars@gwu.edu
Postal: George Washington University
1922 F Street, NW
Old Main, Suite 208
Washington, DC 20052 UNITED STATES
Co-Auth: JOHN BISHOW
Email: Mailto:Bishow.John@bls.gov
Postal: Government of the United States of America
Bureau of Labor Statistics
2 Massachusetts Avenue, NE
Washington, DC 20212 UNITED STATES
ABSTRACT:
Major shocks to the labor market in the last two decades have
raised concerns that workers, especially white-collar and
service industry workers, have become increasingly vulnerable to
costly job displacements. We construct annual estimates of
private severance pay coverage for the last two decades,
utilizing two Bureau of Labor Statistics data series - the
Employee Benefits Surveys (EBS) and the Employment Cost Index
(ECI) - to explore the implications of these changes on recent
coverage trends. We find only modest evidence that employers
have adjusted to this perception by expanding severance pay
coverage. Although coverage has increased among
administrative/professional workers in both the goods and
service sectors and among clerical workers in the goods sector,
it has declined among groups believed to be newly vulnerable to
job displacement risk - workers in the service sector generally,
and especially clerical/sales workers.
JEL Classification: J65, J32, J33
______________________________
"Contractual Employment Protection and the Scarring Risk of
Unemployment"
BY: ELKE J. JAHN
Government of the Federal Republic of Germany
Institute for Employment Research (IAB)
Institute for the Study of Labor (IZA)
University of Erlangen-Nuernberg
Department of Economics
THOMAS WAGNER
University of Applied Sciences Nurnberg
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=840726
Paper ID: IZA Discussion Paper No. 1813
Date: October 2005
Contact: ELKE J. JAHN
Email: Mailto:Elke.Jahn@iab.de
Postal: Government of the Federal Republic of Germany
Institute for Employment Research (IAB)
Regensburger Str. 104
D-90327 Nuernberg, GERMANY
Co-Auth: THOMAS WAGNER
Email: Mailto:Thomas.Wagner@fh-nuernberg.de
Postal: University of Applied Sciences Nurnberg
90489 Nuernberg, GERMANY
ABSTRACT:
Risk-averse job seekers fearing the scarring effect of
unemployment meet vacancies offering contractual employment
protection (CEP) in form of guaranteed employment (GEC) or
severance pay contracts (SPC). A GEC fully eliminates both the
income risk and the scarring risk of unemployment. SPC diversify
the income risk, but provide only limited protection against the
scarring risk. (1) Workers strictly prefer contract market to
spot market jobs. (2) A higher productivity, a lower probability
of demand shocks or of finding a re-employment after a dismissal
as well as lower public unemployment benefits increase the
fraction of workers concluding a GEC. (3) Although firms are
risk-neutral, first-best SPC are not incentive compatible under
asymmetric information on the demand for the output of the job.
In the second-best equilibrium, a positive fraction of
over-insured workers will conclude a GEC, while workers signing
a SPC incur income risk. (4) With asymmetric information on the
reemployment status of a dismissed worker, employees who
conclude a third-best SPC face both uninsurable income risk and
the unemployment scar. Workers with a precautionary motive who
expect a large or long lasting scar, conclude SPC with wage
replacement rates strictly larger than one and low recession
wages, which make their jobs more viable.
JEL Classification: J31, J32, J81
______________________________
"Optimal Severance Payment: Theory and Practice"
BY: BYEONGJU JEONG
CERGE-EI, Center For Econ Research & Grad
Education, and Econ Institute, Prague
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=868470
Paper ID: CERGE-EI Working Paper No. 255
Date: April 2005
Contact: BYEONGJU JEONG
Email: Mailto:BYEONGJU.JEONG@CERGE.CUNI.CZ
Postal: CERGE-EI, Center For Econ Research & Grad Education, and
Econ Institute, Prague
P.O. Box 882
7 Politickych veznu
111 21 Prague 1, CZECH REPUBLIC
Phone: (420-2) 240 05 258
Fax: (420-2) 240 05 143
ABSTRACT:
I present a model in which the employment contract includes
severance payment as an instrument for achieving optimal
separation between the firm and the worker. I show that the
privately optimal severance payment from the model can replicate
the level and the variation in actual severance payments (and
notice periods) across OECD countries. I conduct a policy
experiment in which the existing unemployment benefits are
financed by a separation tax. Under this policy, the actual
severance payments need to change only marginally in order to
achieve socially optimal separation.
______________________________
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"Executive Pensions (Earlier Circulated as Putting Executive
Pensions on the Radar Screen)"
Journal of Corporation Law, 2005
BY: LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
ROBERT J. JACKSON
Harvard University
John M. Olin Center for Law, Economics, and
Business
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=694766
Paper ID: Harvard Law and Economics Discussion Paper No. 507
Contact: LUCIAN ARYE BEBCHUK
Email: Mailto:bebchuk@law.harvard.edu
Postal: Harvard Law School
Cambridge, MA 02138 UNITED STATES
Phone: 617-495-3138
Fax: 617-496-3119
Co-Auth: ROBERT J. JACKSON
Email: Mailto:rojackso@law.harvard.edu
Postal: Harvard University
John M. Olin Center for Law, Economics, and
Business
Cambridge, MA 02138 UNITED STATES
ABSTRACT:
Because public firms are not required to disclose the monetary
value of pension plans in their executive pay disclosures,
financial economists and the media alike have generally analyzed
executive pay using figures that do not include the value of
such pension plans. This paper presents evidence that omitting
the value of pension benefits significantly undermines the
accuracy of existing estimates of executive pay, its
variability, and its sensitivity to performance.
We study the pension arrangements of CEOs of S&P 500 companies
that (1) are now serving and are near the retirement age; or (2)
left their positions during 2003 and the first half of 2004.
Roughly two-thirds of these CEO have a pension plan (or similar
retirement arrangement), and our findings with respect to these
CEOs are as follows:
· The executives' pension plans had a median actuarial value of
$15 million.
· The ratio of the executives' pension value to the executives'
total compensation (including both equity and non-equity pay)
during their service as CEO had a median value of 34%.
· Including pension values increased the median percentage of
the executives' total compensation composed of salary-like
payments during and after their service as CEO from 15% to 39%.
In addition, the pension benefits in our sample varied
considerably with respect to both their magnitude and their
relationship to the executives' overall compensation. Our
findings indicate that the standard omission of pension plan
values by researchers and the media leads to:
· Significant underestimation of the magnitude of executive
compensation;
· Severe distortions in comparisons among executive pay
packages; and
· Significant overestimation of the extent to which executive
pay is linked to performance.
Our analysis demonstrates the importance of requiring
companies to place the value of executive pension plans on
investors' radar screen. We put forward disclosure rules that
would require companies to make the value of such plans
transparent and thus enable investors to better evaluate the
magnitude, makeup, and performance-sensitivity of total
executive pay.
JEL Classification: D23, G32, G34, G38, J33, J44, K22, M14
______________________________
"The New Tax Law Regulating Deferred Compensation and Quitting
for Good Reason"
Tax Notes, Vol. 110, No. 4, January 30, 2006
BY: DAVID E. GORDON
Clark Consulting
Pearl Meyer & Partners
Contact: DAVID E. GORDON
Email: Mailto:David.Gordon@clarkconsulting.com
Postal: Clark Consulting
No Address Available,
ABSTRACT:
In this article the author discusses how severance arrangements
are affected by section 409A, which subjects deferred
compensation to many new rules. In particular, he focuses on how
the common provision that allows an executive to receive
additional severance if he quits for good reason raises a number
of complex issues under the IRS's recently proposed regulations.