JENNIFER N. CARPENTER, New York University - Department of Finance
Email: jcarpen0@stern.nyu.edu
RICHARD STANTON, University of California, Berkeley - Finance Group
Email: stanton@haas.berkeley.edu
NANCY WALLACE, University of California, Berkeley - Real Estate Group
Email: wallace@haas.berkeley.edu

This paper is the first to perform a comprehensive estimation of employee stock option exercise behavior and option cost to firms. We develop a GMM-based methodology, robust to heteroskedasticity and correlation across exercises, for estimating the rate of voluntary option exercise as a function of the stock price path and of various firm and option holder characteristics. We use it to estimate an exercise function from a sample of 870,624 employee-option grants at 47 publicly-traded firms between 1980-2005, finding that volatility has a counterintuitive effect, and that men exercise faster than women. We also estimate the rate of employment termination, which determines forfeitures, cancellations, and forced exercises. We use the estimated exercise and termination functions in a simulation based valuation model to analyze the effect of different firm and option holder characteristics on option value, and show that the true value of these options can differ substantially from values calculated using the usual FASB approximation.

DAVID YERMACK, New York University - Stern School of Business
Email: dyermack@stern.nyu.edu

I study large charitable stock gifts by Chairmen and CEOs of public companies. These gifts, which are not subject to insider trading law, often occur just before sharp declines in their companies share prices. This timing is more pronounced when executives donate their own shares to their own family foundations. Evidence related to reporting delays and seasonal patterns suggests that some CEOs backdate stock gifts to increase personal income tax benefits. CEOs family foundations hold donated stock for long periods rather than diversifying, permitting CEOs to continue voting the shares.

DAVID YERMACK, New York University - Stern School of Business
Email: dyermack@stern.nyu.edu

We study the compensation and productivity of more than 2,000 Methodist ministers in a 43-year panel data set. The church appears to use pay-for-performance incentives for its clergy, as their compensation follows a sharing rule by which pastors receive approximately 3 percent of the incremental revenue from membership increases. The elasticity between ministers pay and parish size is similar to the firm size elasticity of compensation for public company CEOs. Among a range of possible performance measures, those with the greatest informativeness about pastoral effort are linked most closely to compensation.

ANA M. ALBUQUERQUE, Boston University School of Management
Email: albuquea@bu.edu
GUS DE FRANCO, University of Toronto - Joseph L. Rotman School of Management
Email: gdefranc@utm.utoronto.ca
RODRIGO S. VERDI, Massachusetts Institute of Technology (MIT)
Email: rverdi@mit.edu

We study the determinants of firms' choice of peers, and how that choice impacts CEO compensation. Our sample includes 678 firms (1,152 firm-years) that disclose peers following the new disclosure rules for executive compensation. Competitive benchmarking predicts that peer choice will be explained by similarity in firm characteristics that capture similarity in the labor market for executives. In contrast, critics argue that managers will act in a self-serving manner when selecting compensation peers. We find that peer choice is driven by economics factors such as similarity in industry, size, performance, investment tangibility, and past return covariance. However, we also find that firms appear to be self-serving when selecting peers. Specifically, firm-chosen peers are larger and pay their CEOs higher compensation compared with predicted peers. Further, the compensation of firms' CEOs is positively associated with CEO compensation at firm-chosen peers, after controlling for economic determinants of CEO compensation.

BRIAN D. CADMAN, University of Utah - David Eccles School of Business
Email: brian.cadman@business.utah.edu
MARY ELLEN CARTER, Boston College - Department of Accounting
Email: carterma@bc.edu
KATERINA SEMIDA, University of Pennsylvania - The Wharton School
Email: isemida@wharton.upenn.edu

We examine whether compensation peer firms are selected opportunistically to increase CEO pay. Using a sample of 608 firms from the S&P 1500 and 2,154 peer firms, identified from their 2006 proxy statements. We find only limited evidence that firms choose peer groups opportunistically. Although sample firms appear to select bigger and better performing peer firms relative to other potential peers, only size has any power in explaining components of sample firm CEO pay. In addition, firms often select peers that are from the same industry and peers that also have selected the sample firm as its peer, both capturing similarities in economic characteristics between sample firms and chosen peers. Our evidence is more consistent with firms using compensation peer firms to benchmark CEO pay in a competitive labor market than firms strategically selecting peer firms to influence or justify greater CEO pay.

