IAN L. DEW-BECKER, Northwestern University - Department of Economics
Email: i-dew@northwestern.edu

This paper reviews the history of executive compensation disclosure and other government policies affecting CEO pay, and as well surveys the literature on the effects of these policies. Disclosure has increased nearly uniformly since 1933. A number of other regulations, including special taxes on CEO pay and rules regarding votes on some pay packages have also been introduced, particularly in the last 20 years. However, there is little solid evidence that any of these policies have had any substantial impact on pay. Policy changes have likely helped drive the move towards more use of stock options, but there is no conclusive evidence on how policy has otherwise affected the level or composition of pay. I also review evidence from overseas on "Say on Pay," recently proposed in the US, which would allow nonbinding shareholder votes on CEO compensation. The experiences of other countries have been positive, with tighter linkages between pay and performance and improved communication with investors. Mandatory say on pay would be beneficial in the US.

JEAN-PIERRE DANTHINE, University of Lausanne - Institute of Banking and Finance (IBF), Centre for Economic Policy Research (CEPR), Swiss Finance Institute
Email: jean-pierre.danthine@unil.ch
JOHN B. DONALDSON, Columbia Business School
Email: jd34@columbia.edu

We reexamine the issue of executive compensation within a general equilibrium production context. Intertemporal optimality places strong restrictions on the form of a representative manager's compensation contract, restrictions that appear to be incompatible with the fact that the bulk of many high-profile managers' compensation is in the form of various options and option-like rewards. We therefore measure the extent to which a convex contract alone can induce the manager to adopt near-optimal investment and hiring decisions. To ask this question is essentially to ask if such contracts can effectively align the stochastic discount factor of the manager with that of the shareholder-workers. We detail exact circumstances under which this alignment is possible and when it is not.

RANDALL S. THOMAS, Vanderbilt University - School of Law, Vanderbilt University - Owen Graduate School of Management
Email: randall.thomas@law.vanderbilt.edu

This article compares executive pay practices in the U.S. with those employed elsewhere in the world. After providing an overview of current practices, it goes on to analyze whether there is likely to be a convergence of these practices. It first examines the influence of market based factors, such as evolving share ownership patterns, cross-border hiring, transnational mergers and acquisitions, and the growth of multinational enterprises, on the likelihood of convergence occurring. It concludes that these factors point in the direction of increasing convergence in executive pay. Next, the paper discusses the influence of legal regulations, including corporate law, judicial interpretations of fiduciary principles, shareholder voting requirements, restrictions on stock option plans and disclosure rules on comparative executive pay practices. Other legal regimes, such as, tax law, labor law, and "soft" law that might also influence executive compensation are also scrutinized to see how they will affect pay convergence. In its final section, the article considers the effects of culture in several countries and how it impacts compensation levels and practices.

PHILIP R. BROWN, University of Western Australia - Department of Accounting and Finance, University of New South Wales - Australian School of Business, Lancaster University - Department of Accounting and Finance
Email: PHILIP.BROWN@UWA.EDU.AU
ALEXANDER SZIMAYER, Fraunhofer ITWM (KL)
Email: aszimaye@ecel.uwa.edu.au

Accounting standards require companies to assess the fair value of any stock options granted to executives and employees. We develop a model for accurately valuing executive and employee stock options, focusing on performance hurdles, early exercise and uncertain volatility. We apply the model in two case studies and show that properly computed fair values can be significantly lower than traditional BlackScholes values. We then explore the implications for pay-for-performance sensitivity and the design of effective share-based incentive schemes. We find that performance hurdles can require a much greater fraction of total compensation to be a fixed salary, if pre-existing incentive levels are to be maintained.

STEPHEN G. SAPP, affiliation not provided to SSRN

This paper examines the relationship between the compensation of the top five executives at a set of over 400 publicly listed Canadian firms and various internal and external corporate governance-related factors. The media is full of stories suggesting a relationship between large executive compensation packages and failures in governance at various levels within organisations, but there exists little formal analysis of many of these relationships. Our analysis provides empirical evidence supporting some of these assertions, refuting others and documenting new relationships. We find that variances in internal governance related to differences across firms in the characteristics of the CEO, compensation committee and board of directors do influence both the level and composition of executive compensation, especially for the CEO. Considering external measures of corporate governance, we find that different types of shareholders and competitive environments impact executive compensation. We do not find that either the internal or external governance characteristics dominate.

