HANNO N. LUSTIG, UCLA, Anderson School of Management, National Bureau of Economic Research (NBER)
Email: hlustig@anderson.ucla.edu
CHAD SYVERSON, University of Chicago - Department of Economics, National Bureau of Economic Research (NBER)
Email: syverson@uchicago.edu
STIJN VAN NIEUWERBURGH, New York University, National Bureau of Economic Research (NBER)
Email: svnieuwe@stern.nyu.edu

Three of the most fundamental changes in US corporations since the early 1970s have been (1) the increased importance of organizational capital in production, (2) the increase in managerial income inequality and pay-performance sensitivity, and (3) the secular decrease in labor market reallocation. Our paper develops a simple explanation for these changes: a shift in the composition of productivity growth away from vintage-specific to general growth. This shift has stimulated the accumulation of organizational capital in existing firms and reduced the need for reallocating workers to new firms. We characterize the optimal managerial compensation contract when firms accumulate organizational capital but risk-averse managers cannot commit to staying with the firm. A calibrated version of the model reproduces the increase in managerial compensation inequality and the increased sensitivity of pay to performance in the data over the last three decades.

LEONCE BARGERON, University of Pittsburgh - Finance Group
Email: LLBargeron@katz.pitt.edu
FREDERIK P. SCHLINGEMANN, University of Pittsburgh - Finance Group
Email: schlinge@katz.pitt.edu
RENE M. STULZ, Ohio State University - Department of Finance, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: stulz@cob.ohio-state.edu
CHAD J. ZUTTER, University of Pittsburgh - Finance Group
Email: czutter@pitt.edu

CEOs have a potential conflict of interest when their company is acquired: they can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. We investigate the determinants of target CEO retention by the acquirer and whether target CEO retention affects the premium paid by the acquirer. The probability that a CEO is retained increases with a private bidder, the performance of the target, and with the fraction of target shares held by insiders. Regardless of the bidder type, we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for management buyouts.

SHANE A. JOHNSON, Texas A&M University - Department of Finance
Email: sjohnson@mays.tamu.edu
HARLEY E. RYAN, affiliation not provided to SSRN
YISONG S. TIAN, York University - Schulich School of Business
Email: ytian@ssb.yorku.ca

Operating performance and stock return results imply that managers who commit fraud anticipate large stock price declines if they were to report truthfully, which would cause greater losses for managerial stockholdings than for options because of differences in convexity. Fraud firms have significantly greater incentives from unrestricted stockholdings than control firms do, and unrestricted stockholdings are their largest incentive source. Our results emphasize the importance of the shape and vesting status of incentive payoffs in providing incentives to commit fraud. Fraud firms also have characteristics that suggest a lower likelihood of fraud detection, which implies lower expected costs of fraud.

EDUARDO SCHIEHLL, HEC Montréal, Department of Accounting Studies
Email: eduardo.schiehll@hec.ca
FRANÇOIS BELLAVANCE, HEC Montreal - Department of Management Sciences
Email: francois.bellavance@hec.ca

This study documents that boards choose performance measures that best reflect the CEO's contribution to firm value, taking into account the firm's monitoring environment. This study therefore has policy implications regarding the need for enhanced disclosure of CEO compensation to improve investor understanding of the alignment between executive pay and firm performance. Agency theory states that any costless performance measure providing incremental information about the agent's effort will improve the efficiency of the contract with the agent. In contrast with most of the literature in this area, which investigates pay-performance sensitivity and governance structure, we examine an important component of pay-for-performance plans used to align and compensate executive actions that might not be reflected in traditional financial performance measures. The results provide evidence that the use of non-financial performance measures in the CEO bonus plan varies predictably. Growth opportunities are positively associated with the firm's choice to integrate non-financial information into the CEO bonus plan. The results are also sensitive to our proxy for board independence and CEO ownership in firms with high growth opportunities. This study examines the associations between the board of director's choice to integrate non-financial performance measures into the CEO bonus plan and two other governance mechanisms board independence and CEO ownership in a sample of publicly traded Canadian firms.

