Archive for the ‘Executive Compensation’ Category

Shareholder Lawsuits: Where Is the Line Between Legitimate and Frivolous? [PDF]

Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: November 27, 2012

Shareholders of public companies are not responsible for designing executive compensation packages. Still, a shareholder vote on compensation is required in two circumstances:  when a company wants to establish an equity-based compensation plan, and annually as part of the Dodd Frank requirement shareholders have an advisory “say on pay.”  In deciding how to vote, shareholders rely on information provided in the annual proxy.

Recently, shareholder groups have sued companies for inadequate disclosure.  They allege that the companies provide insufficient disclosure to determine how they should vote on these matters.

We explore this issue in closer detail and ask:

• How much disclosure is too much disclosure?
• If a company follows SEC guidelines, why is this not sufficient?
• When do lawsuits cross the line from legitimate to frivolous?
• If disclosure litigation is successful, what other board decisions would be subject to potential lawsuits?

Read the Closer Look and let us know what you think!

To view the entire collection of Stanford Closer Looks please click here. You can also follow more corporate governance and leadership news at @StanfordCorpGov and  @StnfrdLeadrship.

Which U.S. Market Interactions Affect CEO Pay? Evidence from U.K. Companies (SSRN)
Authors: Joseph Gerakos, University of Chicago – Booth School of Business;  Joseph D. Piotroski ,
Stanford University – Graduate School of Business; Suraj Srinivasan , Harvard Business School
Date: August 2012
Management Science, Forthcoming

Abstract: This paper examines how different types of interactions with U.S. markets by non-U.S. firms are associated with higher level of CEO pay, greater emphasis on incentive-based compensation, and smaller pay gap with U.S. firms. Using a sample of CEOs of U.K. firms and using both broad cross-sectional and narrow event-window tests, we find that capital market relationship in the form of an U.S. exchange listing is related to higher U.K CEO pay; however, the effect is similar when U.K. firms have a listing in any foreign country implying a foreign listing effect not unique to the U.S. Product market relationships measured by the extent of sales in the U.S. by U.K. companies are associated with higher pay, greater use of U.S.-style pay arrangements, and a reduction in the U.S.-U.K. pay gap. The product market effect is incremental to the effect of a U.S. exchange listing, the extent of the firm’s non-U.S. foreign market interactions, and the characteristics of the executive. The U.S-U.K. CEO pay gap reduces in U.K. firms that make U.S. acquisitions. Further, the firm’s use of a U.S. compensation consultant increases the sensitivity of U.K. pay practices to U.S. product market relationships.

Keywords: CEO compensation, international pay, globalization, corporate governance, incentives, cross-listing, United Kingdom

Fixed or Contingent: How Should “Governance Monitors” Be Paid?  [PDF]
Authors: Professor David F. Larcker, Stanford Graduate School of Business, and Brian Tayan, Researcher, Center for Leadership Development and Research, Stanford GSB.
Published: October 2012

Corporate monitors are important participants in corporate governance systems.  Monitors include the board of directors, the general counsel, and internal and external auditors.  Monitors are paid by the organization but their responsibilities largely or mostly non-managerial.

How should monitors be paid?  Because their objective is to detect and mitigate agency problems, one could argue that they should be paid almost entirely on a fixed-salary basis.  On the other hand, an entirely fixed compensation system might not provide sufficient incentive to perform.

We discuss this issue in greater detail.  We ask:

• Should corporate monitors be paid a bonus?
• If so, what form should it take?
• What performance targets should be used to calculate the bonus?
• Do performance incentives enhance or impede the effectiveness of monitors?

Read the Closer Look and let us know what you think!

To view the entire collection of Stanford Closer Looks please click here. You can also follow more corporate governance and leadership news at @StanfordCorpGov and @StnfrdLeadrship.

