Results 1 - 10 of 152

Why do some firms give stock options to all employees: An empirical examination of alternative theories

by Paul Oyer, Scott Schaefer , 2003
"... Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and helping firms retain employees. We gather data on firms’ stock option grants to middle managers from three distin ..."
Abstract - Cited by 115 (8 self) - Add to MetaCart
Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and helping firms retain employees. We gather data on firms’ stock option grants to middle managers from three distinct sources, and use two methods to assess which theories appear to explain observed granting behavior. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. Second, we conduct a cross-sectional regression analysis of firms option-granting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.

The Difference That CEOs Make: An Assignment Model Approach

by Marko Terviö , 2007
"... This paper presents an assignment model of CEOs and firms. The distributions of CEO pay levels and firms’market values are analyzed as the competitive equilibrium of a matching market where talents, as well as CEO positions, are scarce. It is shown how the observed joint distribution of CEO pay and ..."
Abstract - Cited by 89 (2 self) - Add to MetaCart
This paper presents an assignment model of CEOs and firms. The distributions of CEO pay levels and firms’market values are analyzed as the competitive equilibrium of a matching market where talents, as well as CEO positions, are scarce. It is shown how the observed joint distribution of CEO pay and market value can then be used to infer the economic value of underlying ability differences. The variation in CEO pay is found to be mostly due to variation in rm characteristics, whereas implied differences in managerial ability are small and make relatively little difference to shareholder value. The value-added of scarce CEO ability within the 1000 largest firms in the US was about $21-25 billion in 2004, of which the CEOs received about $4 billion as ability rents while the rest was capitalized into market values.

Lower Salaries and No Options? On the Optimal Structure of Executive Pay

by Ingolf Dittmann, Ernst Maug - Journal of Finance , 2007
"... We calibrate the standard principal–agent model with constant relative risk aversion and lognormal stock prices to a sample of 598 U.S. CEOs. We show that this model pre-dicts that most CEOs should not hold any stock options. Instead, CEOs should have lower base salaries and receive additional share ..."
Abstract - Cited by 66 (8 self) - Add to MetaCart
We calibrate the standard principal–agent model with constant relative risk aversion and lognormal stock prices to a sample of 598 U.S. CEOs. We show that this model pre-dicts that most CEOs should not hold any stock options. Instead, CEOs should have lower base salaries and receive additional shares in their companies; many would be required to purchase additional stock in their companies. These contracts would re-duce average compensation costs by 20 % while providing the same incentives and the same utility to CEOs. We conclude that the standard principal–agent model typically used in the literature cannot rationalize observed contracts. We don’t give options because it would be a lottery ticket. (Warren Buffet) There will be no new stock option grants from Microsoft. Instead, we will award actual stock to our employees. (Steve Ballmer, Microsoft) THIS PAPER ANALYZES THE OPTIMAL STRUCTURE OF CEO PAY, or, more specifically, the

Employee sentiment and stock option compensation, MIT working paper

by Nittai K. Bergman, Dirk Jenter , 2004
"... Preliminary and incomplete 3 The use of broad equity-based compensation for employees in the lower ranks of an organization is a puzzle for standard economic theory: any positive incentive effects should be diminished by free rider problems, and undiversified employees should discount company equity ..."
Abstract - Cited by 44 (0 self) - Add to MetaCart
Preliminary and incomplete 3 The use of broad equity-based compensation for employees in the lower ranks of an organization is a puzzle for standard economic theory: any positive incentive effects should be diminished by free rider problems, and undiversified employees should discount company equity heavily. We point out that employees do not appear to value company stock as prescribed by extant theory. Employees frequently purchase company stock for their 401(k) plans at market prices, and especially so after company stock has performed well, implying that their private valuation must at least equal the market price. We begin by developing a model of optimal compensation policy for a firm faced with employees with positive sentiment. Our goal is to establish the conditions necessary for the firm to compensate its employees with options in equilibrium, while explicitly taking into account that current and potential employees are able to purchase equity in the firm through the stock market. We show that using option compensation under these circumstances is not a puzzle if employees prefer the (non-traded) options offered by the firm to the (traded) equity offered by the market, or if the (traded) equity is overvalued. We then provide empirical evidence confirming that firms use broad-based option compensation when boundedly rational employees

Yesterday’s heroes: Compensation and creative risk-taking, working paper,

by Ing-Haw Cheng , Harrison Hong , Jose Scheinkman , Jeremy Stein , Rene Stulz , Steven Kaplan , Tobias Adrian , Sule Alan , Augustin Landier , Terry Walter , Bob Deyoung , 2010
"... Abstract: We investigate the link between compensation and risk-taking among finance firms during the period of 1992-2008. First, there are substantial cross-firm differences in residual pay (defined as total executive compensation controlling for firm size). Second, residual pay is correlated with ..."
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Abstract: We investigate the link between compensation and risk-taking among finance firms during the period of 1992-2008. First, there are substantial cross-firm differences in residual pay (defined as total executive compensation controlling for firm size). Second, residual pay is correlated with pricebased risk-taking measures including firm beta, return volatility, the sensitivity of firm stock price to the ABX subprime index, and tail cumulative return performance. Third, these risk-taking measures are correlated with pay even though executives are highly incentivized as measured by insider ownership. Finally, compensation and risk-taking are not related to governance variables but covary with ownership by institutional investors who tend to have short-termist preferences and the power to influence firm management policies. Our findings suggest that our residual pay measure is picking up other important high-powered incentives not captured by insider ownership. They also point to substantial heterogeneity in both firm culture and investor preferences for short-termism and risk-taking. _____________________ We thank
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2006) ”CEOs Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts

