In this article, the authors develop and test a theory on the effect of institutional investor heterogeneity on CEO pay. Their theory predicts that institutional investors’ incentives and capabilities to monitor CEO pay are determined by the fiduciary responsibilities, conflicts of interest, and information asymmetry that institutional investors face. Their theory suggests, in contrast to previous literature, that public pension funds and mutual funds exert different effects on CEO pay at their portfolio firms because they do not have the same monitoring incentives and capabilities. Using a longitudinal sample of S&P 1500 firms for the years 1998 to 2002, the authors find that public pension fund ownership is more negatively—indeed, oppositely—associated with both the level of CEO pay and CEO pay-for-performance sensitivity than mutual fund ownership. Their findings suggest that (a) researchers’ use of institutional investor classifications that do not distinguish public pension fund ownership and mutual fund ownership can be misleading and (b) while CEO pay critics have called for pay plans that are in line with the “less pay and more sensitivity” principle, this may be an ineffective goal to pursue.

This study examines the explicit use of relative performance evaluation (RPE) in executive compensation contracts and the selection of RPE peers. Using S&P 1500 firms’ first proxy disclosures under the SEC’s 2006 executive compensation disclosure rules, we find that about 25 percent of our sample firms explicitly use RPE in setting executive compensation. We demonstrate that a lack of knowledge of both actual peer-group composition and the link between RPE-based performance targets and future peer performance significantly hinder the traditional implicit test from detecting RPE use. We also find that firms consider both costs and benefits of RPE as an incentive mechanism when deciding to use RPE. Finally, both efficient contracting and rent extraction considerations influence RPE peer selection, with the relative importance of these competing considerations depending on RPE firms’ performance.

Recent scandals allegedly linked to CEO compensation have brought executive compensation and perquisites to the forefront of debate about constraining executive compensation and reforming the associated corporate governance structure. We briefly describe the structure of executive compensation, and the agency theory framework that has commonly been used to conceptualize executives acting on behalf of shareholders. We detail some criticisms of executive compensation and associated ethical issues, and then discuss what previous research suggests are likely intended and unintended consequences of some widely proposed executive compensation reforms. We explicitly discuss the following recommendations for reform: require greater independence of compensation committees, require executives to hold equity in the corporation, require greater disclosure of executive compensation, increase institutional investor involvement in corporate governance (including executive compensation), and require firms to expense stock options on their income statements. We provide a brief summary discussion of ethical issues related to executive compensation, and describe possible future research.KEY WORDS: corporate governance, executive compensation, independent compensation committee, institutional investor, stock-based compensation.Recent scandals allegedly linked to CEO compensation have brought executive compensation and perquisites to the forefront of debate about constraining executive compensation and reforming the associated corporate governance structure. This paper discusses intended and possible unintended consequences of recent calls for reform of executive compensation and related corporate governance structures. We focus on U.S. publicly traded companies, which are subject to rules of the relevant stock exchange and the Securities and Exchange Commission (SEC). We begin by briefly describing the structure of executive compensation, and then describe the agency theory framework that has commonly been used to conceptualize situations where an agent acts on behalf of a principal, such as an executive acting on behalf of shareholders. We detail some criticisms of executive compensation and associated ethical issues, and then discuss what previous research suggests are likely intended and unintended consequences of some widely proposed executive compensation reforms.We explicitly discuss reforms related to three of Business Roundtable's 1 widely supported principles Ella Mae Matsumura is an Associate Professor in the University of Wisconsin-Madison School of Business' Department of Accounting and Information Systems. She received her Ph.D. degree from the University of British Columbia. She teaches courses on strategic cost management and performance measurement. Her research includes work on agency relationships, compensation, performance evaluation, decision-making, customer profitability analysis, and audit quality (for example, fraud detection, second-partner review, and going-concern decisions). Her articles have appeared in ...

Research Findings/Insights: Using a manually collected sample of PCODs in Korean chaebol firms, we find that larger, high-performing, less volatile firms with a larger board and higher divergence between voting rights and cash flow rights are more likely to appoint PCODs in the next year. We also report that firms with a high number of PCODs exhibit better operating performance and enjoy lower risk. On the other hand, we find evidence of weak monitoring ability by PCODs. Overall, we suggest that the number of PCODs correlates positively with firm performance, and that the value effect of PCODs increases with the importance of internal trade among group affiliates, the existence of inside directorship by controlling shareholders, and potential settlements from pending litigation. We further differentiate between PCODs and find that former government officials as PCODs drive our findings.Theoretical/Academic Implications: This study contributes to corporate governance knowledge by revealing the relationship between PCODs and firm performance via an empirical inquiry into the role of PCODs on the board. As the controlling shareholders of Korean chaebol firms obtain greater private benefits of control, and such firms may face active government involvement in curbing controlling shareholders' rent extraction, we examine the role and effects of PCODs in these situations and find evidence of the PCOD's value-enhancing effect. We also complement and extend prior studies by providing more direct mechanisms through which PCODs can add value above and beyond firms' ownership structure. Additionally, we expand the concept of political connection by analyzing outside directors' human and social capital from the resource dependence theory perspective. Our attempt complements prior research's exclusive focus on connections of large shareholders or top executives to political parties and is more comprehensive in illustrating the firm's dynamic business environment.Practitioner/Policy Implications: The results of our study are potentially useful to regulators, who will benefit from an understanding of how the presence of PCODs on boards affects firm performance. In particular, our results suggest that in countries where recent reforms aim to improve minority investor protection and market confidence, regulators should consider the composition of outside directors as well as explicit board independence. The results of our study may also be useful to investors, financial analysts, and auditors, as they highlight the importance of considering specific features of board composition when assessing firms' future operating performance and risk mechanisms.

This paper empirically examines the interactive effect of competition intensity and competition type on the use of customer satisfaction measures in executives' annual bonus contracts. Specifically, we predict a stronger association between competition intensity in an industry and the use of customer satisfaction measures in executives' annual bonus contracts when the competition is non-price-based than when the competition is price-based. Using hand-collected data from Standard & Poor's (S&P) 1500 firms' disclosures of the use of customer satisfaction measures in executive bonus contracts in 2006 and 2010 proxy statements, we find results consistent with our prediction. Our results are robust to alternative measures of competition type and competition intensity. We also find similar results when we use the weight on customer satisfaction measures in executive bonus contracts as the dependent variable. Our study extends the literature on the effect of competition on the design of managerial incentives by distinguishing between competition intensity and competition type, and providing the first large-sample empirical evidence on the joint effect of these two dimensions of competition on the incentive use of an important nonfinancial performance measure. Data Availability: Data used in this study are obtained from publicly available sources.