CAMELIA M. KUHNEN, Northwestern University - Kellogg School of Management
Email: c-kuhnen@kellogg.northwestern.edu
ALEXANDRA NIESSEN, University of Cologne
Email: niessen@wiso.uni-koeln.de

In a competitive managerial labor market, compensation contracts should not depend on public attitudes or social norms regarding income inequality or "fair pay". In contrast to the standard view of optimal incentive design, we find that public opinion impacts executive compensation. We show that transient negative shocks to the public's view of executive pay leads to less total CEO pay, and to a shift away from options-based compensation and towards other types of pay. Furthermore, the level and composition of CEO pay also depends on persistent local social norms, such as state-level attitudes towards income inequality, or religiosity. For instance, in states where residents are likely to be more concerned with income inequality, CEO pay is lower across all types of compensation. Therefore, by changing the incentives faced by managers, social norms may influence executive decisions and ultimately, have an effect on real economic outcomes.

PAUL KALYTA, University of Ottawa
Email: kalyta@telfer.uottawa.ca

Existing research on managerial compensation is based primarily on optimal contracting and managerial hegemony theories. Under the optimal contracting theory, observed compensation contracts are optimally determined, aligning the interests of managers and shareholders. Under the managerial hegemony theory, observed compensation contracts deviate from the optimum because top managers with power over boards are able to influence their own pay. I argue that the impact of managerial power over boards on managerial pay, and hence the deviation of compensation contracts from the optimum, is contingent on the transparency of managerial compensation. Within this framework, I investigate the impact of supplemental executive retirement plans (SERPs) - historically the least transparent compensation component - on opportunistic decision making. An empirical analysis based on a time series sample of CEOs of S&P/TSX60 firms provides support of the compensation transparency theory. I find that SERP benefits are primarily driven by variables proxying for CEO power over the board, whereas more transparent compensation components are primarily driven by economic factors. The results also suggest that CEOs whose SERPs are contingent on firm performance appear to reduce firm R&D expenditures as they approach retirement. Both findings provide important contributions to existing research on the impact of managerial compensation on opportunistic decisions.

DANIEL KLEIN, University of Mannheim - Department of Business Administration and Finance
Email: klein@corporate-finance-mannheim.de
ERNST G. MAUG, University of Mannheim - Department of Business Administration and Finance, European Corporate Governance Institute (ECGI)
Email: maug@cf.bwl.uni-mannheim.de

We analyze a large data set of almost 200,000 option packages for more than 15,000 US top executives and analyze their motivations for the early exercise of their stock options. We estimate a hazard model to identify the main variables that influence executives' timing decisions and find that behavioral factors (e.g., trends in past stock prices), institutional factors (vesting dates, grant dates, blackout periods), and inside information strongly influence the timing of stock option exercises. By contrast, we find little support for the influence of variables proposed by models based on utility theory and risk aversion.

CAROL A. MARQUARDT, CUNY Baruch College
Email: Carol_Marquardt@baruch.cuny.edu
CHRISTINE E.L. TAN, City University of New York - Baruch College
Email: Christine_Tan@baruch.cuny.edu
SUSAN M. YOUNG, City University of New York - Stan Ross Department of Accountancy
Email: Susan_Young@baruch.cuny.edu

We examine whether short-term financial reporting objectives related to executive compensation and employment horizons affect managers' decisions to undertake accelerated share repurchases (ASRs) versus open market repurchases (OMRs). In an ASR, the firm repurchases borrowed shares and simultaneously enters into a forward contract with an investment bank. This structure provides potential financial reporting advantages over OMRs in that earnings per share (EPS) benefits are recorded immediately (i.e., the reporting effects are "accelerated") while the actual share repurchases and potential costs associated with the forward contract are deferred to a future date. Consistent with this short-term focus, we find that firms are more likely to choose ASRs over OMRs when the repurchase is accretive to EPS, when annual bonus compensation is explicitly tied to EPS performance, when CEO horizons are short, and when CEOs are more entrenched. These results are robust to controlling for endogeneity in the decision to repurchase shares. In addition, we find no evidence that compensation committees adjust executive pay for the effects of the ASR. Overall, our results suggest that short-term financial reporting benefits are a significant determinant of decisions to undertake ASRs, consistent with theories of managerial myopia.