Tag: Pay for performance

Harvard Convenes the 2015 Executive Compensation & Corporate Governance Roundtable

The Harvard Law School Program on Corporate Governance and the Harvard Law School Program on Institutional Investors convened the Harvard Roundtable on Executive Compensation & Corporate Governance last Wednesday, October 21, 2015. The event brought together for a roundtable discussion 62 prominent experts with a wide range of perspectives on the subject, including senior officers from leading institutional investors (both mutual funds and public pension funds) with aggregate assets under management exceeding $13 trillion, and from significant issuers, prominent advisors, and academics. Participants in the event, and the topics of discussion, are set out below.

The Roundtable discussion on issues relating to the process of determining executive compensation included discussion of the work of proxy advisors and their interaction with investors and issuers, engagement between issuers and investors themselves and compensation disclosure issues, such as pay-for-performance disclosure and pay-ratio disclosure. The Roundtable then moved to a discussion of the substantive terms of compensation arrangements, including compensation levels, composition, and structures. Issues that were considered included the composition of long-term and short-term incentive pay and contractual provisions such as claw-backs and hedging policies. The Roundtable ended with a discussion of current issues in corporate governance, including lessons from the 2015 proxy season, current thinking on engagement with investors, and proxy access.

The Roundtable was co-organized by Lucian Bebchuk, Stephen Davis, and Scott Hirst, and was supported by a number of co-sponsors (listed here), the supporting organizations of the Program on Corporate Governance (listed on the program site here), and the institutional members of the Harvard Institutional Investor Forum (listed here).

The participants in the Harvard Roundtable on Executive Compensation & Corporate Governance included:


Executive Overconfidence and Compensation Structure

Ling Lisic is Associate Professor of Accounting at George Mason University. This post is based on an article authored by Professor Lisic; Mark Humphery-Jenner, Senior Lecturer at UNSW Business School; Vikram Nanda, Professor of Finance and Managerial Economics at University of Texas at Dallas; and Sabatino Silveri, Assistant Professor of Finance at the University of Memphis. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

In our paper “Executive Overconfidence and Compensation Structure,” forthcoming in the Journal of Financial Economics, we investigate whether overconfidence affects the compensation structure of CEOs and other senior executives. There is a burgeoning literature on the impact of CEO overconfidence on corporate policies. Overconfident CEOs are prone to overestimate returns to investments and to underestimate risks. Little is known, however, about the nature of incentive contracts offered to overconfident managers or even whether firms “fine-tune” compensation contracts to match a manager’s personality traits. We help fill this gap.


2016 Proxy Season Update

Laura D. Richman is counsel and Michael L. Hermsen is partner at Mayer Brown LLP. This post is based on a Mayer Brown Legal update, available here, authored by Laura D. Richman, Robert F. Gray, Michael L. Hermsen, Elizabeth A. Raymond, and David A. Schuette.

It is time for public companies to think about the upcoming 2016 proxy and annual reporting season. Preparation of proxy statements and annual reports requires a major commitment of corporate resources. Companies have to gather a great deal of information to produce the necessary disclosures. In addition, with increasing frequency, companies are choosing to implement the required elements of their proxy statements with a focus on shareholder engagement, seeking to clearly present, and effectively advocate for, their positions on annual meeting agenda items. As the process for the 2016 proxy and annual reporting season begins, there are a number of recent developments that public companies should be aware of that will impact current and future seasons.

This post is divided into five sections covering the following topics:


The Limits of Using TSR as an Incentive Measure

David N. Swinford is the President and Chief Executive Officer of Pearl Meyer & Partners, LLC. This post relates to research conducted by Pearl Meyer and the Cornell University ILR School’s Institute for Compensation Studies.

The widespread and growing use of total shareholder return (TSR) as an incentive measure is not the panacea many believe it to be. To test our point of view we wanted to explore one critical question: Does the inclusion of TSR measures in long-term incentive plans result in improved firm performance?

To find out the answer, Pearl Meyer collaborated with the Cornell University ILR School’s Institute for Compensation Studies to conduct original research on the use of TSR by S&P 500 companies over a ten year period.


The Effect of Relative Performance Evaluation

Frances M. Tice is Assistant Professor of Accounting at the University of Colorado at Boulder. This post is based on an article authored by Ms. Tice.

