ELIEZER M. FICH, Drexel University - Bennett S. LeBow College of Business
Email: efich@drexel.edu
ANH L. TRAN, Drexel University
Email: anh@drexel.edu
RALPH A. WALKLING, Drexel University - Lebow College of Business
Email: rw@Drexel.edu

While the previous literature addresses the existence of golden parachutes, it does not consider their relative importance to CEOs. This importance is critical because it correlates with the moral hazard problem facing the firm’s top decision maker. When firms become acquisition targets, their CEO has important influence over the deal’s outcome. In these cases, an incorrectly sized parachute relative to other executive compensation could produce either a ‘rush to sale’ or ‘unyielding resistance’ despite the acquisition price offered. Either of these attitudes might harm target shareholders. We examine 851 acquisition offers from 1999-2007 to investigate whether golden parachutes benefit the executives receiving them, the shareholders in the firms that grant them, or both. Although we do find evidence of incentive alignment and ex-post settling up, our primary results are consistent with rent extraction.

LUCIAN A. BEBCHUK, Harvard University - Harvard Law School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: bebchuk@law.harvard.edu
YANIV GRINSTEIN, Cornell University - Samuel Curtis Johnson Graduate School of Management
Email: yg33@cornell.edu
URS PEYER, INSEAD - Finance
Email: urs.peyer@insead.edu

This paper integrates and further develops the analysis of two discussion papers we circulated earlier, “Lucky CEOs” and “Lucky Directors.” We study the relation between opportunistic timing of option grants and corporate governance, focusing on at-the-money “lucky” grants awarded at the lowest price of the grant month. We find that both CEO and independent directors received an abnormally high number of lucky grants, and that opportunistic timing of director grants was not merely a by-product of their coinciding with executive grants or of firms’ routinely timing all grants. Lucky grants to CEOs and directors are associated with higher CEO compensation from other sources, and are correlated with a lack of majority of independent directors on the board, no independent compensation committee with an outside blockholder, or a long-serving CEO. For any given firm, the odds of a lucky grant increased when the payoffs from luck were high and when a preceding grant was lucky.

Lucky CEOs is available on SSRN at: http://papers.ssrn.com/abstract =945392
Lucky Directors is available on SSRN at: http://papers.ssrn.com/abstract =952239

DAVID I. WALKER, Boston University School of Law
Email: diwalker@bu.edu

Executive equity compensation in the U.S. is evolving. At the turn of the millennium, stock options dominated the equity pay landscape, accounting for over half of the aggregate ex ante value of senior executive pay at large public companies, while restricted stock and similar compensation accounted for only about ten percent. Beginning in 2006, stock grants have displaced options as the single largest component of senior executive compensation at these firms. Accompanying this shift has been increased variation among companies in their relative emphasis on stock and options in equity pay packages. Both phenomena provide an opportunity for a rich exploration of executive pay contracting focusing specifically on equity pay design. Such an exploration is timely given the current focus in Washington on the relationship between equity compensation and corporate risk taking. This article begins that exploration and has two primary aims. First, it describes the evolution in executive equity pay practices and the current equity compensation landscape. Second, it considers the extent to which this evolution and the current use of stock and option pay can be explained as a function of efficient contracting (and what 'efficient contracting' means in this context). The analysis reveals several features of the executive equity pay landscape that suggest limitations on efficient compensation contracting. First, although directionally consistent with changes in the conventional economic determinants of equity pay design, the dramatic shift over the last decade from very heavy reliance on options to a more balanced emphasis on stock and options suggests that option expensing, option taint, and/or increased perceived option risk played leading roles. Second, the tri-modal distribution of the mix of stock and options being granted in recent years suggests that optimizing incentives is not the sole consideration of issuing firms. Third, the extent to which the same mix of stock and options is granted to the various member of the executive suite suggests that individual optimization is quite limited.

