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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. 8, No. 3: January 25, 2007
Editor: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Compensation
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T A B L E O F C O N T E N T S
"The Effect of Equity Compensation on Voluntary Executive
Turnover"
STEVEN BALSAM
Temple University - Department of Accounting
SETIYONO MIHARJO
Temple University - Department of Accounting
"Employee Sentiment and Stock Option Compensation"
NITTAI BERGMAN
Massachusetts Institute of Technology (MIT) - Sloan
School of Management
DIRK JENTER
Massachusetts Institute of Technology (MIT) - Sloan
School of Management, National Bureau of Economic
Research (NBER)
"Performance Pay and Earnings: Evidence from Personnel Records"
TUOMAS PEKKARINEN
University of Oxford - Nuffield College, Institute for
the Study of Labor (IZA)
CHRIS RIDDELL
Queen's University
"Pay Distribution in the Top Executive Team"
LUCIAN ARYE BEBCHUK
Harvard Law School, National Bureau of Economic Research
(NBER)
MARTIJN CREMERS
Yale School of Management
URS PEYER
INSEAD - Finance
"Do Directors Perform for Pay?"
RENEE B. ADAMS
University of Queensland Business School, European
Corporate Governance Institute (ECGI)
DANIEL FERREIRA
London School of Economics & Political Science (LSE) -
Department of Management, European Corporate Governance
Institute (ECGI)
"CEO Cash and Stock-Based Compensation Changes, Layoff Decisions,
and Shareholder Value"
JEFFREY T. BROOKMAN
University of Nevada, Las Vegas
SAEYOUNG CHANG
University of Nevada, Las Vegas - Department of Finance
CRAIG G. RENNIE
University of Arkansas - Sam M. Walton College of
Business
"Lucky Directors"
LUCIAN ARYE BEBCHUK
Harvard Law School, National Bureau of Economic Research
(NBER)
YANIV GRINSTEIN
Cornell University - Samuel Curtis Johnson Graduate
School of Management
URS PEYER
INSEAD - Finance
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"The Effect of Equity Compensation on Voluntary Executive
Turnover"
Journal of Accounting & Economics, Forthcoming
Contact: STEVEN BALSAM
Temple University - Department of Accounting
Email: steven.balsam@temple.edu
Auth-Page: http://ssrn.com/author=28716
Co-Author: SETIYONO MIHARJO
Temple University - Department of Accounting
Email: smiharjo@temple.edu
Auth-Page: http://ssrn.com/author=350334
Abstract: http://ssrn.com/abstract=934825
ABSTRACT: Equity compensation provides incentives for executives
to remain with the firm to avoid forfeiture of restricted shares
and some or all of the value of stock options held. Empirically
we show that the intrinsic value of unexercisable in-the-money
options, the time value of unexercised options, and the value of
restricted shares are inversely related to voluntary executive
turnover. These findings which are most pronounced for strong
performers, hold for CEOs and non-CEOs alike. While paying excess
cash compensation also reduces turnover, the effect is less
pronounced than that of equity compensation.
______________________________
"Employee Sentiment and Stock Option Compensation"
Journal of Financial Economics (JFE), Forthcoming
Author: NITTAI BERGMAN
Massachusetts Institute of Technology (MIT) - Sloan
School of Management
Email: nbergman@mit.edu
Auth-Page: http://ssrn.com/author=93842
Contact: DIRK JENTER
Massachusetts Institute of Technology (MIT) - Sloan
School of Management, National Bureau of Economic
Research (NBER)
Email: djenter@mit.edu
Auth-Page: http://ssrn.com/author=224670
Abstract: http://ssrn.com/abstract=946469
ABSTRACT: The use of equity-based compensation for rank-and-file
employees is a puzzle. We analyze whether the popularity of
option compensation may be driven by employee optimism, and show
that optimism by itself is insufficient to make option
compensation optimal. The crucial insight is that firms compete
with financial markets as suppliers of equity to employees and
that employees' access to the equity market restricts firms'
ability to profit from employee optimism. Firms must be able to
extract some of the implied rents even though employees can
purchase company equity in the financial markets. Such rent
extraction becomes feasible if employees prefer the stock options
offered by firms to the equity offered by the market, or if the
traded equity is overvalued. We provide empirical evidence that
firms use broad-based options compensation when boundedly
rational employees are likely to be excessively optimistic about
company stock, and when employees are likely to strictly prefer
options over stock.
