E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
A N D P E N S I O N L A W
Vol. 2, No. 1: January 18, 2001
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TOPIC OF THIS ISSUE:
Executive Compensation
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T A B L E of C O N T E N T S
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WORKING PAPERS
"Regulating Executive Pay: Using the Tax Code to Influence CEO
Compensation"
NANCY L. ROSE
Massachusetts Institute of Technology (MIT)
Department of Economics
CATHERINE D. WOLFRAM
University of California at Berkeley
Haas School of Business
National Bureau of Economic Research (NBER)
"What's In It For Me? Personal Benefits Obtained By CEOs Whose
Firms Are Acquired"
JAY C. HARTZELL
New York University
Stern School of Business, Finance
ELI OFEK
New York University
Stern School of Business, Finance
DAVID YERMACK
New York University
Stern School of Business, Finance
"The Taxation of Executive Compensation"
BRIAN J. HALL
Harvard Business School
Negotiations, Organizations and Markets
National Bureau of Economic Research (NBER)
JEFFREY B. LIEBMAN
Harvard University, Kennedy School of Government
National Bureau of Economic Research (NBER)
"Executive Compensation"
KEVIN J. MURPHY
University of Southern California
Marshall School of Business
NEW and FORTHCOMING ARTICLES
"CEO Incentives: It's Not How Much You Pay, But How"
Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY,
Harvard University Press, 1998; Harvard Business Review,
No. 3, May-June 1990
MICHAEL C. JENSEN
The Monitor Company
Harvard Business School
Negotiations, Organizations and Markets
KEVIN J. MURPHY
University of Southern California
Marshall School of Business
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W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Regulating Executive Pay: Using the Tax Code to Influence CEO
Compensation"
BY: NANCY L. ROSE
Massachusetts Institute of Technology (MIT)
Department of Economics
CATHERINE D. WOLFRAM
University of California at Berkeley
Haas School of Business
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=244570
Paper ID: MIT Dept. of Economics Working Paper No. 00-24
Date: September 2000
Contact: NANCY L. ROSE
Email: Mailto:nrose@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
Room E52-371b
50 Memorial Drive
Cambridge, MA 02142 USA
Phone: 617-253-8956
Fax: 617-253-1330
Co-Auth: CATHERINE D. WOLFRAM
Email: Mailto:cdwolfram@yahoo.com
Postal: University of California at Berkeley
Haas School of Business
Berkeley, CA 94720 USA
Paper Requests:
Contact: Linda Woodbury, MIT Department of Economics, E52-251;
50 Memorial Drive; Cambridge, MA 02142. Phone:(617)253-8885.
Fax:(617)253-1330. Mailto:lwoodbur@mit.edu Individual working
papers $7 & $10; Subscriptions $80 domestic (including Canada &
Mexico) & $100 international.
ABSTRACT:
This study explores corporate responses to 1993 legislation,
implemented as section 162(m) of the Internal Revenue Code, that
capped the corporate tax deductibility of top management
compensation at $1 million per executive unless it qualified as
substantially "performance-based." We detail the provisions of
this regulation, describe its possible effects, and test its
impact on U.S. CEO compensation during the 1990s. Data on nearly
1400 publicly-traded U.S. corporations are used to explore the
determinants of section 162(m) compensation plan qualification
and the effect of section 162(m) on CEO pay. Our analysis
suggests that section 162(m) may have created a "focal point"
for salary compensation, leading some salary compression close
to the deductibility cap. There is weak evidence that
compensation plan qualification is associated with higher growth
rates, as would be the case if qualification relaxed some
political constraints on executive pay. There is little evidence
that the deductibility cap has had significant effects on
overall executive compensation levels or growth rates at firms
likely to be affected by the deductibility cap, however, nor is
there evidence that it has increased the performance sensitivity
of CEO pay at these firms. We conclude that corporate pay
decisions seem to be relatively insulated from this type of
blunt policy intervention.