JEFFREY N. GORDON, Columbia Law School, European Corporate Governance Institute (ECGI)
Email: jgordon@law.columbia.edu

Shareholder and public dissatisfaction with executive compensation has led to calls for an annual shareholder advisory vote on a firm's compensation practices and policies, so-called say on pay. Governance activists have recently begun to use the proxy machinery to target specific firms for such a shareholder vote. Some governance activists have also backed federal legislative proposals that would implement say on pay generally for US public companies. This paper assesses the case for such a mandatory federal rule in light of the UK experience with a similar regime adopted in 2002. The best argument for a mandatory rule is that it would destabilize pay practices that have produced excessive compensation and that would not yield to firm-by-firm pressure. This has not been the UK experience; pay continues to increase. The most serious concern is the likely evolution of a best compensation practices regime which would embed normatively-opinionated practices that would ill-suit many firms. There is some evidence of a UK evolution in that direction. This problem might be more pronounced in the US because US shareholders are even more likely than their UK counterparts to delegate judgments over compensation practices to a small number of proxy advisors who themselves will be economizing on analysis. The paper argues that the jury-rigged system now operating to push for compensation reform in US firms in light of the SEC's robust new compensation disclosure regime should be permitted to operate for a few more years before mandatory say-on-pay is seriously considered. In any event, if compensation levels are unacceptable as social matter rather than as a pay-for-performance matter, then general tax law changes would be more productive than tinkering with corporate governance.

SAMER KHALIL, American University of Beirut
Email: sk61@aub.edu.lb
MICHEL MAGNAN, Concordia University - Department of Accountancy
Email: mmagnan@jmsb.concordia.ca
PAUL ANDRÉ, ESSEC Business School Paris
Email: andre@essec.fr

The positive stock market reaction to DSU adoption provides valid economic underpinnings to the current worldwide trend in director compensation toward the cancellation of stock option plans and their substitution by DSU. However, the adoption of DSU plans for directors does not add much value in settings where there is already good monitoring by a large shareholder, by a broader investor base or by the board.The paper adds to the scant literature on directors' compensation by examining a recent development in directors' pay; DSU plans having many distinguishing features that set them apart from stock options. Second, it investigates whether investors' reaction varies with DSU attributes. Third, the specificity of the Canadian settings allows an analysis of the reaction to DSU adoption given different ownership structures and stock market listing.The sample comprises all firms within Canada's top 1,000 that adopted DSU plans between 1997 (first one) and 2005. Results show that adopters exhibit positive abnormal returns at the adoption announcements and that these vary in accordance with DSU attributes: Investors reward firms that adopt stricter standards. Findings also indicate a more positive reaction when firms are widely held, have higher levels of related directors, higher free cash flows, and are not cross-listed in the US.We examine the impact of the adoption of deferred share unit (DSU) plans for directors on a firm's stock market value. We also examine the differential response to plan and firm characteristics.

JOHN R. GRAHAM, Duke University - Fuqua School of Business, National Bureau of Economic Research (NBER)
Email: john.graham@duke.edu
SI LI, Wilfrid Laurier University - School of Business and Economics
Email: sli@wlu.ca
JIAPING QIU, McMaster University - Michael G. DeGroote School of Business
Email: qiu@mcmaster.ca

We study the role of latent managerial ability in determining executive compensation. We decompose the variation of executive compensation into time variant and invariant firm and manager components and find that the time invariant manager fixed effect, a proxy for latent (i.e. unobservable) managerial human capital, explains a majority of the variation in executive pay. In addition, we show that including manager fixed effects alters coefficients and interpretations of other variables. We also find that firm performance improves after CEOs with larger compensation fixed effects are hired, which is consistent with the fixed effect being associated with innate managerial ability or social capital, which in turn leads to better performance. We further derive managers' excess compensation by purging time variant effects and firm, manager, and year fixed effects, and show that firms with over-paid managers use less debt, consistent with theoretical predictions.