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"Performance Pay and Earnings: Evidence from Personnel Records"
IZA Discussion Paper No. 2253
Contact: TUOMAS PEKKARINEN
University of Oxford - Nuffield College, Institute
for the Study of Labor (IZA)
Email: tuomas.pekkarinen@nuffield.oxford.ac.uk
Auth-Page: http://ssrn.com/author=98085
Co-Author: CHRIS RIDDELL
Queen's University
Email: riddellc@post.queensu.ca
Auth-Page: http://ssrn.com/author=576667
Full Text: http://ssrn.com/abstract=928791
ABSTRACT: This paper examines the effects of performance pay on
earnings using linked employee-employer panel data from Finland.
These payroll data contain information on the exact share of
earnings obtained and hours worked on a performance pay contract.
Using these data, we estimate the effects of performance pay in
the presence of both individual and firm-specific unobserved
heterogeneity. Furthermore, we are able to estimate the effects
of performance pay contracts in tasks of different complexity and
for the subsample of workers who change jobs following an
establishment closure. Unobservable firm characteristics explain
30-50% of the variance in performance pay. After controlling for
unobservable individual and firm characteristics, performance pay
workers earn substantially more than fixed rate workers. The
effects persist when only workers who changed firms, and
contracts, due to an establishment closure are used for
identification. There is also a strong, negative relationship
between job complexity and the incentive effects of performance
pay. Finally, we exploit several "natural experiments" where
there was a compensation regime change in one plant of a given
firm, but not in other plants. The plants are highly similar
pre-regime change, and had a common trend in earnings pre-regime
change. These experiments also yield substantial earnings
premiums.
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"Pay Distribution in the Top Executive Team"
Harvard Law and Economics Discussion Paper No. 574
Contact: LUCIAN ARYE BEBCHUK
Harvard Law School, National Bureau of Economic
Research (NBER)
Email: bebchuk@law.harvard.edu
Auth-Page: http://ssrn.com/author=17037
Co-Author: MARTIJN CREMERS
Yale School of Management
Email: martijn.cremers@yale.edu
Auth-Page: http://ssrn.com/author=254417
Co-Author: URS PEYER
INSEAD - Finance
Email: urs.peyer@insead.edu
Auth-Page: http://ssrn.com/author=273466
Full Text: http://ssrn.com/abstract=954609
ABSTRACT: We investigate the distribution of pay in the top
executive team in public companies. In particular, we study the
CEO's pay slice (CPS), defined as the fraction of the aggregate
top-five total compensation paid to the CEO. A firm's CPS might
reflect the relative significance of the CEO - in terms of
ability, contribution to the firm, or power - relative to other
members of the top executive team.
We find that CPS has been going up over the past decade. During
this period, CEOs have increased their fraction of both
equity-based compensation and non-equity compensation.
The level of CPS is associated with various characteristics of
the top team and the firm's governance arrangements. Among other
things, CPS is high when the CEO has long tenure; when the CEO
chairs the board; when few other executives are members of the
board; and when the firm has more entrenching provisions.
High CPS is associated with lower firm value as measured by
Tobin's Q. Using a simultaneous equations approach yields
findings consistent with the possibility that this negative
correlation is at least partly due to high CPS, or the factors
that it reflects, bringing about a lower Tobin's Q.
High CPS is also associated with a reduction in the sensitivity
of CEO turnover to performance. This is the case especially in
firms with high entrenchment levels.
Overall, our results indicate that the distribution of
compensation in the top executive team is an aspect of pay
arrangements and corporate governance that is worthy of financial
economists' attention.
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"Do Directors Perform for Pay?"
EFA 2004 Maastricht Meetings Paper No. 4460
Author: RENEE B. ADAMS
University of Queensland Business School, European
Corporate Governance Institute (ECGI)
Email: r.adams@business.uq.edu.au
Auth-Page: http://ssrn.com/author=248065
Contact: DANIEL FERREIRA
London School of Economics & Political Science
(LSE) - Department of Management, European
Corporate Governance Institute (ECGI)
Email: d.ferreira@lse.ac.uk
Auth-Page: http://ssrn.com/author=327077
Full Text: http://ssrn.com/abstract=887500
ABSTRACT: Many corporations reward their outside directors with a
modest fee for each board meeting they attend. Using a large
panel data set on director attendance behavior in publicly-listed
firms for the period 1996-2003, we provide robust evidence that
directors are less likely to have attendance problems at board
meetings when board meeting fees are higher. This is surprising
since meeting fees, on average roughly $1,000, represent an
arguably small fraction of the total wealth of a representative
director in our sample. Thus, corporate directors appear to
perform for even very small financial rewards.
