JAMAL IBRAHIM HAIDAR, University of California, Berkeley
Email: haidar@berkeley.edu

The paper shows that the effect of the Emergency Economic Stabilization Act (EESA) is ambiguous. It discusses the benefits and costs of mark-to-market valuation and design of executive pay package policies within the US 2009 EESA. It highlights how mark-to-market valuation standard influenced financial institutions, explains why mark-to-market policy suspension proponents can support EESA, and realizes how FASB and SEC can count on EESA while assessing the need and cost of mark-to-market policy. Also, the paper discusses the promise of executive wage caps within EESA. Moreover, it differentiates between executive pay packages pre and post EESA policies.

GEORGIOS VOULGARIS, University of Manchester - Manchester Business School
Email: georgios.voulgaris@postgrad.mbs.ac.uk
KONSTANTINOS STATHOPOULOS, Manchester Business School
Email: k.stathopoulos@mbs.ac.uk
MARTIN WALKER, University of Manchester - Manchester Business School
Email: martin.walker@mbs.ac.uk

This paper provides new evidence on the effect of compensation consultants on CEO pay. We find that the use of a compensation consultant has an increasing effect on the level of total CEO compensation, which is consistent with the “ratcheting up” effect of consultants on CEO pay argued by the managerial power approach. However, we also find that this influence on pay levels mainly stems from an increase in equity based compensation. In contrast, we report a negative influence of consultants on basic (cash) pay. In addition, we model the choice of hiring a consultant and show that it can be explained by economic determinants, e.g. firm size, firm governance, firm’s propensity to hire outside consultancy, complexity of the contract. The existence of a powerful CEO does not increase the likelihood of hiring a pay consultant. The results are robust to several model specifications, different controls for firm and governance characteristics and tests for selection bias. Our results indicate that compensation consultants have a positive effect on the structure of CEO pay since they encourage incentive based compensation. We also show that economic determinants, rather than CEO power, explain the decision to hire compensation consultants. Overall, we offer new evidence suggesting that pay consultants contribute to the solution of the executive pay determination problem and are not part of the problem; our results cast doubts on the conclusions of the managerial power approach regarding the role of compensation consultants. This study offers insights to the positive effect the hiring of a pay consultant could have towards the design of a CEO pay contract.

SANJAI BHAGAT, University of Colorado at Boulder - Department of Finance
Email: sanjai.bhagat@colorado.edu
ROBERTA ROMANO, Yale Law School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: roberta.romano@yale.edu

This Article advances an executive compensation reform proposal that is specifically addressed to firms receiving government financial assistance and thought to pose a systemic risk, although we think that all firms should consider its adoption. Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. With these criteria in mind, we suggest that incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold nor the options exercised for a period of at least two to four years after an individual resignation or last day in office. We would permit a minor amount to be paid out to executives currently to address tax, liquidity, and premature turnover concerns that the proposal could induce. We believe that this approach will provide superior incentives for executives(and traders whose actions can substantially impact an organization) to manage firms in investors longer-term interest, and diminish their incentive to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation. By reducing management incentive to take on unwarranted risk, our proposal would therefore also decrease the probability that public resources will be dissipated in bailouts of financial firms, particularly those deemed by public officials as “too big to fail.”

ALEX EDMANS, University of Pennsylvania - The Wharton School
Email: aedmans@wharton.upenn.edu
XAVIER GABAIX, New York University - Stern School of Business, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)
Email: xgabaix@stern.nyu.edu
TOMASZ SADZIK, New York University
Email: tsadzik@nyu.edu
YULIY SANNIKOV, University of California, Berkeley - Department of Economics
Email: sannikov@econ.berkeley.edu

Contracts in a dynamic model must address a number of issues absent from static frameworks. Shocks to firm value may weaken the incentive effects of securities (e.g. cause options to fall out of the money), and the impact of some CEO actions may not be felt until far in the future. We derive the optimal contract in a setting where the CEO can affect firm value through both productive effort and costly manipulation, and may undo the contract by privately saving. The optimal contract takes a surprisingly simple form, and can be implemented by a "Dynamic Incentive Account." The CEO's expected pay is escrowed into an account, a fraction of which is invested in the firm's stock and the remainder in cash. The account features state-dependent rebalancing and time-dependent vesting. It is constantly rebalanced so that the equity fraction remains above a certain threshold; this threshold sensitivity is typically increasing over time even in the absence of career concerns. The account vests gradually both during the CEO's employment and after he quits, to deter short-termist actions before retirement.

