Abstract

http://ssrn.com/abstract=964303
 
 

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Pay Distribution in the Top Executive Team


Lucian A. Bebchuk


Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Martijn Cremers


University of Notre Dame

Urs Peyer


INSEAD - Finance

2006

Harvard Law and Economics Discussion Paper No. 574

Abstract:     
We investigate the distribution of pay in the top executive team in public companies. In particular, we study the CEO's pay slice (CPS), defined as the fraction of the aggregate top-five total compensation paid to the CEO. The level of a firm's CPS might reflect the relative centrality of the CEO in the top executive team in terms of ability, contribution to the firm, or power.

We find that CPS has been going up over the past decade. During this period, CEOs have increased their fraction of both equity-based compensation and non-equity compensation. The level of CPS is associated with various characteristics of the top team and the firm's governance arrangements. Among other things, CPS is high when the CEO has long tenure; when the CEO chairs the board; when few other executives are members of the board; and when the firm has more entrenching provisions.

High CPS is associated with lower firm value as measured by Tobin's Q. Using a simultaneous equations approach yields findings consistent with the possibility that this negative correlation is at least partly due to high CPS, or the relative CEO centrality it might reflect, bringing about a lower Tobin's Q. Consistent with the negative correlation between high CPS and Q, high CPS is associated with a less favorable market reaction, and a higher likelihood of a negative market reaction, to acquisitions announced by the firm. We also find that high CPS is associated with lower variability of stock returns over time. Overall, our results indicate that the distribution of compensation in the top executive team is an aspect of pay arrangements and corporate governance that deserves researchers' attention.

Number of Pages in PDF File: 57

Keywords: Executive compensation, corporate governance, CEOs, options, equity-based compensation, non-equity compensation, Tobin's Q, entrenchment, independent directors, board size, CEO tenure, CEO turnover, acquisitions, variability of returns, pay distribution, and internal pay equity

JEL Classification: D23, G32, G38, J33, J44, K22, M14

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Date posted: January 12, 2007 ; Last revised: May 18, 2009

Suggested Citation

Bebchuk, Lucian A. and Cremers, Martijn and Peyer, Urs, Pay Distribution in the Top Executive Team (2006). Harvard Law and Economics Discussion Paper No. 574. Available at SSRN: http://ssrn.com/abstract=964303 or http://dx.doi.org/10.2139/ssrn.964303

Contact Information

Lucian A. Bebchuk (Contact Author)
Harvard Law School ( email )
Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)
HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
K. J. Martijn Cremers
University of Notre Dame ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
Urs C. Peyer
INSEAD - Finance ( email )
Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4178 (Phone)
+33 1 6072 4045 (Fax)
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