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Abstract:
We examine whether compensation consultants' potential cross-selling incentives explain more lucrative CEO pay packages using 755 firms from the S&P 1500 for 2006. Critics allege that these incentives lead consultants to bias their advice to secure greater revenues from their clients (Waxman, 2007). Among firms that retain consultants, we are unable to find widespread evidence of higher levels of pay or lower pay-performance sensitivities for clients of consultants with potentially greater conflicts of interest. Overall, we do not find evidence suggesting that potential conflicts of interest between the firm and its consultant are a primary driver of excessive CEO pay.

Executive Compensation, Compensation Consultants

Abstract:
This paper examines the influence and characteristics of governance-sensitive institutional investors (i.e., institutions that explicitly consider firms' governance mechanisms in their investment decisions). While we find that governance-sensitive institutions tend to prefer firms with existing preferred governance mechanisms, there is evidence that ownership by governance-sensitive institutions is associated with future improvements in shareholder rights. We also find that large, low-turnover institutions with preferences for growth and small-cap firms are more likely to be governance-sensitive. Overall, our results suggest that common proxies for governance sensitivity by investors (e.g., total institutional ownership, legal type, blockholding) do not cleanly measure governance preferences.

Corporate Governance, Institutional Investors, Board of Directors

Abstract:
Using data from FTSE 350 firms, we examine factors influencing explicit relative performance evaluation (RPE) conditions in performance-vested equity grants. We provide exploratory evidence on whether the use or characteristics of RPE are associated with efforts to improve incentives by removing common risk, other economic factors discussed in the RPE literature, or external pressure to implement RPE. We find that many of these economic factors, including common risk reduction, are more closely related to specific relative performance conditions than to the firm-level decision to use RPE in some or all of their equity grants. We also find that greater external monitoring by institutional investors or others is associated with plans with more stringent overall RPE conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. And, we find evidence that vesting percentages vary in RPE and non-RPE plans.

Compensation, equity incentives, relative performance, corporate governance

Abstract:
Using data from FTSE 350 firms, we examine the factors influencing the explicit relative performance evaluation (RPE) conditions in performance-vested equity grants. We provide evidence on the use of RPE either to improve incentives by removing common risk or by linking greater vesting percentages to higher relative performance rankings. We also investigate whether RPE is used to opportunistically increase vesting and/or placate external parties calling for its use. We find that specific RPE conditions vary depending upon whether the plan is used to remove common risk or to promote superior relative performance. However, we find no evidence that greater external monitoring by institutional investors or others is associated with specific RPE performance conditions. The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all. However, we find no evidence that vesting percentages are higher in RPE plans than in non-RPE plans, and no evidence that RPE is used opportunistically to increase vesting and compensation.

Executive compensation, relative performance evaluation, equity grants

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:
We examine whether the relation between earnings and bonuses changes after Sarbanes-Oxley. Theory predicts that, as the financial reporting system reduces the discretion allowed managers, firms will put more weight on earnings in compensation contracts to encourage effort. However, the increased risk imposed by Sarbanes-Oxley on executives may cause firms to temper this contracting outcome. We examine and find support for the joint hypothesis that the implementation of Sarbanes-Oxley and related reforms led to a decrease in earnings management and that firms responded by placing more weight on earnings in bonus contracts. We find no evidence that firms changed compensation contracts to compensate executives for assuming more risk.

Executive compensation, bonuses, Sarbanes-Oxley

Abstract:
We examine the role of accounting in CEO equity compensation design. For a sample of ExecuComp firms in 1995-2001, we find that financial reporting concerns are positively related to stock option use and total compensation, and negatively related to the use of restricted stock. We confirm our findings by examining changes in CEO compensation in firms that begin expensing options in 2002 or 2003. We find that these firms reduce their option use and increase their restricted stock use after starting to expense options but exhibit no decrease in total compensation. Taken together, our analyses suggest that favorable accounting treatment for options led to a higher use of options and lower use of restricted stock than would have been the case absent accounting considerations.

executive compensation, financial reporting

Abstract:
We examine changes in executive compensation that firms make in response to underwater options. Using a sample of firms with underwater options in 2000, we estimate that 81% of firms to take action to respond to underwater options. We examine explanations for firms' responses. Opponents argue that it rewards poor performance and transfers wealth unjustifiably from shareholders to executives. We find some support for this argument in that firms with weaker governance structures are more likely to reprice underwater options. Alternatively, firms that respond claim they do so to restore incentives, retain executives, and insulate executives from market-wide or
industry-wide factors beyond their control. Our results find evidence in support of these arguments in that restoring incentives and retaining executives seems to be the primary drivers of firms' responses.