by Shivaram Rajgopal, Terry Shevlin, Valentina Zamora - Journal of Finance
"... Although agency theory suggests that firms ought to index executive compensation to remove market-wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004) posits that absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities ris ..."
Abstract - Cited by 32 (0 self) - Add to MetaCart
Although agency theory suggests that firms ought to index executive compensation to remove market-wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004) posits that absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities rise and fall with the economy's fortunes. We directly test and find support for Oyer's (2004) theory. We argue that the CEO's outside opportunities depend on his talent proxied by the CEO's financial press visibility and his firm's recent industry-adjusted ROA. Our results are robust to alternate explanations such as managerial skimming, oligopoly and asymmetric benchmarking.
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Inside the black box: The role and composition of compensation peer groups, unpublished manuscript

by Michael Faulkender , 2008
"... This paper documents the features of compensation peer groups and demonstrates that they play a significant role in understanding variation in CEO compensation. We hand-collect a sample of 83 (373) of the S&P 500 firms that provided explicit lists of compensation peer firms in their proxy statem ..."
Abstract - Cited by 28 (2 self) - Add to MetaCart
This paper documents the features of compensation peer groups and demonstrates that they play a significant role in understanding variation in CEO compensation. We hand-collect a sample of 83 (373) of the S&P 500 firms that provided explicit lists of compensation peer firms in their proxy statements in fiscal year 2005 (2006). Results show that inclusion of the group’s median compensation more than doubles the portion of the variation in CEO salary that can be explained, dominating measures such as size and firm performance. Univariate analysis suggests that firms forego lower paid potential peers in their same industry in favor of higher paid peers outside of their industry when constructing the peer groups. In multivariate regression analysis, this result carries through as we find that even after controlling for industry and size, peer group composition is significantly affected by the level of compensation of the potential peers. Firms appear to select highly paid peers to justify greater CEO compensation and this effect is strongest in firms where the CEO is the chairman of the Board, when the firm is larger, has greater market share, is more complex, has poorer governance, and when Towers Perrin is the firm’s compensation consultant.

Corporate financing decisions when investors take the path of least resistance

by Malcolm Baker, Joshua Coval, Jeremy C. Stein - Journal of Financial Economics , 2007
"... We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to greenfield investment financed wit ..."
Abstract - Cited by 26 (5 self) - Add to MetaCart
We explore the consequences for corporate financial policy that arise when investors exhibit inertial behavior. One implication of investor inertia is that, all else equal, a firm pursuing a strategy of equity-financed growth will prefer a stock-for-stock merger to greenfield investment financed with an SEO. With a merger, acquirer stock is placed in the hands of investors, who, because of inertia, do not resell it all on the open market. If there is downward-sloping demand for acquirer shares, this leads to less price pressure than an SEO, and cheaper equity financing as a result. We develop a simple model to illustrate this idea, and present supporting empirical evidence. Both individual and institutional investors tend to hang on to shares granted them in mergers, with this tendency being much stronger for individuals. Consistent with the model and with this cross-sectional pattern in inertia, acquirers targeting firms with high institutional ownership experience more negative announcement effects and greater announcement volume. Moreover, the results are strongest when the overlap in target and acquirer institutional ownership is low and when the demand curve for the acquirer’s shares appears to be steep.

Essays in relative performance evaluation.

by Ana Albuquerque , 2006
"... Abstract Relative performance evaluation (RPE) in CEO compensation provides insurance against external shocks and yields a more informative measure of CEO actions. I argue that empirical evidence on the use of RPE is mixed because previous studies rely on a misspecified peer group. External shocks ..."
Abstract - Cited by 19 (1 self) - Add to MetaCart
Abstract Relative performance evaluation (RPE) in CEO compensation provides insurance against external shocks and yields a more informative measure of CEO actions. I argue that empirical evidence on the use of RPE is mixed because previous studies rely on a misspecified peer group. External shocks and flexibility in responding to the shocks are functions of, for example, the firm's technology, the complexity of the organization, and the ability to access external credit, which depend on firm size. When peers are composed of similar industry-size firms, evidence is consistent with the use of RPE in CEO compensation. JEL Classification: D8, G3, J33.

CEO Turnover in a Competitive Assignment Framework

by Andrea L. Eisfeldt, Camelia M. Kuhnen , 2010
"... There is considerable and widespread concern about whether CEOs are appropriately punished for poor performance. The empirical literature on CEO turnover documents that CEOs are indeed more likely to be forced out if their performance is poor relative to the industry average. However, CEOs are also ..."
Abstract - Cited by 18 (0 self) - Add to MetaCart
There is considerable and widespread concern about whether CEOs are appropriately punished for poor performance. The empirical literature on CEO turnover documents that CEOs are indeed more likely to be forced out if their performance is poor relative to the industry average. However, CEOs are also more likely to be replaced if the industry is doing badly. We show that these empirical patterns are natural and efficient outcomes of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics, and where industry conditions affect the outside options of both managers and firms. Our model also has several new predictions about the type of replacement manager, and their pay and performance. We construct a dataset which describes all turnover events during the period 1992-2006 and show that these predictions are also born out empirically.