Optimal Compensation Contracts with Pay-For-Performance and Termination Incentives

This paper studies optimal compensation contracts in the presence of both pay-for-performance and termination incentives. While these incentives have been studied independently, this paper’s model is the first to incorporate both. The primary result is that pay-for-performance and the threat of termination are substitute incentive devices; holding effort constant, optimal pay-for-performance incentives are increasing in the cost of termination. Our test of this result compares compensation contracts of managers of real estate investment trusts and general partners of real estate limited partnerships. REIT managers’ wealth changes by $25.30 per$1,000 change in REIT value. Compensation for general partners, who are more costly to fire than REIT managers, changes by $253.57 per$1,000 change in partnership value

Is a Higher Calling Enough? Incentive Compensation in the Church (CRI 2009-011)

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% of the incremental revenue from membership increases. Ministers receive the strongest rewards for attracting new parishioners who switch from other congregations within their denomination. Monetary incentives are weaker in settings where ministers have less control over their measured performance

Why do firms hold so much cash? A tax-based explanation

U.S. corporations hold significant amounts of cash on their balance sheets, and these cash holdings have been justified in the existing empirical literature by transaction costs and precautionary motives. An additional explanation, considered in this study, is that U.S. multinational firms hold cash in their foreign subsidiaries because of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms that face higher repatriation tax burdens hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. Estimates indicate that a one standard deviation increase in the tax burden from repatriating foreign income is associated with a 7.9% increase in the ratio of cash to net assets. In addition, certain firms, specifically those that are less financially constrained domestically and those that are more technology intensive, exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.

The Impact of the Likelihood of Turnover on Executive Compensation

This study analyzes the role of three incentive devices in managerial compensation: pay for performance, termination, and career concerns. A model is derived which shows that the three incentives are substitutes; where the termination (or career concerns) incentive is low, the optimal contract contains stronger pay-for-performance incentives. The empirical implication, then, is that the pay-for-performance sensitivity of managers should be decreasing (increasing) in the probability of termination (retirement). To test the model’s predictions, I first use a sample of CEOs to estimate the probabilities of forced and voluntary turnover. Then, these estimated probabilities are compared to the CEOs’ estimated pay-for-performance sensitivity. The evidence is consistent with the hypothesis that boards consider the likelihood of termination when setting the compensation contract; the relationship between changes in CEO compensation and firm performance is decreasing in the estimated probability of forced turnover. While CEOs nearing retirement do not appear to have compensation that is increasingly sensitive to performance, their wealth does have increased sensitivity. Consistent with the model’s intuition, the sensitivity of total CEO firm-related wealth to performance is positively related to the probability of voluntary turnover

Is a Higher Calling Enough? Incentive Compensation in the Church

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% of the incremental revenue from membership increases. Ministers receive the strongest rewards for attracting new parishioners who switch from other congregations within their denomination. Monetary incentives are weaker in settings where ministers have less control over their measured performance. (c) 2010 by The University of Chicago. All rights reserved

Conflicts of Interest in Sell-side Research and The Moderating Role of Institutional Investors

Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994-2000 period, we find that analysts’ recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls