An Activist View of CEO Compensation

7 Pages Posted: 25 Apr 2017

See all articles by Alex Baum

Alex Baum

Value Act Capital

David Robert Hale

Value Act Capital

Mason Morfit

Value Act Capital

David F. Larcker

Stanford University - Graduate School of Business

Brian Tayan

Stanford University - Graduate School of Business

Date Written: April 25, 2017

Abstract

Understanding CEO compensation plans is a continuing challenge for directors and investors. The disclosure of these plans is dictated by SEC rules that rely heavily on the “fair value” of awards at the time they are granted. The problem with these numbers is that they are static and do not reflect how pay changes with performance. Activist fund ValueAct Capital has developed a framework to address this problem. Their approach is to strip down and systematically reconstruct the compensation figures in the annual proxy, allowing for a step-by-step evaluation of the conditions under which variable pay is realized. In this Closer Look, we examine this framework in detail.

We ask:

• How useful is this framework in understanding the relation between pay and performance? • Are large “minimum” payments indicative of managerial abuse? • What insights does this analysis provide into the governance quality of different firms? • How might a board monitor to ensure that the CEO is not taking on excessive risk? • What does it say about SEC rules that the results of this analysis are vastly different from the figures provided in the annual proxy?

The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: Compensation, Executive Compensation, Pay for Performance, Equity, Incentives, Realizable Pay, Performance Measurement, Corporate Governance Research

JEL Classification: G30, G34, J3, M12, M52

Suggested Citation

Baum, Alex and Hale, David Robert and Morfit, Mason and Larcker, David F. and Tayan, Brian, An Activist View of CEO Compensation (April 25, 2017). Rock Center for Corporate Governance at Stanford University Closer Look Series: Topics, Issues and Controversies in Corporate Governance No. CGRP-65; Stanford University Graduate School of Business Research Paper No. 17-31. Available at SSRN: https://ssrn.com/abstract=2958245

Alex Baum

Value Act Capital ( email )

One Letterman Drive
Building D, 4th floor
San Francisco, CA 94129
United States

David Robert Hale

Value Act Capital ( email )

One Letterman Drive
Building D 4th floor
San Francisco, CA 94129
United States

Mason Morfit

Value Act Capital ( email )

One Letterman Drive
Building D, 4th floor
San Francisco, CA 94129
United States

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Brian Tayan

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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