Keywords: Executive Compensation, CEO Pay, Tax Policy,
Regulation, OBRA, Section 162(m)
JEL Classification: G3, H2, G34, H25, J33, J44, L51
______________________________
"What's In It For Me? Personal Benefits Obtained By CEOs Whose
Firms Are Acquired"
BY: JAY C. HARTZELL
New York University
Stern School of Business, Finance
ELI OFEK
New York University
Stern School of Business, Finance
DAVID YERMACK
New York University
Stern School of Business, Finance
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=236094
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Paper ID: Presented at Tuck-JFE Contemporary Corporate
Governance Conference
Date: June 2000
Contact: JAY C. HARTZELL
Email: Mailto:jhartzel@stern.nyu.edu
Postal: New York University
Stern School of Business, Finance
Suite 9-190
44 West 4th Street
New York, NY 10012 USA
Phone: 212-998-0359
Fax: 212-995-4233
Co-Auth: ELI OFEK
Email: Mailto:eofek@stern.nyu.edu
Postal: New York University
Stern School of Business, Finance
44 West 4th Street
New York, NY 10012 USA
Co-Auth: DAVID YERMACK
Email: Mailto:dyermack@stern.nyu.edu
Postal: New York University
Stern School of Business, Finance
MEC 9-56
44 West 4th Street
New York, NY 10012 USA
ABSTRACT:
We study benefits received by target company CEOs in completed
mergers and acquisitions. These executives obtain wealth
increases with a median of $4 to $5 million and a mean of $8 to
$11 million, roughly in line with the permanent income streams
that they sacrifice. CEOs receive lower financial gains from
those transactions in which they become executives of the buyer,
suggesting that tradeoffs exist between the financial and
career-related benefits they extract. Regression estimates
suggest that target shareholders receive lower acquisition
premia in transactions that involve extraordinary personal
treatment of the CEO.
Keywords: Takeovers, acquisitions
JEL Classification: G34, J44
______________________________
"The Taxation of Executive Compensation"
BY: BRIAN J. HALL
Harvard Business School
Negotiations, Organizations and Markets
National Bureau of Economic Research (NBER)
JEFFREY B. LIEBMAN
Harvard University, Kennedy School of Government
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=220848
Paper ID: NBER Working Paper No. W7596
Date: March 2000
Contact: BRIAN J. HALL
Email: Mailto:bhall@hbs.edu
Postal: Harvard Business School
Negotiations, Organizations and Markets
Baker 185
Soldiers Field Road
Boston, MA 02163 USA
Phone: 617-495-5062
Fax: 617-496-4191
Co-Auth: JEFFREY B. LIEBMAN
Email: Mailto:jeffrey_liebman@harvard.edu
Postal: Harvard University, Kennedy School of Government
79 John F. Kennedy Street
Cambridge, MA 02138 USA
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
Over the past 20 years, there has been a dramatic increase in
the share of executive compensation paid through stock options.
In this paper, we examine the extent to which tax policy has
influenced the composition of executive compensation, and
discuss the implications of rising stock-based pay for tax
policy. We begin by describing the tax rules for executive pay
in detail and analyzing how changes in various tax rates affect
the tax advantages of stock options relative to salary and
bonus. Our empirical analysis leads to three conclusions. First,
there is little evidence that tax changes have played a major
role in the dramatic explosion in executive stock option pay
since 1980. Although the tax advantage of options has
approximately doubled since the early 1980s options currently
have only a slight tax advantage relative to cash approximately
$4 per $100 of pre-tax compensation to the executive. more
convincing story for the dramatic explosion in stock options
involves changes in corporate governance and the market for
corporate control. For example, there is a strong correlation
between the fraction of shares held by large institutional
investors and the fraction of executive pay in the form of stock
options, a result that holds both longitudinally and
cross-sectionally. Second, we find evidence that the million
dollar rule (which limited the corporate deductibility of
non-performance-related executive compensation to $1 million)
led firms to adjust the composition of their pay away from
salary and toward performance related pay,' although our
estimates suggest that substitution was minor. We find no
evidence that the regulation decreased the level of total
compensation. Third, we examine whether there is evidence for
significant shifting of the timing of option exercises in
response to changes in tax rates. After replicating the Goolsbee
(1999) result regarding tax-shifting with our data for the 1993
tax reform, we show that no such shifting occurred in either of
the two tax reforms of the 1980s. Moreover, we find evidence
that much of the unusually large level of option exercises in
1992 was the result of the rising stock market rather than the
change in marginal tax rates.
JEL Classification: G34, H2, J33
______________________________
"Executive Compensation"
BY: KEVIN J. MURPHY
University of Southern California
Marshall School of Business
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=163914
Date: April 1998
Contact: KEVIN J. MURPHY
Email: Mailto:kevin.murphy@marshall.usc.edu
Postal: University of Southern California
Marshall School of Business
Finance and Business Economics
Los Angeles, CA 90089-1427 USA
Phone: (213) 740-6553
ABSTRACT:
This paper summarizes the empirical and theoretical research on
executive compensation and provides a comprehensive and
up-to-date description of pay practices (and trends in pay
practices) for chief executive officers (CEOs). Topics discussed
include the level and structure of CEO pay (including detailed
analyses of annual bonus plans, executive stock options, and
option valuation), international pay differences, the
pay-setting process, the relation between CEO pay and firm
performance ("pay-performance sensitivities"), the relation
between sensitivities and subsequent firm performance, relative
performance evaluation, executive turnover, and the politics of
CEO pay.
JEL Classification: J33, J41, G30
______________________________
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"CEO Incentives: It's Not How Much You Pay, But How"
Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY,
Harvard University Press, 1998; Harvard Business Review,
No. 3, May-June 1990
BY: MICHAEL C. JENSEN
The Monitor Company
Harvard Business School
Negotiations, Organizations and Markets
KEVIN J. MURPHY
University of Southern California
Marshall School of Business
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=146148
Contact: MICHAEL C. JENSEN
Email: Mailto:mjensen@hbs.edu
Postal: The Monitor Company
Two Canal Park
Cambridge, MA 02141 USA
Phone: 617-252-2636
Fax: 603-971-5546
Co-Auth: KEVIN J. MURPHY
Email: Mailto:kevin.murphy@marshall.usc.edu
Postal: University of Southern California
Marshall School of Business
Finance and Business Economics
Los Angeles, CA 90089-1427 USA
ABSTRACT:
Paying top executives "better" would eventually mean paying them
more. The arrival of spring means yet another round in the
national debate over executive compensation. Soon the business
press will trumpet answers to the questions it asks every year:
Who were the highest paid CEOs? How many executives made more
than a million dollars? Who received the biggest raises?
Political figures, union leaders, and consumer activists will
issue now-familiar denunciations of executive salaries and urge
that directors curb top-level pay in the interests of social
equity and statesmanship. The critics have it wrong. There are
serious problems with CEO compensation, but "excessive" pay is
not the biggest issue. The relentless focus on how much CEOs are
paid diverts public attention from the real problem--how CEOs
are paid. In most publicly held companies, the compensation of
top executives is virtually independent of performance. On
average, corporate America pays its most important leaders like
bureaucrats. Is it any wonder then that so many CEOs act like
bureaucrats rather than the value-maximizing entrepreneurs
companies need to enhance their standing in world markets? We
recently completed an in-depth statistical analysis of executive
compensation. Our study incorporates data on thousands of CEOs
spanning five decades. The base sample consists of information
on salaries and bonuses for 2,505 CEOs in 1,400 publicly held
companies from 1974 through 1988. We also collected data on
stock options and stock ownership for CEOs of the 430 largest
publicly held companies in 1988. In addition, we drew on
compensation data for executives at more than 700 public
companies for the period 1934 through 1938.