Executive compensation, stock options

Abstract:
We examine whether repricing underwater stock options reduces both executive and overall employee turnover using a sample of firms that reprice stock options in 1998 and a sample of firms with underwater stock options that choose not to reprice. We find little evidence that repricing affects executive turnover. However, using forfeited stock options to proxy for overall employee turnover, we find that employee turnover in 1999 is negatively related to the 1998 repricing, suggesting that repricing helps to prevent turnover due to underwater options. We find no evidence that the relation between turnover and repricing differs between high technology and nonhigh technology firms.

Executive Compensation, Stock Option Repricing, Employee Turnover, Employee Retention

Abstract:
We examine repricing activity surrounding the FASB's 1998 announcement regarding accounting for repriced options. We find that repricing increases during, and decreases after, the 12-day window between the announcement and proposed effective dates, consistent with firms timing repricings to avoid recording an expense. We find that firms experiencing increasing earnings patterns, firms with earnings around zero, and growth firms are more likely to reprice in the window, but having repriced recently decreases the likelihood of doing so. The evidence suggests that firms trade off financial reporting benefits against reputation costs in decisions to time repricings to get favorable accounting treatment.

Executive Compensation, Accounting Standards, Accounting Choice, Stock Option Repricing

Abstract:
In this study, we examine factors that explain firms' decisions to reprice stock options. Comparing a sample of firms that reprice executive stock options in 1998 to a control sample of firms with out-of-the-money options in 1998 that choose not to reprice, we find that young, high technology firms are more likely to reprice than other firms. In addition, we find that the likelihood of repricing increases as options become more out-of-the-money, and that firms reprice in response to poor firm-specific performance, not poor industry performance. These results are not consistent with claims that firms reprice to insulate management from uncontrollable industry effects. However, we find no relation between the likelihood of repricing and conflicts of interest between executives and shareholders, suggesting that repricing is not related to agency problems. The results are consistent with the often stated motivation that firms must reprice out-of-the-money options to restore the incentive effects of those options and to prevent management in competitive labor markets from going to work for other firms.

Repricing; Executive compensation; Stock options

Abstract:
We examine stock option repricing activity that coincided with the December 4, 1998 FASB announcement regarding accounting for repriced employee stock options. The accounting treatment requires recognition of compensation expense in future periods if there is an increase in stock price after repricing. We find that repricing firms experience significant negative cumulative abnormal returns surrounding the December 4, 1998 FASB announcement date. We document a significant increase in repricing activity in the 12-day window between the announcement date and the proposed effective date, during which firms could reprice without taking a charge to earnings, and a significant decrease in repricing activity after the proposed effective date. This evidence suggests that the FASB announcement of the new accounting altered firms' economic decisions. In examining firms' decisions to reprice in the 12-day window to avoid the accounting charge, we find that positive earnings firms, growth firms, firms experiencing increasing earnings patterns, and firms with the greater potential effect on earnings are more likely than other firms to reprice in this window. In addition, we find that firms' prior repricing behavior affects their decision to reprice in this window, suggesting that there are implicit costs associated with repricing. The evidence is consistent with firms' trading off valuation implications of repricing to avoid an earnings charge against these implicit costs associated with repricing in the window.

Abstract:
In this paper, we investigate the timeliness of and stock price reaction to a sample of Form 8-K reports filed in 1993 with the Securities and Exchange Commission (SEC). Under current SEC regulations, a Form 8-K must be filed within 5 to 15 days after the occurrence of certain events, such as a bankruptcy filing or an auditor change, as well as after any material development that a registrant believes is relevant to its investors. The SEC?s presumption is that the Form 8-K is relevant to investors; in particular, the report "plays a critical role in the periodic reporting system, which is intended to provide investors with a continuous stream of corporate information" (SEC Accounting Series Release No. 306 [1982]). This function has assumed greater importance in light of proposals made by the SEC to expand the number of required disclosures in the Form 8-K and to reduce the allowed time for filing. Specifically, in an attempt to provide more consistent and timely disclosure by all public companies, the SEC proposes that earnings and selected other financial data be released through an 8-K within 30 days after the end of each fiscal quarter (60 days after fiscal year-end). Form 8-K filing deadlines would be shortened; disclosures currently due in 15 calendar days would be accelerated to 5 business days, and those due in 5 business days would be reduced to 1 business day (SEC [1998]).