Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad

Garvey, G. T.; Milbourn, Todd T.

doi:10.1016/j.jfineco.2004.01.006

Cited by 403 publications

(314 citation statements)

References 21 publications

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“…We conclude that delta incentives cause managers to have greater concern over avoiding the costs of financial distress than with the possibility of reducing the firm's credit costs in times of good performance. This pattern recalls the "asymmetric benchmarking" of CEO compensation incentives documented by Garvey and Milbourn (2006). CEOs' vega incentives are estimated as positive in both directions but without statistical significance.…”

Section: Interest Increasing and Interest Decreasing Slope Segmentssupporting

confidence: 56%

Negative Hedging: Performance-Sensitive Debt and CEOs’ Equity Incentives

Tchistyi¹,

Yermack²,

Yun³

2011

J. Financ. Quant. Anal.

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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's performance deteriorates or improves, thereby increasing expected costs of financial distress while also making a firm riskier to the benefit of option holders. We find that managers whose compensation is more sensitive to stock price 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. JEL classifications: G30; G34

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Section: Interest Increasing and Interest Decreasing Slope Segmentssupporting

confidence: 56%

Negative Hedging: Performance-Sensitive Debt and CEOs’ Equity Incentives

Tchistyi¹,

Yermack²,

Yun³

2011

J. Financ. Quant. Anal.

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“…Greater agency problems in large …rms may necessitate higher equity incentives and thus more pay as a risk premium (Gayle and Miller, 2009). Our analyses in Sections 2.1.1 and 2.3.2 con…rm that …rm size is strongly positively related to both CEO pay levels and their e¤ective dollar ownership.…”

Section: Evidencementioning

confidence: 60%

“…An increase in …rm size can also raise the optimal level of CEO e¤ort if the marginal product of e¤ort increases with size (Himmelberg and Hubbard, 2000;Baker and Hall, 2004). Finally, moral hazard problems may be more severe in larger …rms, resulting in stronger incentives and greater disutility for CEOs as …rms grow (Gayle and Miller, 2009). …”

Section: Other Shareholder Value Explanationsmentioning

confidence: 99%

Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research. JEL-Codes: D310, D860, G340, M120. Terms of use: Documents in

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“…Another related strand in the executive compensation literature is benchmarking or relative performance evaluation; that is, indexing CEO pay to industry or market benchmarks (e.g., Jensen and Murphy, 1990;Gibbons and Murphy, 1990;Aggarwal and Samwick, 1999;Garvey and Milbourn, 2006). In theory, the compensation policy as an incentive mechanism, if working effectively, should pay for good performance and penalize for bad performance.…”

Section: Introductionmentioning

confidence: 99%

“…As a result, due to the predominantly strong market years over the period starting from the early 1990s, the findings of such studies might be heavily influenced by pay for good performance and overlook penalty for bad performance, thereby leading to potentially biased inferences. For example, Garvey and Milbourn (2006) report asymmetric benchmarking in compensation so that executives are rewarded for good luck but not penalized for bad luck. Our study, by examining the executive compensation practices in the set of financially distressed firms and by comparing these firms to similar firms that are not financially distressed, concentrates on the situations where firms clearly under-perform the market and thus, one would expect that boards would find benchmarking relatively easy to implement.…”

Section: Introductionmentioning

confidence: 99%

Not So Lucky Any More: CEO Compensation in Financially Distressed Firms

Kang

Mitnik

2008

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S ABSTRACT Not So Lucky Any More: CEO Compensation in Financially Distressed Firms *There is a debate on whether executive pay reflects rent extraction due to "managerial power" or is the result of arms-length bargaining in a principal-agent framework. In this paper we offer a test of the managerial power hypothesis by empirically examining the CEO compensation of U.S. public companies that were ever in financial distress between 1992 and 2005. Using a bias-corrected matching estimator that estimates the causal effects of financial distress, we find that, for the distressed firms, CEO turnover rates increase markedly and their CEOs, both incumbents and successors, experience significant reductions in total compensation. The bulk of the reduction in total compensation derives from the decline in value of stock option grants, which we argue is due to a change in the opportunistic timing of option grants. We define "lucky" grants as those with grant prices below or at the lowest stock price of the grant month, and we find that the proportion of lucky grants for financially distressed firms is higher before insolvency and lower upon and after insolvency, while the proportion for similar but solvent firms remains stable throughout the period. We interpret this evidence as consistent with a decrease in managerial power induced by a tightening in the "outrage" constraint due to the episode of financial distress. JEL Classification:G30, J33, M52

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Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad

Cited by 403 publications

References 21 publications

Negative Hedging: Performance-Sensitive Debt and CEOs’ Equity Incentives

Negative Hedging: Performance-Sensitive Debt and CEOs’ Equity Incentives

Executive Compensation: A Survey of Theory and Evidence

Not So Lucky Any More: CEO Compensation in Financially Distressed Firms

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