Executive Pay and Corporate Governance
Fall 2005, Volume 17.4
A Remedy for the Executive Pay Problem: The Case for “Compensation Discussion and Analysis”
The author faults the lead article on three counts: it fails to address levels of pay; the “smoking guns” of managerial compensation are often benign; and detailed shareholder involvement may not be workable. He recommends proxy disclosure of a comprehensive “Compensation Discussion and Analysis” statement signed by the compensation committee and subject to an advisory shareholder vote.
Corporate Culture and the Problem of Executive Compensation
The former SEC chairman declares, “I have problems with exorbitant executive pay precisely because I care about markets and private enterprise.” He calls for regulatory reforms such as stock option expensing, better disclosure, greater independence of directors, and more shareholder empowerment, while welcoming market forces such as monitoring by companies like Institutional Shareholder Services.
Developments in Remuneration Policy
Thanks in part to the efforts of the International Corporate Governance Network, a majority of U.K. boards are independent of management. In contrast, U.S. boards remain “dominated by the imperial CEO”—and U.S. institutional investors have failed to hold boards accountable for escalating remuneration. The solution lies in “greater transparency, better analysis, and more shareholder monitoring.”
Finance, Politics, and the Accounting for Stock Options
The lack of fair-value accounting for stock options has encouraged “six-and-one restructurings”—the exchange of deep out-of-the-money options for new options that need not be expensed if re-pricing does not occur before six months. Effectively, employees are short the stock, in contrast to normal incentive schemes. A sample of 61 such deals shows abnormal stock price declines, on average.
Is U.S. CEO Compensation Broken?
There is a tendency to focus on the annual income of CEOs (salary, bonus, and stock and option grants) while ignoring their existing equity holdings—and to conclude on that basis that pay is “excessive.” The authors look at the effect of stock price changes on CEO wealth and find that the pay-for-performance relationship is strong and has improved in recent years.
Letting Go of Norm: How Executive Compensation Can Do Better Than “Best Practices”
Cautious boards tend to gravitate toward a “safe” norm in compensation, relying on assorted strategic targets and balanced scorecards in setting pay. But rewarding managers for profit growth can produce higher long-term stock price returns, and equity grants based on last year’s performance (rather than annual fixed-value amounts) are better for shareholders because they create stronger incentives.
Pay Without Performance: Overview of the Issues
The pay-setting process in U.S. public companies no longer reflects the economic model of “arm’s-length” contracting between executives and directors in a competitive labor market, but is shaped instead by managerial power and influence. A strong pay-performance link requires better disclosure, greater use of clawback provisions and indexed stock and options, and more shareholder power.
Takeover Defenses and Bargaining Power
The notion that strong takeover defenses will help a target extract a higher price in a negotiated acquisition helped usher in the modern era of poison pills. But deal premiums are no higher for targets incorporated in states with strong antitakeover statutes, and such defenses are only relevant in a few negotiated transactions. This article features interviews with senior M&A investment bankers.
Taking Shareholder Protection Seriously? Corporate Governance in the U.S. and Germany
A comparison of the U.S. and German systems of corporate governance shows that while both have shortcomings, particularly in the market for corporate control, the U.S. system is more shareholder friendly. The authors propose changes, revolving chiefly around giving primacy to shareholder rights, to improve both systems.
The Limits of Organizational Theory and Incentives (Or, Why Corporate Success Is Not Just About Money)
Incentive structures end up being “internalized” by employees—that is, viewed not just as leading to financial rewards but ultimately shaping their behavior and values. This partly explains why corporate organizations are often described as having “cultures”—and why it can be so difficult to change direction with a workforce that has been conditioned to certain strategy-specific behaviors.
Top Management Incentives and Corporate Performance
Managers and directors tend to rely on the percentage of pay “at risk” to measure incentive strength, but this article presents a measure of CEO “wealth leverage” that, when applied to some 700 public companies, suggests that pay for performance is not only alive and well but a useful predictor of corporate stock price performance.
U.S. Family-Run Companies—They May Be Better Than You Think
The conventional wisdom is that family-run firms operate primarily for the benefit of family members at the expense of other shareholders. But this study of 63 “true” family firms finds them to be stronger performers, on average, than their non-family counterparts, although companies with dual-class share structures (especially those with insider-dominated boards) do not fare so well.
University of Rochester Roundtable on Corporate M&A and Shareholder Value
Contrary to popular opinion—and despite some highly public disasters—corporate M&A increases efficiency and value, on average, and benefits the shareholders of both selling and buying firms. To the extent that M&A is value-destroying for buyers, it is largely because of legal “control rights” conferred on target company managements that impede the transfer of assets to their highest-valued uses.
The views and opinions expressed in the Journal do not necessarily represent those of Morgan Stanley or its affiliates.
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For close to 20 years, the Journal of Applied Corporate Finance has distinguished itself as a unique forum for addressing the topics that drive corporate value. Featuring articles by top academic thinkers and financial practitioners, this quarterly publication presents the practical application of the best current research in finance.
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