LUCIAN A. BEBCHUK, Harvard University - Harvard Law School, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)
Email: bebchuk@law.harvard.edu
ALMA COHEN, Tel Aviv University - Eitan Berglas School of Economics, Harvard Law School, National Bureau of Economic Research (NBER)
Email: almac@post.tau.ac.il
HOLGER SPAMANN, Harvard University - Harvard Law School
Email: hspamann@law.harvard.edu

The standard narrative of the meltdown of Bear Stearns and Lehman Brothers assumes that the wealth of the top executives of these firms was largely wiped out along with their firms. In the ongoing debate about regulatory responses to the financial crisis, commentators have used this assumed fact as a basis for dismissing both the role of compensation structures in inducing risk-taking and the potential value of reforming such structures. This paper provides a case study of compensation at Bear Stearns and Lehman during 2000-2008 and concludes that this assumed fact is incorrect.

We find that the top-five executive teams of these firms cashed out large amounts of performance-based compensation during the 2000-2008 period. During this period, they were able to cash out large amounts of bonus compensation that was not clawed back when the firms collapsed, as well as to pocket large amounts from selling shares. Overall, we estimate that the top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during 2000-2008. These cash flows substantially exceeded the value of the executives’ initial holdings in the beginning of the period, and the executives’ net payoffs for the period were thus decidedly positive. The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out, as standard narratives suggest, that the executives’ pay arrangements provided them with excessive risk-taking incentives. We discuss the implications of our analysis for understanding the possible role that pay arrangements have played in the run-up to the financial crisis and how they should be reformed going forward.

CLARA KULICH, affiliation not provided to SSRN
Email: c.kulich@exeter.ac.uk
GRZEGORZ TROJANOWSKI, University of Exeter - School of Business and Economics
Email: G.Trojanowski@ex.ac.uk
MICHELLE K. RYAN, University of Exeter - School of Psychology
Email: M.Ryan@exeter.ac.uk
S. ALEXANDER HASLAM, University of Exeter - School of Psychology
Email: A.Haslam@exeter.ac.uk
LUC RENNEBOOG, Tilburg University - Department of Finance, European Corporate Governance Institute (ECGI)
Email: Luc.Renneboog@uvt.nl

This paper offers a new explanation of the gender pay gap in leadership positions by examining the relationship between managerial bonuses and company performance. Drawing on findings of gender studies, agency theory, and the leadership literature, we argue that the gender pay gap is a context-specific phenomenon which results partly from the fact that company performance has a moderating impact on pay inequalities. Employing a matched sample of 192 female and male executive directors of UK listed firms we corroborate the existence of the gender pay disparities in corporate boardrooms. In line with our theoretical predictions, we find that bonuses awarded to men are not only larger than those allocated to women, but also that managerial compensation of male executive directors is much more performance-sensitive than that of female executives. The contribution of attributional and expectancy-related dynamics to these patterns is highlighted in line with previous work on gender stereotypes and implicit leadership theories such as the romance of leadership. Gender differences in risk-taking and confidence are also considered as potential explanations for the observed pay disparities. The implications of organizations’ indifference to women’s performance are examined in relation to issues surrounding the recognition and retention of female talent.

B. ESPEN ECKBO, Dartmouth College - Tuck School of Business, European Corporate Governance Institute (ECGI)
Email: b.espen.eckbo@dartmouth.edu

The U.S. government has acquired large shareholdings in companies like AIG, GM and others, essentially becoming "owner of last resort" through its defense of the "too big to fail" doctrine. I argue in this Congressional testimony that the government should adopt a pro-active stance in terms of exercising its voting rights to promote best governance practices. I am not advocating direct government intervention in the business operations of the firms in which it is a large shareholder. What I do recommend is the form of shareholder activism commonly exercised today by large institutional shareholders such as pension funds, and which is needed to ensure that the companies operate under the most effcient governance system. Minority shareholders benefit from the presence of a large blockholder because only the latter has the economic incentive to exercise voting rights in an efficient manner. Thus, the government is now in a unique position to improve ineffcient governance systems and practices. However, to have this positive effect, the government must take a pro-active stance on share-voting in accordance with the value-maximizing principle. I discuss four areas where the institutional investment community (as relatively large shareholders) in the U.S. recommends active voting to improve governance: (1) director election reform, (2) elimination of costly takeover defenses, (3) splitting CEO and board chairmanship positions, and (4) executive compensation ("say on pay").