DAVID I. WALKER, Boston University School of Law
Email: diwalker@bu.edu

A consensus is developing that executive compensation in the U.S. is inadequately linked to long-term company performance, resulting in reckless, short-term decision making. Congress, the Obama administration, and academic commentators have recently embraced dramatic restrictions on the form and holding period of senior executive pay, at least at some companies. A common view, apparently, is that while regulation of the amount of executive pay would do more harm than good, regulation of form and term is desirable.

This essay questions that view. It highlights the challenges of fruitfully regulating the term and form of pay arising from the complexity and diversity of executive pay arrangements, uncertainty as to the underlying reasons (and hence appropriate remedies) for short-termism, and the conflict between deterring reckless short-term behavior and encouraging sufficient risk-taking to maximize share value over the long term. This essay goes on to analyze and critique existing regulatory proposals, and, while not endorsing a regulatory solution, offer two ideas that policy makers should consider if faced with the job of crafting a regulatory response to short-termism: focusing regulation solely on the term of pay, leaving form to individual company discretion, and adopting a comprehensive disclosure-based response.

RAMIN BAGHAI, London Business School
Email: rbaghaiwadji.phd2006@london.edu
MARC GABARRO, London Business School
Email: mgabarro.phd2006@london.edu

Do managers perform stock splits to derive personal benefits from them? Given that the authority to carry out a stock split lies largely with the CEO, we wonder what the CEO's personal incentives are to undertake a stock split. We show that the more convex the compensation structure of a CEO, the larger is the likelihood of a stock split. As it is well-documented that stock splits lead to an increase in return volatility, we argue that the likely reason for our finding is that CEOs attempt to increase the value of their option-based compensation component via the stock split. Using data on CEOs' mandatory filings of stock option exercises, we provide further evidence of this strategic behavior by documenting that stock splits predict the exercise of stock options by CEOs.

SUDARSHAN JAYARAMAN, Washington University, St. Louis - John M. Olin School of Business
Email: jayaraman@wustl.edu
TODD T. MILBOURN, Washington University, St. Louis - John M. Olin School of Business
Email: milbourn@olin.wustl.edu

We examine how managerial incentives are affected by two equity market trading characteristics - stock liquidity and stock return volatility. We find that pay-for-performance sensitivity (PPS) is, in general, increasing in stock liquidity. However, when greater stock liquidity is due to non-informational trading, we find that it is associated with lower PPS. In terms of stock return volatility, while some studies suggest that greater idiosyncratic volatility measures risk, others argue that it represents more firm-specific information. Our empirical tests attempt to disentangle the two effects and their relation with PPS. We introduce earnings volatility to capture uncertainty of the operating environment thereby allowing idiosyncratic volatility to capture the effect of information. We then find some evidence that idiosyncratic volatility is positively associated with PPS. We also explore the role of firm size. Consistent with the relative importance of information vis-a-vis that of risk diminishing with size, we find strong evidence that idiosyncratic volatility is positively associated with PPS for small firms and inversely related with PPS for large firms. Overall, our study provides further insights about the role of risk and information in managerial incentives.

MANNING G. WARREN, Brandeis School of Law
Email: mgw111@louisville.edu

The remedy of restoration of compensation, known in the agency context as the faithless servant doctrine, provides for the corporate principal's recovery of compensation previously paid or payable to corporate officers and other agents who have breached their fiduciary obligations. Although a limited clawback provision was one of the reforms enacted as part of the Sarbanes-Oxley Act, courts have refused to imply a private remedy, and, even if they were to do so, it would be of limited utility. Given the many variations of the clawback concept, including the demands for clawback of AIG and Merrill Lynch bonuses and of pre-bankruptcy returns paid to Madoff investors, I have chosen to distinguish the equitable remedy of restoration of compensation as equitable clawback. My essay contends that the remedy's increased recognition and broader use would add primacy to individual versus entity liability, and, consequently, help reestablish the link between executive wealth and executive responsibility.