This article has two objectives. First, it shows how debt financing distorts the inventory decision of a retailer who orders multiple items that differ in cost, revenue, or demand parameters. Taking advantage of limited liability, a debt-financed retailer will favor items with a low salvage value, those with a high profit margin, and those that represent a large proportion of the total inventory investment. Second, we argue that this distortion is mitigated when financing is provided by the supplier(s) who can observe the actual order quantities before determining the credit terms. “Borrowing goods” rather than “borrowing cash” limits the retailer’s ability to deviate from the first-best inventory decision. This benefit of trade credit financing is most significant when sourcing multiple differentiated items from a single supplier, and when bankruptcy risk and, thus, the limited liability effect are considerable.
{"title":"Inventory, Risk Shifting, and Trade Credit","authors":"J. Chod","doi":"10.2139/ssrn.2411128","DOIUrl":"https://doi.org/10.2139/ssrn.2411128","url":null,"abstract":"This article has two objectives. First, it shows how debt financing distorts the inventory decision of a retailer who orders multiple items that differ in cost, revenue, or demand parameters. Taking advantage of limited liability, a debt-financed retailer will favor items with a low salvage value, those with a high profit margin, and those that represent a large proportion of the total inventory investment. Second, we argue that this distortion is mitigated when financing is provided by the supplier(s) who can observe the actual order quantities before determining the credit terms. “Borrowing goods” rather than “borrowing cash” limits the retailer’s ability to deviate from the first-best inventory decision. This benefit of trade credit financing is most significant when sourcing multiple differentiated items from a single supplier, and when bankruptcy risk and, thus, the limited liability effect are considerable.","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"2011 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-03-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132042704","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This note deals with the simplified case of a principal (e.g., a firm's board of directors) which delegates execution of an economic activity to a business unit (or a subsidiary firm) managed by a manager. It is assumed that the manager has no control over the cash flows injected into the unit or withdrawn from it: such decisions are made by the principal. The principal aims at measuring the manager's performance in a given interval of time. Neither the net present value (NPV) nor its companion net terminal value (NTV) are appropriate measures for this purpose, because they depend on the cash flows injected and withdrawn by the principal. We introduce the manager's profitability index (MPI), which is invariant under changes in the cash flows, so neutralizing the effect on value creation of the principal's decisions. We also break down the project's NTV into two components, which measure the manager's contribution and the principal's contribution to value creation.
{"title":"ROI and Profitability Index: A Note on Managerial Performance","authors":"C. Magni","doi":"10.2139/ssrn.2546917","DOIUrl":"https://doi.org/10.2139/ssrn.2546917","url":null,"abstract":"This note deals with the simplified case of a principal (e.g., a firm's board of directors) which delegates execution of an economic activity to a business unit (or a subsidiary firm) managed by a manager. It is assumed that the manager has no control over the cash flows injected into the unit or withdrawn from it: such decisions are made by the principal. The principal aims at measuring the manager's performance in a given interval of time. Neither the net present value (NPV) nor its companion net terminal value (NTV) are appropriate measures for this purpose, because they depend on the cash flows injected and withdrawn by the principal. We introduce the manager's profitability index (MPI), which is invariant under changes in the cash flows, so neutralizing the effect on value creation of the principal's decisions. We also break down the project's NTV into two components, which measure the manager's contribution and the principal's contribution to value creation.","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"112 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-01-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128606326","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a model to examine implications of empowering shareholders to replace the board of directors. We find that empowerment can benefit shareholders by providing incentive for boards to act in the best interests of the shareholders. Our results, however, also highlight unintended consequences. On one hand, boards might respond to the threat of replacement by taking action to extend their tenure at the expense of shareholders. On the other hand, empowerment might also lead to the replacement of boards that add value to firms. We find conditions under which empowerment either benefits or harms shareholders. In particular, we find conditions under which empowerment exacerbates the agency problems it is seemingly intended to address. We also discuss empirical implications of our main findings.
