Are U.S. CEOs Paid More than U.K. CEOs? Inferences from Risk- Adjusted Pay (CRI 2009-003)

We compute and compare risk-adjusted pay for US and UK CEOs, where the adjustment is based on estimated risk premiums stemming from the equity incentives borne by CEOs. Controlling for firm and industry characteristics, we find that US CEOs have higher pay, but also bear much higher stock and option incentives than UK CEOs. Using reasonable estimates of risk premiums, we find that risk-adjusted US CEO pay does not appear large compared to that of UK CEOs. We also examine differences in pay and equity incentives between a sample of non-UK European CEOs and a matched sample of US CEOs, and find that risk-adjusting pay may explain about half of the apparent higher pay for US CEOs

Discussion of “Are voluntary disclosures that disavow the reliability of mandated fair value information informative or opportunistic?”

Blacconiere, Frederickson, Johnson, and Lewis identify an interesting disclosure and add to our understanding of firm disclosure of option expense. The disclosure is more nuanced than is suggested by the term “disavowal”. Some disclosures are weak, almost tautological “not necessarily … reliable” statements, whereas others are straightforward statements about the “subjective nature” of the inputs to the option valuation model. The “not necessarily … reliable” language largely disappears after SFAS 123R, while stronger language persists. A striking finding in BFJL is lack of opportunism in disavowals, but I suggest that it is preliminary to conclude that there is no opportunism

Executive equity compensation and incentives: a survey

Stock and option compensation and the level of managerial equity incentives are aspects of corporate governance that are especially controversial to shareholders, institutional activists, and government regulators. Similar to much of the corporate finance and corporate governance literature, research on stock-based compensation and incentives has not only generated useful insights, but also produced many contradictory findings. Not surprisingly, many fundamental questions remain unanswered. In this study, the authors synthesize the broad literature on equity-based compensation and executive incentives and highlight topics that seem especially appropriate for future research.Executives ; Stockholders ; Corporate governance

A Review of the Empirical Disclosure Literature: Discussion

Healy and Palepu, J. Account. Econ. (2001), this issue, provide a broad review of the empirical disclosure literature. This discussion focuses on the empirical voluntary disclosure literature, and assumes firms’ disclosure policies are endogenously determined by the same forces that shape firms’ governance structures and management incentives. This provides not only a more focused view of the literature, but also alternative explanations for some of the results discussed in Review and specific suggestions for future research

The Directors\u27 and Officers\u27 Insurance Premium: An Outside Assessment of the Quality of Corporate Governance

Using a sample of directors\u27 and officers\u27 (D & O) premiums gathered from the proxy statements of Canadian companies, this article examines the D & O premium as a measure of ex ante litigation risk. I find a significant association between D & O premiums and variables that proxy for the quality of firms\u27 governance structures. The association between the proxies for governance structure quality and D & O premiums is robust to a number of alternative specifications. This article provides confirmatory evidence that the D & O premium reflects the quality of the firm\u27s corporate governance by showing that measures of weak governance implied by the D & O premium are positively related to excess CEO compensation. The overall results suggest that D & O premiums contain useful information about the quality of firms\u27 governance

Kinematic discrimination of ataxia in horses is facilitated by blindfolding

BACKGROUND: Agreement among experienced clinicians is poor when assessing the presence and severity of ataxia, especially when signs are mild. Consequently, objective gait measurements might be beneficial for assessment of horses with neurological diseases. OBJECTIVES: To assess diagnostic criteria using motion capture to measure variability in spatial gait-characteristics and swing duration derived from ataxic and non-ataxic horses, and to assess if variability increases with blindfolding. STUDY DESIGN: Cross-sectional. METHODS: A total of 21 horses underwent measurements in a gait laboratory and live neurological grading by multiple raters. In the gait laboratory, the horses were made to walk across a runway surrounded by a 12-camera motion capture system with a sample frequency of 240 Hz. They were made to walk normally and with a blindfold in at least three trials each. Displacements of reflective markers on head, fetlock, hoof, fourth lumbar vertebra, tuber coxae and sacrum derived from three to four consecutive strides were processed and descriptive statistics, receiver operator characteristics (ROC) to determine the diagnostic sensitivity, specificity and area under the curve (AUC), and correlation between median ataxia grade and gait parameters were determined. RESULTS: For horses with a median ataxia grade ≥2, coefficient of variation for the location of maximum vertical displacement of pelvic and thoracic distal limbs generated good diagnostic yield. The hoofs of the thoracic limbs yielded an AUC of 0.81 with 64% sensitivity and 90% specificity. Blindfolding exacerbated the variation for ataxic horses compared to non-ataxic horses with the hoof marker having an AUC of 0.89 with 82% sensitivity and 90% specificity. MAIN LIMITATIONS: The low number of consecutive strides per horse obtained with motion capture could decrease diagnostic utility. CONCLUSIONS: Motion capture can objectively aid the assessment of horses with ataxia. Furthermore, blindfolding increases variation in distal pelvic limb kinematics making it a useful clinical tool

The Use of Equity Grants to Manage Optimal Equity Incentive Levels

We predict and find that firms use annual grants of options and restricted stock to CEOs to manage the optimal level of equity incentives. We model optimal equity incentive levels for CEOs, and use the residuals from this model to measure deviations between CEOs’ holdings of equity incentives and optimal levels. We find that grants of new incentives from options and restricted stock are negatively related to these deviations. Overall, our evidence suggests that firms set optimal equity incentive levels and grant new equity incentives in a manner that is consistent with economic theory

Stock Option Plans for Non-Executive Employees

We examine determinants of non-executive employee stock option holdings, grants, and exercises for 756 firms during 1994–1997. We find that firms use greater stock option compensation when facing capital requirements and financing constraints. Our results are also consistent with firms using options to attract and retain certain types of employees as well as to create incentives to increase firm value. After controlling for economic determinants and stock returns, option exercises are greater (less) when the firm\u27s stock price hits 52-week highs (lows), which confirms in a broad sample the psychological bias documented by Heath et al. (Quarterly Journal of Economics 114 (1999) 601–628)

Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility

The costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives, accounting choice, financing decisions, and the valuation of equity. We present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock-return volatility that is easily implemented using data from only the current year’s proxy statement or annual report. This method can be applied to either executive stock option portfolios or to firm-wide option plans. In broad samples of actual and simulated CEO option portfolios, we show that these proxies capture more than 99% of the variation in option portfolio value and sensitivities. Sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics, and is most severe in samples of CEOs with a large proportion of out-of-the-money options. However, the proxies’ explanatory power remains above 95% in all subsamples