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Incentive Contracts are not Rigged by Powerful CEOs

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  • Wan, Kam-Ming

Abstract

Morse et al. (2011), henceforth MNS, interpret the data to suggest that more powerful CEOs ex post change their incentive contracts to put greater weight on performance measures that are ex-post more favorable. My paper points out a number of issues with their inference. First and most importantly, MNS do not control for the fact that not just the most powerful but almost all firms change their incentive contracts ex post . This is also consistent with an optimal contracting model. Nevertheless, the MNS specification attributes all explanatory power of the average incentive realignment to the cross-coefficient; that is, to more powerful CEOs. When the average level of ex post contract change is also controlled for, the MNS cross-coefficient (the additional change attributed to more powerful CEOs) declines by 55% and becomes insignificant. Second, newly-hired CEOs often receive large one-time startup packages. These firms should be broken out, because the MNS theory is not about newly-hired CEOs as new CEOs could not have rigged a previously-set compensation. Third, the results are sensitive to how industry performance is adjusted for. Fourth, the results are sensitive to the level of winsorization.

Suggested Citation

  • Wan, Kam-Ming, 2014. "Incentive Contracts are not Rigged by Powerful CEOs," Critical Finance Review, now publishers, vol. 3(1), pages 99-152, January.
    • Handle: RePEc:now:jnlcfr:104.00000016
    DOI: 10.1561/104.00000016
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    Cited by:

    1. Song, Wei-Ling & Wan, Kam-Ming, 2017. "Explicit employment contracts and CEO compensation," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 540-560.
    2. Song, Wei-Ling & Wan, Kam-Ming, 2019. "Does CEO compensation reflect managerial ability or managerial power? Evidence from the compensation of powerful CEOs," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 1-14.

    More about this item

    Keywords

    CEO compensation; Rigging; Stock options; Repricing;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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