YONCA ERTIMUR, Duke University - Fuqua School of Business
Email: yertimur@duke.edu
VOLKAN MUSLU, University of Texas at Dallas - School of Management
Email: vmuslu@utdallas.edu
FABRIZIO FERRI, Harvard Business School
Email: fferri@hbs.edu

We study the determinants and consequences of compensation-related activism using a sample of 134 vote-no campaigns and 1,198 shareholder proposals related to executive pay between 1997 and 2007. The frequency of shareholder proposals and vote-no campaigns has increased substantially after 2002, fueled by greater union pension fund activism and growing investor concerns with executive pay. Shareholders target firms with abnormally high CEO pay and lend greater voting support to proposals in such firms, reflecting a sophisticated understanding of CEO pay figures. Voting shareholders do not support proposals that try to micromanage executive pay and favor instead proposals related to process by which executive pay is determined. The greater voting support for these proposals translates to higher implementation rates. We find a $7.3 million reduction in total CEO pay for firms with abnormally high CEO pay that are targeted by compensation-related vote-no campaigns and a $2.3 million reduction in firms targeted by proposals sponsored by institutional proponents and calling for greater link between pay and performance. Our findings have implications for the current debate on the adoption of a 'say on pay' shareholder vote on executive pay.

(MICHAEL) HUI LI, La Trobe University
Email: h.li@pgrad.unimelb.edu.au
BRUCE D. GRUNDY, University of Melbourne
Email: bruceg@unimelb.edu.au

This paper investigates the relation between investor sentiment, executive compensation and corporate investment. We derive a model that shows the share price will be jointly affected by investor sentiment and the corporate investment decision. The model predicts that, if a compensation contract that includes long-term options or both long-term options and long-term restricted shares, the investment level increases with investors’ optimism. The model also predicts that the relation between investment level and the options or the shares in the firm depends on the value of parameters including investor sentiment and the fraction of the options or the fraction of the shares hold by the managers. We find no significant relation between investment level and the managers’ compensation, while a significant relation between investment level and investor sentiment as measured by share turnover. We also find if the compensation contract only includes options, then conditional on investor sentiment, the options have a negative relation with investment level. The result suggests that managers make investment decisions that cater for investor sentiment. The long-term option may be used to reduce the possible overinvestment given a high degree of investors’ optimism.

ANUP AGRAWAL, University of Alabama - Culverhouse College of Commerce & Business Administration
Email: aagrawal@cba.ua.edu
TAREQUE NASSER, University of Alabama
Email: tnasser@cba.ua.edu

There is an intense, ongoing debate on whether the level and composition of CEO pay is an outcome of an efficient arms-length bargaining process or is controlled by powerful CEOs. An independent director who is also a blockholder (IDB) has both a strong incentive and the ability to monitor management. So the presence of an IDB in a firm can lead to arms-length bargaining in setting CEO pay. Alternatively, IDBs may pursue private benefits at the expense of small shareholders. This paper examines three issues. First, we investigate the determinants of an IDB’s presence in a firm. Second, we examine the relations between IDB presence and (1) the level and structure of CEO compensation, and (2) CEO turnover-performance sensitivity. Third, we analyze if IDB presence is related to firm performance and valuation. We find IDBs to be more prevalent in smaller, younger, and high growth firms with poor performance and lower cash holdings. This finding suggests that IDB presence is not a random occurrence. After controlling for other things, and accounting for the potential endogeneity of IDB presence, we find that firms with IDBs have lower CEO compensation, lower proportions of CEO pay via stock and options, higher CEO turnover-performance sensitivity, and higher valuations. The magnitudes of these effects are substantial, and are generally bigger when an IDB serves on the compensation committee. Our findings suggest that IDB presence promotes better incentives and monitoring of the CEO, and consequently leads to higher firm valuation.

V. G. NARAYANAN, Harvard Business School
Email: vnarayanan@hbs.edu
LISA BREM, Harvard Business School
Email: lbrem@hbs.edu

As the recession lingered on into 2009, the U.S. government sought to limit executive pay and excessive risk. The debate raged over what constituted excessive risk and how best to mitigate it. This case describes the government restrictions on executive pay for TARP recipients and delves into the debate on executive compensation and incentives that encourage excessive risk.

DANIEL SHAVIRO, New York University School of Law
Email: shavirod@juris.law.nyu.edu

Tax rules encouraging excessive debt, complex financial transactions, poorly designed incentive compensation for corporate managers, and highly leveraged home ownership all may have contributed to the financial crisis, but do not appear to have been among the primary causes. Even without a strong causal link, however, the preexisting case for tax reform at all these margins arguably is strengthened by the 2008 financial crisis, which suggests that tax rules not only fell short of classic neutrality benchmarks but generally leaned in precisely the wrong direction.