This paper summarizes the empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay.

This paper-- a joint product of the Finance and Private Sector Development Department and the Transition Economics Division, Policy Research Department -- is part of a larger effort in the Bank to explore issues of corporate governance in transition economies. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Grace Evans, room N11-041, extension 85783 (47 pages). June 1995

This paper analyzes junk bond defaults during 1980 to 1991 to determine which factors affect the length of time spent in default. Bondholder holdouts are not a significant problem, as firms with proportionately more bonds have shorter default spells. In contrast, bank debt is associated with slower restructurings. Bargaining problems arising from contingent liabilities, lawsuits, and size delay the process, although multiple bond classes do not. Neither information problems nor firm value appear to matter. HLTs do not resolve their defaults at a significantly faster pace. Defaults tend to take less time in the 1990s, despite Drexel’s disappearance from the market.

The recent financial crisis in East Asia, across countries with very different institutional characteristics, allows the identification of factors that determine the use of bankruptcy as a means of resolving corporate distress. Using a sample of 4,569 publicly traded East Asian firms, we observe a total of 106 bankruptcies in 1997 and 1998. We find that the likelihood of filing is lower for firms with ownership links to banks and families, controlling for firm and country characteristics. In addition, filings are more likely in countries with better judicial systems. Finally, we find that the interaction between strong creditor rights and a better judicial system increases the likelihood of bankruptcy. JEL Classification Codes: G33, G34. The authors are from the World Bank. We thank Magdi Amin, G.K. van der Mandele, and Charles

This paper studies the determinants of executive turnover and firm valuation as a function of ownership and control structure in Italy, a country that features low legal protection for investors, firms with controlling shareholders and pyramidal groups. The results show that firms where the largest shareholders act as top executives, have a firm lock on control and own less than 50 percent of the firm's cash-flow rights exhibit poor governance, as measured by a lower sensitivity of turnover to performance and a lower Q ratio. JEL classification: G34, J63, L14 Keywords: Management turnover, corporate governance, pyramidal groups Author's address: Institute of Finance and Accounting, London Business School, Regent's Park, London NW1 4SA, United Kingdom. E-mail: pvolpin@london.edu. Acknowledgements: Ithank an anonymous referee, Julian Franks, Rafael La Porta, Marco Pagano, Henri Servaes, Andrei Shleifer, and participants at seminars at Harvard University, London Business School and London School of Economics for helpful comments. I also thank Richard Frost and Samanta Padalino for editing suggestions. I acknowledge support from the National Science Foundation Graduate Fellowship program and the JP Morgan Chase Research Fellowship at London Business School. 1 1.

The financial crisis in East Asia in 1997-1998 led to financial distress of firms with different financial and ownership structures and happened across countries with very diverse institutional setups. Studying this event allows the identification of factors that determine the use of bankruptcy as a means of resolving corporate financial distress. Of a sample of 1,472 publicly traded firms in five East Asian countries, we identify 644 firms as financially distressed. Of these, 83 filed for bankruptcy during 1997-1998. We find, controlling for some firm characteristics, that the likelihood of filing is lower for bank-owned and group-affiliated firms. Furthermore, we find that stronger creditor rights and a better judicial system in the country increases the likelihood of bankruptcy filing.

In Sweden, a bankruptcy filing automatically terminates CEO employment and places the firm in an open auction. This has prompted warnings of strong shareholder risk-shifting incentives to delay filing (”go for broke”). However, during severe distress, equity incentives are weak while CEO incentives to preserve private benefits of control are strong. We show that the CEO may temporarily override risk-shifting incentives, even if she owns a substantial proportion of the firm’s equity. Depending on the available investment opportunities, such managerial conservatism may result in firm-value maximizing behavior. Examining Swedish bankruptcies, we find that proxies for CEO control benefits as well as managerial quality are significant determinants of the dramatic CEO wage loss from filing, and of the probability of the CEO being rehired by the buyer in the auction. The expected value of private control benefits increases in the CEO’s quality reputation (through the rehiring decision), alleviating to some extent concerns with entrenchment. We also find that firms sold as going concerns generate a post-bankruptcy operating profitability at par with industry rivals.

In a setting where firms can choose their capital structures, we derive the optimal compensation contract for employees who are averse to bearing their own human capital risk, while equity holders can diversify this risk away. In the absence of other frictions, the optimal contract implies that all firms will be unlevered, and instead will hold cash. In the presence of corporate taxes, the optimal contract implies optimal debt levels consistent with those observed, implying that the importance of human capital risk is comparable to that of taxes in the capital structure decision. Our model makes a number of predictions for the cross-sectional distribution of firm leverage. Consistent with existing empirical evidence, it implies the existence of persistent unexplained idiosyncratic differences in leverage across firms. It also predicts that, ceteris paribus, firms with more leverage should pay higher wages, an as yet unexplored empirical implication of the model. JEL classification: G14.

University (Corporate Law Seminar) for helpful comments on a previous draft of this paper.

Firms that maintain no formal record of actions and events would hardly be considered well managed. Yet, organizations that require the recording of actions and the filing of reports are often labelled "bureaucratic" and ine#cient. This paper argues that the thin line between e#cient management practices and ine#cient bureaucracy is crossed to curb managerial agency costs in a multi-layer hierarchy. The model predicts that bureaucracy increases with the frequency of managerial turnover, and it establishes a link between bureaucracy, incentive schemes, and leverage in a cross-section of firms.