Archive for December, 2011

• 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!

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CEO Preferences and Acquisitions

Dirk Jenter 
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Katharina Lewellen 
Dartmouth College – Tuck School of Business

December 2011

Rock Center for Corporate Governance at Stanford University Working Paper No. 105

Abstract: 
This paper explores the impact of target CEOs’ retirement preferences on the incidence, the pricing, and the outcomes of takeover bids. Mergers frequently force target CEOs to retire early, and CEOs’ private merger costs are the forgone benefits of staying employed until the planned retirement date. Using retirement age as an instrument for CEOs’ private merger costs, we find strong evidence that target CEO preferences affect merger patterns. The likelihood of receiving a takeover bid increases sharply when target CEOs reach age 65. The probability of a bid is close to 4% per year for target CEOs below age 65 but increases to 6% for the retirement-age group, a 50% increase in the odds of receiving a bid. This increase in takeover activity appears discretely at the age-65 threshold, with no gradual increase as CEOs approach retirement age. Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, reinforcing the conclusion that retirement-age CEOs are more willing to accept takeover offers. These results suggest that the preferences of target CEOs have first-order effects on both bidder and target behavior.

Keywords: takeover bids, CEO retirement preferences and acquisitions, mergers & acquisitions

 JEL Classifications: G32, G34, G35