Ten Myths of “Say On Pay”
Authors: Professor David F. Larcker,  Stanford Graduate School of Business; Allan McCall, co-founder of Compensia and currently a PhD candidate at the Stanford GSB; Gaizka Ormazabal, Assistant Professor of Accounting at IESE Business School at the University of Navarra; and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford GSB.
Published: July 28,  2012

Say on pay is the practice of granting shareholders the right to vote on a company’s executive compensation program at the annual shareholder meeting.  Under the Dodd-Frank Act of 2010, publicly traded companies in the U.S. are required to adopt say on pay.  Advocates of this approach believe that say on pay will increase the accountability of corporate directors and lead to improved compensation practices.

In recent years, several myths have come to be accepted by the media and governance experts.  These myths include the beliefs that:

1. There is only one approach to “say on pay”
2. All shareholders want the right to vote on executive compensation
3. Say on pay reduces executive compensation levels
4. Pay plans are a failure if they do not receive high shareholder support
5. Say on pay improves “pay for performance”
6. Plain-vanilla equity awards are not performance-based
7. Discretionary bonuses should not be allowed
8. Shareholders should reject nonstandard benefits
9. Boards should adjust pay plans to satisfy dissatisfied shareholders
10. Proxy advisory firm recommendations for say on pay are correct

We examine each of these myths in the context of the research evidence and explain why they are incorrect.

We ask:

* Should the U.S. rescind the requirement for mandatory say on pay and return to a voluntary regime?

Read the attached Closer Look and let us know what you think!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov .  To view the entire collection of  Stanford Closer Looks please click here.

Compensation & Wealth Calculators (Widget)
Executive compensation based on company performance 

Boards, shareholders, and journalists often look at a chief executive’s annual compensation plan to determine whether the company is offering the right incentives to increase shareholder value. Few consider another key question: how does the compensation that the CEO has already received over the years in the form of stock and stock options influence managerial decision making?

Glossary

The following glossary of terms are frequently used in discussions of corporate governance. Link the Stanford Corporate Governance Research Program glossary of terms to your website:  http://www.gsb.stanford.edu/cgrp/research/glossary

• The Influence of Proxy Advisory Firm Voting Recommendations  on Say-on-Pay Votes and Executive Compensation Decisions by David F. Larcker, Allan L. McCall, and Brian Tayan, Stanford Graduate School of Business and Rock Center for Corporate Governance

This report examines current evidence regarding the influence of third-party proxy advisory firms’ voting recommendations on shareholder proposal voting outcomes, particularly say-on-pay votes. It also presents the findings of a study, conducted by The Conference Board, NASDAQ, and the Rock Center for Corporate Governance at Stanford University, which shows that proxy advisory firms have a substantial impact on the design of executive compensation programs.  Read the entire study results in the link above.

• What Is CEO Talent Worth?  (PDF)
  By Professor, David F. Larcker and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford Graduate School of Business, and Usman Liaqat
  January 24, 2012

The topic of executive compensation elicits strong emotions among corporate stakeholders and practitioners. On the one hand are those who believe that chief executive officers in the United States are overpaid. On the other hand are those who believe that CEOs are simply paid the going fair-market rate.

Much less effort, however, is put into determining whether total compensation is commensurate with the value of services rendered.

We examine the issue and explain how such a calculation might be performed. We ask:

* How much value creation should be attributable to the efforts of the CEO?
* What percentage of this value should be fairly offered as compensation?
* Can the board actually perform this calculation? If not, how does it make rational decisions about pay levels?

Read the attached Closer Look and let us know what you think!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov .  To view the entire collection of  Stanford Closer Looks please click here.

• What Does It Mean for an Executive To Make $1 Million? (PDF)
  By Professor, David F. Larcker,  Allan L. McCall, Stanford GSB Phd candidate in accounting, and Brian Tayan, Researcher, Corporate Governance Research Program, Stanford Graduate School of Business
  December 14, 2011
• Companion PowerPoint presentation for use in teaching:  What Does It Mean for an Executive To “Make” $1 Million? (PowerPoint)

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?

Read the attached Closer Look and let us know what you think!

To receive monthly alerts about the Closer Look series, please email the Stanford Corporate Governance Research Program at corpgovernance@gsb.stanford.edu. You can also follow more corporate governance news on Twitter: @StanfordCorpGov .  To view the entire collection of  Stanford Closer Looks please click here.