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Abstract:
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.

Compensation, Relative Performance Evaluation, talent

Abstract:
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.

Abstract:
We examine the extent to which the behavioral agency model describes the relation between stock-based compensation and managerial risk-seeking behavior. The behavioral agency model, which incorporates prospect theory, predicts that while managers are more risk-seeking in the loss decision context than in the gain decision context because of loss aversion, such risk-seeking behavior in the loss context is mitigated because managers instantly endow stock-based compensation (i.e., wealth at stake), which increases their risk-bearing. We find that in general, managers are more risk-seeking in the loss context than in the gain context, consistent with prospect theory. Contrary to prospect theory, however, we find that managers endowed with in-the-money stock options are less risk-seeking than managers endowed with at-the-money stock options. This finding is also contrary to agency theory which generally predicts that stock options encourage risk-seeking behavior. We also explore whether managers' subjective valuation of stock options is associated with risk-seeking behavior. We find evidence consistent with managers valuing stock options more than restricted stock of similar objective value. Overall, our results support the propositions based on the behavioral agency model. Moreover, managers appear to consider both risk-bearing as well as subjective valuations of stock-based compensation in their decision-making process. Our findings are important for those using and evaluating the efficacy of different types of stock-based compensation in inducing firm value-increasing risk-seeking behavior.

Stock-based compensation, loss aversion, risk-bearing

Abstract:
While firms claim that 6&1 exchanges and makeup grants help realign incentives and retain employees, critics argue that these responses provide opportunities for managerial rent extraction. Moreover, scholars challenge that these alternative responses are chosen to avoid the expense associated with traditional repricings or to substitute for cash. I test these competing explanations by comparing 6&1 exchange firms with traditional repricing firms, and makeup grant firms with traditional repricing firms. Results indicate that 6&1 exchange firms have a greater need to realign employee incentive and makeup grant firms have a greater need to retain employees. I also find that firms having higher financial reporting concerns are more likely to choose 6&1 exchanges or makeup grants over traditional repricings. Also, firms with stronger governance structures choose 6&1 exchanges and firms with less dividend constraints choose makeup grants. Overall, these findings suggest that economic reasons drive alternative responses to underwater stock options.

Abstract:
I examine whether superior managerial talent signaled through earnings forecast accuracy is associated with higher compensation and career prospects. In the spirit of Trueman’s [1986] model, I expect that managers with superior forecast accuracy enjoy higher compensation and career prospects not as a result of their forecasting behavior per se, but rather because their observable forecasting behavior signals their unobservable managerial talent. Using a sample of CFOs in the S&P1500 providing management forecasts of annual and quarterly EPS over the period 1998-2006, I find that CFOs classified as superior forecasters receive higher bonus and equity pay, are more likely to advance their career, and enjoy higher salaries and initial equity grants in the subsequent year.

CFO, compensation, career, earnings guidance, forecasting ability

Abstract:
Using a sample of large UK firms from 2002 - 2006, we examine the role that shareholder remuneration votes play in executive compensation design. In particular, we investigate what aspects of CEO compensation shareholders vote against and whether corporate boards, in turn, respond to negative votes by making changes in those CEO pay elements. Prior research investigates US firms that voluntarily seek shareholder ratification of equity compensation plans and thus may suffer from self-selection bias. Conversely, the UK provides an ideal setting because remuneration votes have been required for all listed firms since 2002. Results indicate that shareholders disapprove of higher salaries, weak pay-for-performance sensitivity in bonus pay and greater potential dilution in stock-based compensation, particularly stock option pay. We find some evidence that boards respond to past remuneration votes by decreasing grants of stock option compensation but not by changing salary or the pay-for-performance link in bonus pay accordingly.

executive compensation, shareholder vote

Abstract:
I examine the characteristics of firms choosing to respond to underwater employee stock options using one of three stock option-based responses. A traditional repricing offers a new and lower exercise price to restore the incentive alignment and retention power lost in underwater options but is subject to potential expense recognition. A 6&1 exchange likewise restores what was lost in underwater options but avoids potential expense recognition by delaying the issuance of replacement options until six months and one day later. A makeup grant potentially increases the total option value lost and avoids potential expense recognition, but is more dilutive since old underwater options are not cancelled. Results indicate that makeup grant firms have relatively deeper underwater options with shorter expected remaining lives. Makeup grant firms also issue these options to more non-executives compared to traditional repricing firms. I also find that while both makeup grant and 6&1 exchange firms have less insider ownership and historically report positive income than traditional repricings, 6&1 exchange firms have greater overhang than makeup grant firms. Taken together, a possible explanation for these results is that firms that have more incentive alignment and/or retention power lost in underwater options prefer makeup grants that potentially increase total option value for its non-executive optionholders. However, when dilution from options is also a concern, it appears these firms may opt for a 6&1 exchange. In addition, it is possible that the choice of response is associated more with the desire to avoid recognizing option expense, rather than with potential rent extraction opportunities, as critics claim.

underwater, stock options, repricing, executives, non-executives