{"title":"Shareholder Empowerment and Board of Directors Effectiveness","authors":"George Drymiotes, Haijin Lin","doi":"10.2139/ssrn.2462984","DOIUrl":"https://doi.org/10.2139/ssrn.2462984","url":null,"abstract":"We develop a model to examine implications of empowering shareholders to replace the board of directors. We find that empowerment can benefit shareholders by providing incentive for boards to act in the best interests of the shareholders. Our results, however, also highlight unintended consequences. On one hand, boards might respond to the threat of replacement by taking action to extend their tenure at the expense of shareholders. On the other hand, empowerment might also lead to the replacement of boards that add value to firms. We find conditions under which empowerment either benefits or harms shareholders. In particular, we find conditions under which empowerment exacerbates the agency problems it is seemingly intended to address. We also discuss empirical implications of our main findings.","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"38 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-11-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125124398","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Jennifer L. Brown, Katharine D. Drake, Melissa A. Martin
Academic and anecdotal evidence indicates that incentive systems often provide short-term payouts without regard for long-term consequences. New detailed disclosures mandated by FIN No. 48, Accounting for Uncertainty in Income Taxes, enable us to use a tax setting to investigate whether boards adjust performance-based pay for uncertainty. We find managers’ bonus payouts are positively associated with tax performance; however, bonus payouts are lower when measures of ex ante tax uncertainty are higher. Our results are robust to tests of alternative explanations including financial reporting aggressiveness, overall firm risk, and other forms of compensation. Further, we document that the relation between bonus compensation and tax performance has changed in the post-FIN No. 48 period. Specifically, we identify a significant association between bonus payout and GAAP ETR only in the pre-FIN No. 48 period and a significant association between bonus payout and cash ETR only in the post-FIN No. 48 period, suggesting that the relation between compensation and tax avoidance should be examined carefully with particular attention to the post-FIN No. 48 period.
{"title":"Compensation in the Post-FIN 48 Period: The Case of Contracting on Tax Performance and Uncertainty","authors":"Jennifer L. Brown, Katharine D. Drake, Melissa A. Martin","doi":"10.2139/ssrn.2327282","DOIUrl":"https://doi.org/10.2139/ssrn.2327282","url":null,"abstract":"Academic and anecdotal evidence indicates that incentive systems often provide short-term payouts without regard for long-term consequences. New detailed disclosures mandated by FIN No. 48, Accounting for Uncertainty in Income Taxes, enable us to use a tax setting to investigate whether boards adjust performance-based pay for uncertainty. We find managers’ bonus payouts are positively associated with tax performance; however, bonus payouts are lower when measures of ex ante tax uncertainty are higher. Our results are robust to tests of alternative explanations including financial reporting aggressiveness, overall firm risk, and other forms of compensation. Further, we document that the relation between bonus compensation and tax performance has changed in the post-FIN No. 48 period. Specifically, we identify a significant association between bonus payout and GAAP ETR only in the pre-FIN No. 48 period and a significant association between bonus payout and cash ETR only in the post-FIN No. 48 period, suggesting that the relation between compensation and tax avoidance should be examined carefully with particular attention to the post-FIN No. 48 period.","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"80 1-2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-09-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131642352","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The requirements in credibility, availability and legitimacy of board members have increased substantially since 2000. In that context, directors’ compensation and its impact on their conduct and decisions become salient issues. Yet, directors’ compensation remains a little examined topic of governance. This is why the Institute for Governance (IGOPP) has produced a report prepared by Dr. Michel Magnan, Professor and Stephen A. Jarislowsky Chair in Corporate Governance from John Molson School of Business at Concordia University, to provide a general survey of the issue and propose some recommendations.This IGOPP report highlights some important findings:_Over the 10 year period from 2001 to 2010, the average annual fees received by directors of Canadian public corporations have increased of 465%. However, this significant increase is not uniform among all corporations since the most substantial raises have occurred in the large financial institutions and in corporations in the oil and mining industries._The level of compensation paid to directors of Canadian corporations