In the paper, The Effect of Relative Performance Evaluation on Investment Efficiency and Firm Performance, which was recently made publicly available on SSRN, I examine the effect of explicit relative performance evaluation (RPE) on managers’ investment decisions and firm performance. Principal-agent theory suggests that firms can motivate managers to act in shareholders’ interest by linking their compensation to firm performance. However, firm performance is often affected by exogenous factors, and as a result, performance-based compensation may expose managers to common risk that they cannot directly control. In such cases, RPE enables the principal to compensate managers on their effort and events under their control by removing the effect of common shocks from measured performance, thus improving risk sharing and incentive alignment. However, RPE use as implemented in practice may not be effective in addressing agency costs because of potential peer group issues, such as availability of firms with common risk or a self-serving bias in peer selection. In addition, prior research also suggests that a large gap in ability between the RPE firm and peers (“superstar effect”) may actually reduce managers’ effort because the probability of winning is low. Therefore, the question of whether explicit RPE use in executive compensation does indeed reduce agency costs remains unanswered in the empirical literature.


Can Institutional Investors Improve Corporate Governance?

Craig Doidge is Professor of Finance at the University of Toronto. This post is based on an article authored by Professor Doidge; Alexander Dyck, Professor of Finance at the University of Toronto; Hamed Mahmudi, Assistant Professor of Finance at the University of Oklahoma; and Aazam Virani, Assistant Professor of Finance at the University of Arizona.

In our paper, Can Institutional Investors Improve Corporate Governance Through Collective Action?, which was recently made publicly available on SSRN, we examine whether a collective action organization of institutional investors can significantly influence firms’ governance choices. Growth in institutional investor ownership over the last few decades puts these investors in the position to have significant influence, particularly if they can work collectively and coordinate their efforts. But we have very limited evidence whether institutional investors are able to overcome the obstacles to collective action. We focus on the Canadian Coalition for Good Governance (CCGG), an organization of institutional investors whose mandate is to promote good governance. We use proprietary data on its private communications and find that its private engagements between owners and independent directors influenced firms’ adoption of majority voting and say-on-pay advisory votes, improved compensation structure and disclosure, and influenced CEO incentive intensity.


CEO and Executive Compensation Practices: 2015 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to CEO and Executive Compensation Practices: 2015 Edition, an annual benchmarking report authored by Dr. Tonello with James Reda of Arthur J. Gallagher & Co. For details regarding how to obtain a copy of the report, contact matteo.tonello@conference-board.org.

The Conference Board, in collaboration with Arthur J. Gallagher & Co., recently released the Key Findings from CEO and Executive Compensation Practices: 2015 Edition, which documents trends and developments on senior management compensation at companies issuing equity securities registered with the U.S. Securities and Exchange Commission (SEC) and, as of May 2015, included in the Russell 3000 Index.

The report has been designed to reflect the changing landscape of executive compensation and its disclosure. In addition to benchmarks on individual elements of compensation packages and the evolving features of short-term and long-term incentive plans (STIs and LTIs), the report provides details on shareholder advisory votes on executive compensation (say-on-pay) and outlines the major practices on board oversight of compensation design.


Pro Forma Compensation

David Larcker is Professor of Accounting at Stanford University. This post is based on an article authored by Professor Larcker; Brian Tayan, Researcher with the Corporate Governance Research Initiative at Stanford University; and Youfei Xiao of the Stanford Graduate School of Business.

In recent years, companies have begun to voluntarily disclose supplemental calculations of executive compensation beyond those required by the Securities and Exchange Commission in the annual proxy. Our paper, Pro Forma Compensation: Useful Insight or Window-Dressing?, which was recently made publicly available on SSRN, examines the motivation to disclose adjusted compensation and the prevalence of this practice.

Corporate disclosure of executive compensation is regulated by the SEC and is reported in the annual proxy Compensation Discussion & Analysis section and various summary compensation tables. These figures are widely cited by corporate observers, and in many cases used to rank (and criticize) corporations for their pay practices.


SEC Chair’s Statement on Pay Ratio

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement. Since it was mandated by Congress, the pay ratio rule has been controversial, spurring a contentious and, at times, heated dialogue. The Commission has received more than 287,400 comment letters, including over 1,500 unique letters, with some asserting the importance of the rule to shareholders as they consider the issue of appropriate CEO compensation and investment decisions, and others asserting that the rule has no benefits and will needlessly cause issuers to incur significant costs.

These differences in views were evident at the time the Commission voted to propose the pay ratio rule. That the Commission was even considering the rule proposal was, for example, criticized as contrary to our mission. We may hear similar thoughts today [August 5, 2015].


The CEO Pay Ratio Rule

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [August 5, 2015], the Commission takes another step to fulfill its Congressional mandate to provide better disclosure for investors regarding executive compensation at public companies. As required by Section 953(b) of the Dodd-Frank Act, today’s rules would require a public company to disclose the ratio of the total compensation of its chief executive officer (“CEO”) to the median total compensation received by the rest of its employees. The hope, quite simply, is that this information will better equip shareholders to promote accountability for the executive compensation practices of the companies that they own.


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    Lucian Bebchuk
    Alon Brav
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    Allen Ferrell
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    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
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    Morton Pierce
    Barry Rosenstein
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    Rodman Ward