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SOCIAL SCIENCE RESEARCH NETWORK
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. 20: July 27, 2006
Editors: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Executive Compensation
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T A B L E O F C O N T E N T S
"Serial CEOs' Incentives and the Shape of Managerial Contracts"
MARIASSUNTA GIANNETTI
Stockholm School of Economics, Centre for Economic Policy
Research (CEPR), European Corporate Governance Institute (ECGI)
"Does Executive Compensation Disclosure Alter Pay at the Expense
of Incentives?"
PETER L. SWAN
University of New South Wales - School of Banking and
Finance
XIANMING ZHOU
University of Hong Kong - School of Economics and Finance
"Why Has CEO Pay Increased So Much?"
XAVIER GABAIX
Massachusetts Institute of Technology (MIT) - Department
of Economics, National Bureau of Economic Research (NBER)
AUGUSTIN LANDIER
New York University - Department of Finance
"After the Scandals: Changing Relationships in Corporate
Governance"
CARY COGLIANESE
University of Pennsylvania Law School
MICHAEL L. MICHAEL
Harvard University - John F. Kennedy School of Government
"Reforming the Taxation of Deferred Compensation"
ETHAN YALE
Georgetown University Law Center
GREGG D. POLSKY
University of Minnesota Law School
"Executive Compensation and Short-Termist Behaviour in
Speculative Markets"
PATRICK BOLTON
Princeton University - Department of Economics, Centre
for Economic Policy Research (CEPR), European Corporate
Governance Institute (ECGI), National Bureau of Economic Research
(NBER)
JOSÉ A. SCHEINKMAN
Princeton University - Department of Economics, National
Bureau of Economic Research (NBER)
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"Serial CEOs' Incentives and the Shape of Managerial Contracts"
Contact: MARIASSUNTA GIANNETTI
Stockholm School of Economics, Centre for Economic
Policy Research (CEPR), European Corporate
Governance Institute (ECGI)
Email: Mariassunta.Giannetti@hhs.se
Auth-Page: http://ssrn.com/author=283885
Full Text: http://ssrn.com/abstract=889040
ABSTRACT: This paper analyzes the optimal contracting consequences
of a recent phenomenon in the managerial labor market, CEO job
hopping. I show that when the managerial labor market is thin and
growth opportunities are relatively low, the optimal contract
rewards the CEO for past performance through a bonus.
Nevertheless, the CEO takes a long horizon in selecting corporate
strategies. If growth opportunities improve, but opportunities
for job hopping remain limited, the optimal contract must include
restricted-equity-like claims, but the overall compensation does
not increase. When the managerial labor market provides more
opportunities for job hopping, large differences in the structure
of executive contracts emerge. It is still optimal to offer a
bonus contract, even though the manager selects inefficient
short-term strategies, if growth opportunities are expected to be
weak. If, instead, growth opportunities are perceived to be
relatively strong, an increase in long-term equity compensation
drives a surge in the overall CEO compensation. I show that,
under these conditions, the optimal contract may include
non-restricted equity even though the main problem is managerial
retention in the intermediate period. Finally, I argue that the
mechanisms highlighted in the model can explain both the surge in
U.S. CEO compensation and the large differences in the level and
structure of managerial compensation across countries and across
firms within a country.
______________________________
"Does Executive Compensation Disclosure Alter Pay at the Expense
of Incentives?"
Contact: PETER L. SWAN
University of New South Wales - School of Banking
and Finance
Email: peter.swan@unsw.edu.au
Auth-Page: http://ssrn.com/author=136389
Co-Author: XIANMING ZHOU
University of Hong Kong - School of Economics and
Finance
Email: xianming.zhou@hku.hk
Auth-Page: http://ssrn.com/author=239991
Full Text: http://ssrn.com/abstract=910865
ABSTRACT: According to the "keeping up with the Jones" theory
promulgated by compensation consultants, compensation disclosure
is responsible for increases in executive pay levels. Jensen and
Murphy (1990a), however, contend that disclosure is responsible
for a decline in performance pay, as public scrutiny penalizes
boards that provide incentives resulting in high payouts. We
provide evidence contrary to both theories using data on pay
levels and incentives pre- and post-disclosure. Disclosure does
not appear to alter pay levels but it does enhance incentives.
Our findings suggest failure in managerial incentive contracts
when pay is opaque to shareholders.
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"Why Has CEO Pay Increased So Much?"
MIT Department of Economics Working Paper No. 06-13
AFA 2007 Chicago Meetings Paper
Contact: XAVIER GABAIX
Massachusetts Institute of Technology (MIT) -
Department of Economics, National Bureau of
Economic Research (NBER)
Email: xgabaix@mit.edu
Auth-Page: http://ssrn.com/author=297281
Co-Author: AUGUSTIN LANDIER
New York University - Department of Finance
Email: alandier@stern.nyu.edu
Auth-Page: http://ssrn.com/author=262766
Full Text: http://ssrn.com/abstract=890829
ABSTRACT: This paper develops a simple competitive model of CEO
pay. A large part of the rise in CEO compensation in the US
economy is explained without assuming managerial entrenchment,
mishandling of options, or theft. CEOs have observable managerial
talent and are matched to assets in a competitive assignment
model. The marginal impact of a CEO's talent is assumed to
increase with the value of the assets under his control. Under
very general assumptions, using results from extreme value
theory, the model determines the level of CEO pay across firms
and over time, and the pay-sensitivity relations. The model
predicts the cross-sectional Cobb-Douglas relation between pay
and firm size. It also predicts that the level of CEO
compensation should increase one for one with the average market
capitalization of large firms in the economy. Therefore, the
five-fold increase of CEO pay between 1980 and 2000 can be fully
attributed to the increase in market capitalization of large US
companies. The model can also be used to study other large
changes at the top of the income distribution, and offers a
benchmark for calibratable corporate finance.
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"After the Scandals: Changing Relationships in Corporate
Governance"
Contact: CARY COGLIANESE
University of Pennsylvania Law School
Email: ccoglian@law.upenn.edu
Auth-Page: http://ssrn.com/author=45817
Co-Author: MICHAEL L. MICHAEL
Harvard University - John F. Kennedy School of
Government
Email: michael_michael@ksg.harvard.edu
Auth-Page: http://ssrn.com/author=412419
Full Text: http://ssrn.com/abstract=911653
ABSTRACT: The spate of recent corporate scandals has produced a
legislative and regulatory reaction aimed at restoring
marketplace integrity. This response - consisting notably of the
Sarbanes-Oxley Act of 2002, implementing regulations and stock
market listing standards - has, in turn, affected relationships
between the chief executive and the board, as well as between the
corporation and gatekeepers. To take stock of these changes, the
Mossavar-Rahmani Center for Business and Government's Regulatory
Policy Program convened a roundtable dialogue in May 2006 that
brought together government officials, business leaders, and
academic researchers. Roundtable participants considered changes
that have and have not occurred in corporate relationships, as
well as their effect on current governance practices. One area
participants also discussed that has not changed much - executive
compensation - appears to be causing even greater concern now
than several years ago. This report synthesizes the roundtable
discussion, and includes a keynote address by SEC Commissioner
Roel C. Campos. The report also highlights key public policy
challenges that lie ahead, and calls for an appropriate balance
in future policymaking between a long- and short-term focus,
between national and state solutions, and, ultimately, between
governmental and market action.
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"Reforming the Taxation of Deferred Compensation"
Georgetown Law and Economics Research Paper No. 913055
Minnesota Legal Studies Research Paper No. 06-29
North Carolina Law Review, Forthcoming
Contact: ETHAN YALE
Georgetown University Law Center
Email: edy@law.georgetown.edu
Auth-Page: http://ssrn.com/author=385377
Co-Author: GREGG D. POLSKY
University of Minnesota Law School
Email: polsk001@tc.umn.edu
Auth-Page: http://ssrn.com/author=249434
Full Text: http://ssrn.com/abstract=913055
ABSTRACT: Executive pay is currently a topic of significant
interest for policymakers, academics, and the popular press. Just
weeks ago, in reaction to widespread press reports and academic
criticism of extravagant executive perquisites, the SEC proposed
new regulations designed to change fundamentally the manner in
which executive compensation is reported to share-holders.
Despite all of this attention, one significant aspect of
executive deferred compensation has gone virtually unnoticed -
the federal tax rules governing this form of compensation are
fundamentally flawed and must be extensively over-hauled. These
rules are flawed because they often create a significant
incentive for companies and their executives to structure
deferred, rather than current, compensation, thereby producing
highly inefficient and inequitable results. This Article
addresses potential legislative reforms that would remedy this
problem by neutralizing the tax treatment of current and deferred
compensation. While this neutrality goal, which was part of the
recent proposals made by President Bush's Advisory Panel on Tax
Reform, is easy to describe in general and conclusory terms, the
devil is in the details. There has been little serious academic
analysis of how to implement a set of tax rules that would create
neutrality while avoiding undue complexity. This Article attempts
to fill that void.