remains below that of comparable corporations in the United States._Directors’ compensation has not attained levels that can be considered excessive after taking into account the growth in institutional and regulatory requirements during the same period._The debate over directors’ compensation and independence should be seen as an issue of board composition and functioning. If cases arise in which directors’ compensation is considered excessive, it only reflects more serious underlying governance problems that undermine the legitimacy, and possibly the credibility, of the board._We are in a context of fiduciary governance. The directors will therefore concern themselves with legislative and regulatory compliance and with the implementation and monitoring of the mechanisms and systems governing the controls, incentives and accountability. Their remuneration is thus a function of this role.The analysis shows that directors’ compensation is only one facet of the board of directors’ governance and is not necessarily the most strategic since it only adds little to the processes for the appointment and assessment of directors, which are already rigorous. The directors’ compensation should reflect the fact that their responsibility is joint, continuous and focused on the long-term oversight of the corporation’s interests as a whole, and not just the short-term interests of some shareholders. Consequently, this report propounds several recommendations, among which the following stand out:_The board’s priority in governance matters is to maintain and increase its legitimacy and credibility through rigorous practices and processes._Directors’ compensation should not be based on the achievement of short-term objectives or goals._Directors’ compensation must be sufficiently high to attract credible candidates that have integrity and specific skills corresponding to the corporation’s objectives
自2000年以来，对董事会成员的可信度、可用性和合法性的要求大幅提高。在这种背景下，董事薪酬及其对其行为和决策的影响成为突出问题。然而，董事薪酬仍然是一个很少被研究的治理话题。这就是为什么治理研究所(IGOPP)制作了一份由康考迪亚大学约翰莫尔森商学院公司治理教授兼Stephen a . Jarislowsky教授Michel Magnan博士编写的报告，对这一问题进行了总体调查，并提出了一些建议。这份IGOPP报告强调了一些重要的发现:从2001年到2010年的十年间，加拿大上市公司董事的平均年费增长了465%。然而，这种显著的增长在所有公司中并不一致，因为最大幅度的增长发生在大型金融机构和石油和采矿行业的公司。加拿大公司董事的薪酬水平仍然低于美国可比公司的水平。考虑到同期机构和监管要求的增长，董事的薪酬并未达到可被认为过高的水平。关于董事薪酬和独立性的争论应被视为董事会组成和运作的问题。如果出现董事薪酬被认为过高的情况，那只会反映出更严重的潜在治理问题，这些问题会损害董事会的合法性，甚至可能损害其可信度。我们处在信托治理的背景下。因此，董事们将关心法律和规章的遵守情况以及管理控制、奖励和责任的机制和制度的执行和监测情况。因此，他们的报酬是这一角色的函数。分析表明，董事薪酬只是董事会治理的一个方面，并不一定是最具战略性的，因为它对已经很严格的董事任命和评估过程几乎没有增加作用。董事薪酬应体现其责任是共同的、连续的，并着眼于对公司整体利益的长期监督，而不仅仅是对部分股东的短期利益的监督。因此，本报告提出了几项建议，其中突出的建议如下:——董事会在治理事务中的优先事项是通过严格的做法和程序来维持和提高其合法性和可信度。董事的薪酬不应以短期目标或目的的实现为基础。董事的薪酬必须足够高，以吸引具有正直和符合公司目标的特定技能的可靠候选人。董事们应该长期持有公司的股份。董事的薪酬应该在任务相似的个人之间统一。董事薪酬必须合理反映其所面临的具体风险。投资者毫不犹豫地挑战董事的技能和他们的决策。在这种情况下，他们的薪酬可能成为一个主要的治理问题。因此，IGOPP的这份报告通过分析董事薪酬的潜在决定因素来框定辩论的框架，并提出原则和建议，作为董事会在这一问题上工作的指南。
{"title":"Directors' Compensation and Governance: Issues and Challenges","authors":"M. Magnan","doi":"10.2139/ssrn.2459121","DOIUrl":"https://doi.org/10.2139/ssrn.2459121","url":null,"abstract":"The requirements in credibility, availability and legitimacy of board members have increased substantially since 2000. In that context, directors’ compensation and its impact on their conduct and decisions become salient issues. Yet, directors’ compensation remains a little examined topic of governance. This is why the Institute for Governance (IGOPP) has produced a report prepared by Dr. Michel Magnan, Professor and Stephen A. Jarislowsky Chair in Corporate Governance from John Molson School of Business at Concordia University, to provide a general survey of the issue and propose some recommendations.This IGOPP report highlights some important findings:_Over the 10 year period from 2001 to 2010, the average annual fees received by directors of Canadian public corporations have increased of 465%. However, this significant increase is not uniform among all corporations since the most substantial raises have occurred in the large financial institutions and in corporations in the oil and mining industries._The level of compensation paid to directors of Canadian corporations remains below that of comparable corporations in the United States._Directors’ compensation has not attained levels that can be considered excessive after taking into account the growth in institutional and regulatory requirements during the same period._The debate over directors’ compensation and independence should be seen as an issue of board composition and functioning. If cases arise in which directors’ compensation is considered excessive, it only reflects more serious underlying governance problems that undermine the legitimacy, and possibly the credibility, of the board._We are in a context of fiduciary governance. The directors will therefore concern themselves with legislative and regulatory compliance and with the implementation and monitoring of the mechanisms and systems governing the controls, incentives and accountability. Their remuneration is thus a function of this role.The analysis shows that directors’ compensation is only one facet of the board of directors’ governance and is not necessarily the most strategic since it only adds little to the processes for