Golden Handshakes: Separation Pay for Retired and Dismissed CEOs

This paper studies separation payments made when CEOs leave their firms. In a sample of 179 exiting Fortune 500 CEOs, more than half receive severance pay and the mean separation package is worth $5.4 million. The large majority of severance pay is awarded on a discretionary basis by the board of directors and not according to terms of an employment agreement. For the subset of exiting CEOs who are dismissed, separation pay generally conforms to theories related to bonding and damage control. Shareholders react negatively when separation agreements are disclosed, but only in cases of voluntary CEO turnover.CEO turnover; severance pay

Stockholder and Bondholder Reactions To Revelations of Large CEO Inside Debt Holdings: An Empirical Analysis (CRI 2009-005)

We conduct an event study of stockholders’ and bondholders’ reactions to companies’ initial reports of their CEOs’ inside debt positions, as required by SEC disclosure regulations that became effective early in 2007. Results show that bond prices rise, equity prices fall, and the volatility of both securities drops at the time of disclosures by firms whose CEOs have sizeable pensions or deferred compensation. The results indicate a transfer of value from equity toward debt, as well as an overall destruction of enterprise value, when a CEO’s inside debt holdings are large

Negative Hedging: Performance Sensitive Debt and CEOs’ Equity Incentives (CRI 2009-014)

We examine the relation between CEOs’ equity incentives and their use of performance-sensitive debt contracts. These contracts require higher or lower interest payments when the borrower\u27s performance deteriorates or improves, thereby increasing expected costs of financial distress while making a firm riskier to the benefit of option holders. We find that managers whose compensation is more sensitive to stock volatility choose steeper and more convex performance pricing schedules, while those with high delta incentives choose flatter, less convex pricing schedules. Performance pricing contracts therefore seem to provide a channel for managers to increase firms’ financial risk to gain private benefits

Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Inside debt, such as pensions and deferred compensation, constitutes a widely-used form of executive compensation, yet the valuation and incentive effects of these instruments have been almost entirely overlooked by prior work. Our paper initiates this line of research by studying CEO pension arrangements in a sample of 237 large capitalization firms. Among our findings are that CEO compensation in most large cap firms exhibits a balance between debt- and equity-based incentives, with the balance shifting systematically away from equity and toward debt as CEOs growolder; that annual increases in pension entitlements represent about 10% of overall compensation for the CEOs in our sample, and about 15% for CEOs aged 61 to 65; that CEOs with high debt-based incentives manage their firms conservatively to reduce default risk; and that pension plan compensation strongly influences patterns of CEO turnover and CEO cash compensation.CEO pensions; inside debt; deferred compensation

The Michelle Markup: The First Lady's impact on stock prices of fashion companies

I analyze changes in apparel company stock prices when Michelle Obama wears designer outfits at major events. The First Lady's selections can create value exceeding $100 million for companies that design and market her clothing. The effect is approximately$2.3 billion during a 2009 European trip that the media labeled a "fashion faceoff" with her French counterpart Carla Bruni. However, firms whose clothing she chooses not to wear see their stock prices drop, and her net impact upon the industry amounts to a redistribution of value among firms. The First Lady's influence on fashion firms represents a private benefit of public office, similar to private benefits of control obtained by corporate managers

REMUNERATION, RETENTION, AND REPUTATION INCENTIVES FOR OUTSIDE DIRECTORS

I study incentives received by outside directors in Fortune 500 firms from compensation,replacement, and the opportunity to obtain other directorships. Changes over time in the value of equity compensation create considerable variation in director pay. Board members of the most successful firms earn millions of dollars within their first five years, a marked change in the historical pattern of rewards for directors. I also find statistically significant evidence that outside directors’ replacement and total board seats held are associated generally with company performance. Previous research had only shown these relations to apply under extreme circumstances such as financial distress

Golden Handshakes: Rewards for CEOs Who Leave

This paper studies separation payments made when CEOs leave their firms. In my sample of Fortune 500 companies these packages are widespread and lucrative. Almost 80 percent of CEOs receive separation pay, and its mean present value exceeds $4.5 million. Severance is positively associated with future pay that CEOs might expect until age 65, and is higher when CEOs depart involuntarily. Shareholders react negatively when separation agreements are disclosed, but only in cases of voluntary CEO turnover. Some evidence suggests that severance pay acts as a bonding device between the board and CEO, while other evidence accords with theories of rent extraction

Remuneration, Retention, and Reputation Incentives for Outside Directors

I study incentives received by outside directors in Fortune 500 firms from compensation, replacement, and the opportunity to obtain other directorships. Changes over time in the value of equity compensation create considerable variation in director pay. Board members of the most successful firms earn millions of dollars within their first five years, a marked change in the historical pattern of rewards for directors. I also find statistically significant evidence that outside directors’ replacement and total board seats held are associated generally with company performance. Previous research had only shown these relations to apply under extreme circumstances such as financial distress

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 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

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