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"CEO Cash and Stock-Based Compensation Changes, Layoff Decisions,
and Shareholder Value"
Financial Review, Forthcoming
Author: JEFFREY T. BROOKMAN
University of Nevada, Las Vegas
Email: jeff.brookman@unlv.edu
Auth-Page: http://ssrn.com/author=97153
Co-Author: SAEYOUNG CHANG
University of Nevada, Las Vegas - Department of
Finance
Email: SAEYOUNG@NEVADA.EDU
Auth-Page: http://ssrn.com/author=75913
Contact: CRAIG G. RENNIE
University of Arkansas - Sam M. Walton College of
Business
Email: crennie@walton.uark.edu
Auth-Page: http://ssrn.com/author=82736
Full Text: http://ssrn.com/abstract=934854
ABSTRACT: The CEOs of firms announcing layoffs receive 22.8% more
total pay in the subsequent year than other CEOs. These pay
increases result almost entirely from increases in stock-based
compensation and are found to persist. In addition, layoff
announcements are accompanied by shareholder value increases
averaging $40 million to $95 million. One-time labor cost savings
from layoffs average $65 million. We conclude CEOs receive pay
increases following layoffs as rewards for past decisions and to
motivate value-enhancing decisions in the future.
______________________________
"Lucky Directors"
Harvard Law and Economics Discussion Paper No. 573
Contact: LUCIAN ARYE BEBCHUK
Harvard Law School, National Bureau of Economic
Research (NBER)
Email: bebchuk@law.harvard.edu
Auth-Page: http://ssrn.com/author=17037
Co-Author: YANIV GRINSTEIN
Cornell University - Samuel Curtis Johnson Graduate
School of Management
Email: yg33@cornell.edu
Auth-Page: http://ssrn.com/author=328371
Co-Author: URS PEYER
INSEAD - Finance
Email: urs.peyer@insead.edu
Auth-Page: http://ssrn.com/author=273466
Full Text: http://ssrn.com/abstract=952239
ABSTRACT: While prior empirical work and much public attention
have focused on the opportunistic timing of executives' grants,
we provide in this paper evidence that outside directors' option
grants have also been favorably timed to an extent that cannot be
fully explained by sheer luck. Examining the option grants
provided by public firms to outside directors during 1996-2005,
we find that:
- Out of all director grant events, 9% (and a higher percentage
when events coinciding with annual meetings are excluded) were
lucky grant events - falling on days with a stock price equal to
a monthly low.
- We estimate that about 800 lucky grant events owed their status
to opportunistic timing, and that about 460 firms and 1400
outside directors were associated with grant events produced by
such timing.
- Opportunistic timing of director grants appears to have taken
place in each of the economy's 12 (Fama-French) industries other
than utilities.
- The opportunistic timing of director grant events has been to a
substantial extent the product of backdating and not merely
spring-loading based on private information.
- The Sarbanes-Oxley Act (SOX) reduced the incidence but did not
eliminate the opportunistic timing of directors' grants.
- Director grant events were more likely to be lucky when the
potential gains from such luck were larger; indeed, for a given
firm or director, grant events were more likely to be lucky in
months in which the difference between the median price and
lowest price of the month was large.
- Directors' luck and executives' luck have been linked.
Directors' grant events were more likely to be lucky when
executives and especially the CEO also received a grant on the
same date. Grant events not coinciding with an award to
executives were still more likely to be lucky when the CEO got a
lucky grant in the current or preceding year.
- Grant events were more likely to be lucky when the firm had
more entrenching provisions protecting insiders from the risk of
removal.
- Grant events were more likely to be lucky when the board did
not have a majority of independent directors.
- Directors' luck has been persistent; a grant event was more
likely to be lucky when the preceding director grant event was
lucky as well.
- 3.8% of all grant events were super-lucky - defined as taking
place at the lowest price of the calendar quarter - and we
estimate that 4.6% of all firms participated in one or more
super-lucky grants that owed their status to opportunistic
timing.
Our results indicate that option grant practices might have
involved some agency problems between outside directors and
shareholders - and not only agency problems between executives
and their boards - and are relevant for assessing the performance
of outside directors and identifying the conditions under which
such directors can best perform.