the appointment and assessment of directors, which are already rigorous. The directors’ compensation should reflect the fact that their responsibility is joint, continuous and focused on the long-term oversight of the corporation’s interests as a whole, and not just the short-term interests of some shareholders. Consequently, this report propounds several recommendations, among which the following stand out:_The board’s priority in governance matters is to maintain and increase its legitimacy and credibility through rigorous practices and processes._Directors’ compensation should not be based on the achievement of short-term objectives or goals._Directors’ compensation must be sufficiently high to attract credible candidates that have integrity and specific skills corresponding to the corporation’s objectives","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-05-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131386088","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The relationship between a principal and the agent who acts on the principal’s behalf contains the potential for conflicts of interest. The principal–agent problem arises when this relationship involves both misaligned incentives and information asymmetry. In asset management, factors contributing to the principal–agent problem include managers’ compensation structures and investors’ tendency to focus on short-term performance. In the banking industry, myriad principal–agent relationships and complex instruments provide a fertile breeding ground for incentive conflicts, many of which were highlighted by the recent financial crisis.
{"title":"The Principal - Agent Problem in Finance","authors":"Sunit N. Shah","doi":"10.2470/rflr.v9.n1.1","DOIUrl":"https://doi.org/10.2470/rflr.v9.n1.1","url":null,"abstract":"The relationship between a principal and the agent who acts on the principal’s behalf contains the potential for conflicts of interest. The principal–agent problem arises when this relationship involves both misaligned incentives and information asymmetry. In asset management, factors contributing to the principal–agent problem include managers’ compensation structures and investors’ tendency to focus on short-term performance. In the banking industry, myriad principal–agent relationships and complex instruments provide a fertile breeding ground for incentive conflicts, many of which were highlighted by the recent financial crisis.","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"38 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132940280","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines the impacts of overconfidence on bank performance during the 2008 financial crisis. I find three significant results related to overconfidence: (1) The number of bank chief executive officers (CEO) who were overconfident grew significantly in the run-up to the crisis (increased 55% between 2000 and 2006); (2) measures of overconfidence (especially vested in-the-money options) were the highest in 2006 – a year preceding the crisis, and (3) overly-optimistic tendencies cut across diverse sectors in the financial industry prior to the crisis. The implication is that a bank with an overconfident CEO was more likely to fail or receive a financial bailout Trouble Asset Relief Program (TARP) fund. Overall, the results demonstrate that the value-destroying investment decisions of an overconfident CEO can extend beyond the firm, and contribute to a global credit crisis.
{"title":"CEO Overconfidence and Bank Failure","authors":"Oluseyi Peter Obitade","doi":"10.2139/ssrn.2352053","DOIUrl":"https://doi.org/10.2139/ssrn.2352053","url":null,"abstract":"This study examines the impacts of overconfidence on bank performance during the 2008 financial crisis. I find three significant results related to overconfidence: (1) The number of bank chief executive officers (CEO) who were overconfident grew significantly in the run-up to the crisis (increased 55% between 2000 and 2006); (2) measures of overconfidence (especially vested in-the-money options) were the highest in 2006 – a year preceding the crisis, and (3) overly-optimistic tendencies cut across diverse sectors in the financial industry prior to the crisis. The implication is that a bank with an overconfident CEO was more likely to fail or receive a financial bailout Trouble Asset Relief Program (TARP) fund. Overall, the results demonstrate that the value-destroying investment decisions of an overconfident CEO can extend beyond the firm, and contribute to a global credit crisis.","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131272009","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In response to recent requests from academics and practitioners, this note addresses the data and program we use in our published articles on executive compensation and incentives. First, we detail our methodology for the calculation of delta (pay-performance sensitivity), vega (risk-taking incentives), and firm-specific wealth (inside equity) for executives on the Execucomp database. Second, we provide the data on these measures for the period 1992-2010 as well as the accompanying SAS program as downloadable files on our websites.
