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Working Paper
Does tax policy affect executive compensation? evidence from postwar tax reforms
Evidence since the 1980s suggests that the level and structure of executive compensation in U.S. public corporations are largely unresponsive to tax incentives. However, the relative tax advantage of different forms of pay has been relatively small during this period. Using a sample of top executives in large firms from 1946 to 2005, we find little response of salaries, qualified stock options, long-term incentive pay, or bonuses paid after retirement to changes in tax rates on labor income--even though tax rates were significantly higher and more heterogeneous across individuals in the first ...
Working Paper
A unified analysis of executive pay: the case of the banking industry
This study examines executive compensation determinants in the U.S. banking industry. Multiple theories of executive pay are discussed and tested using a relatively homogenous sample. We perform an in-depth look at the corporate governance and ownership structure of the companies selected. We explore the simultaneous relationship between compensation, firm performance, and board strength, exploiting variables unique to the banking industry. Our primary finding is that after controlling for both regulatory oversight and external market discipline, a strong board is associated with higher firm ...
Working Paper
Executive compensation and earnings management under moral hazard
This paper analyzes executive compensation in a setting where managers may take a costly action to manipulate corporate performance, and whether managers do so is stochastic. We examine how the opportunity to manipulate affects the optimal pay contract, and establish necessary and sufficient conditions under which earnings management occurs. Our model provides a set of implications on the role earnings management plays in driving the time-series and cross-sectional variation of executive compensation. In addition, the model's predictions regarding the changes of earnings management and ...
Journal Article
Because I'm worth it? CEO pay and corporate governance
Recently, there has been strong public outrage against current pay practices for corporate CEOs. To deal with this issue, the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law by President Obama on July 21, 2010 will allow shareholders to vote on executive pay packages and federal regulators to oversee executive compensation at financial firms. Are there problems with CEO pay? According to a recent survey, 98 percent of respondents from major financial institutions ?believe that compensation structures were a factor underlying the crisis.? In ?Because I?m Worth It? CEO ...
Working Paper
Executive compensation at Fannie Mae and Freddie Mac
Corporate governance-and executive-compensation arrangements in particular-should be an important component of the agenda to reform the housing GSEs. The GSEs' safety-and-soundness regulator-who is essentially the debtholders' and taxpayers' representative-must be admitted to the GSEs' boardroom in a way that is atypical of an ordinary publicly held company. This intrusion into the board's oversight of executive-compensation plans is justified given the GSEs' public purposes and their large potential cost to taxpayers. Prudent public policy requires greater supervisory control over executive ...
Journal Article
Convex payoffs: implications for risk-taking and financial reform
Financial executive pay is a convex function of profits if recipients get a greater increment in pay when returns are high as opposed to moderate, compared with when returns are moderate as opposed to low. Convex compensation packages give financial executives incentive to adopt risky investment projects, implement highly levered capital structures, and create new risk. Financial regulators may be able to enforce changes in compensation that would attenuate these adverse effects.
Report
Deferred compensation, risk, and company value: investor reactions to CEO incentives
Many commentators have suggested that companies pay top executives with deferred compensation, a type of incentive known as inside debt. Recent SEC disclosure reforms greatly increased the transparency of deferred compensation. We investigate stockholder and bondholder reactions to companies' initial reports of their CEOs' inside debt positions in early 2007, when new disclosure rules took effect. We find that bond prices rise, equity prices fall, and the volatility of both securities drops upon disclosures by firms whose CEOs have sizable defined benefit pensions or deferred compensation. ...
Working Paper
Executive compensation: a calibration approach
A study that uses principal-agent theory to produce quantitative predictions about executive compensation, showing that observed incentives closely match optimal predicted incentives.
Speech
Still more lessons from the crisis
Remarks at the Foreign Policy Association Corporate Dinner, New York City
Report
Resolving troubled systemically important cross-border financial institutions: is a new corporate organizational form required?
This paper explores the advantages of a new financial charter for large, complex, internationally active financial institutions that would address the corporate governance challenges of such organizations, including incentive problems in risk decisions and the complicated corporate and regulatory structures that impede cross-border resolutions. The charter envisions a single entity with broad powers in which the extent and timing of compensation are tied to financial results, senior managers and risk takers form a new risk-bearing stakeholder class, and a home-country-based resolution regime ...