Executive Compensation: The Trend Toward One Size Fits All

Abstract

This paper reports the prevalence of a "one-size-fits-all" trend in the structure of executive compensation plans. The way firms distribute total compensation across different pay components -salary, bonus, stock awards, option awards, non-equity incentives, pensions, and perquisites- has become more similar since 2006. In particular, 25% of the variation across firms disappeared in the last thirteen years. Using close votes surrounding Say-on-Pay implementation, I find that shareholders' influence on management decisions causes part of this convergence. This finding is robust in both difference-in-difference and RDD estimations. Additional evidence suggests that proxy advisors play a role by pushing towards standardization. Finally, I find evidence suggesting that standardization leads to a sub-optimal design of contracts. The more similar a firm's compensation structure becomes to the others, the lower its market value. Additionally, I find a negative impact on delta and vega and a positive impact on total compensation and financial misstatements.

Keywords: Corporate Governance, Executives, Shareholder, Corporate Voting, Corporate Regulation

JEL Classification: G30, G34, G38