{"title":"Calculation of Compensation Incentives and Firm-Related Wealth Using Execucomp: Data, Program, and Explanation","authors":"J. Coles, Naveen D. Daniel, L. Naveen","doi":"10.2139/SSRN.2296381","DOIUrl":"https://doi.org/10.2139/SSRN.2296381","url":null,"abstract":"In response to recent requests from academics and practitioners, this note addresses the data and program we use in our published articles on executive compensation and incentives. First, we detail our methodology for the calculation of delta (pay-performance sensitivity), vega (risk-taking incentives), and firm-specific wealth (inside equity) for executives on the Execucomp database. Second, we provide the data on these measures for the period 1992-2010 as well as the accompanying SAS program as downloadable files on our websites.","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116276488","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
During the recent financial crisis, capital flow to hedge funds plunged, and competition among hedge fund managers intensified. This leads to a transfer of bargaining power from hedge fund managers to investors when negotiating fund managers' compensation contracts. We use a signaling game theoretical model to study the optimal compensation contract design for hedge fund managers during crisis periods. Our model predicts that when bargaining power is on the investors' side, hedge fund managers are better off by lowering fees and dropping high-water mark. Using 2007-2008 hedge fund data, we find that funds which lower incentive fees and drop high-water mark provision have higher survival probabilities, attract more capital flows, and obtain higher returns. To our knowledge, our paper is the first work to focus on compensation contract design in times of crisis and our results provide important guidelines for the industry.
{"title":"Hedge Fund Manager Compensation Contracts During Financial Crisis","authors":"Hui Zhao, Xiaoyan Zhang, Fei Pan, K. Tang","doi":"10.2139/ssrn.2127841","DOIUrl":"https://doi.org/10.2139/ssrn.2127841","url":null,"abstract":"During the recent financial crisis, capital flow to hedge funds plunged, and competition among hedge fund managers intensified. This leads to a transfer of bargaining power from hedge fund managers to investors when negotiating fund managers' compensation contracts. We use a signaling game theoretical model to study the optimal compensation contract design for hedge fund managers during crisis periods. Our model predicts that when bargaining power is on the investors' side, hedge fund managers are better off by lowering fees and dropping high-water mark. Using 2007-2008 hedge fund data, we find that funds which lower incentive fees and drop high-water mark provision have higher survival probabilities, attract more capital flows, and obtain higher returns. To our knowledge, our paper is the first work to focus on compensation contract design in times of crisis and our results provide important guidelines for the industry.","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"65 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117025272","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The press and other third-party observers frequently discuss executive compensation. However, executive compensation figures are not always what they seem. Executive pay packages contain a diverse mix of cash and non-cash incentives, payable in one or multiple years and subject to accruals, estimates, and restrictions that often render their ultimate value quite different from their expected value. Even total compensation figures disclosed in the annual proxy comingle forward- and backward-looking amounts as well as fixed and contingent payments that make it difficult for investors to understand what compensation has been promised to executives and what they eventually earn.We untangle the mess and examine three basic methods for calculating compensation: expected value, earned value, and realized value. We discuss the applicability of each, illustrating concepts with real examples and summary statistics.Why don't companies voluntarily disclose these figures so stakeholders can better evaluate incentives and pay for performance?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.
{"title":"What Does it Mean for an Executive to 'Make' $1 Million?","authors":"D. Larcker, Allan L. McCall, Brian Tayan","doi":"10.2139/ssrn.1972627","DOIUrl":"https://doi.org/10.2139/ssrn.1972627","url":null,"abstract":"The press and other third-party observers frequently discuss executive compensation. However, executive compensation figures are not always what they seem. Executive pay packages contain a diverse mix of cash and non-cash incentives, payable in one or multiple years and subject to accruals, estimates, and restrictions that often render their ultimate value quite different from their expected value. Even total compensation figures disclosed in the annual proxy comingle forward- and backward-looking amounts as well as fixed and contingent payments that make it difficult for investors to understand what compensation has been promised to executives and what they eventually earn.We untangle the mess and examine three basic methods for calculating compensation: expected value, earned value, and realized value. We discuss the applicability of each, illustrating concepts with real examples and summary statistics.Why don't companies voluntarily disclose these figures so stakeholders can better evaluate incentives and pay for performance?Topics, Issues and Controversies in Corporate Governance and Leadership: The Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the book Corporate Governance Matters, and A Real Look at Real World Corporate Governance.","PeriodicalId":373523,"journal":{"name":"CGN: Other Corporate Governance: Compensation of Executive & Directors (Topic)","volume":"40 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-12-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129120495","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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