Posts Tagged ‘Pay for performance’

Aligning the Interests of Company Executives and Directors with Shareholders

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Monday February 16, 2015 at 9:00 am
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; 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 [February 9, 2015], the Commission issued proposed rules on Disclosure of Hedging by Employees, Officers and Directors. These congressionally-mandated rules are designed to reveal whether company executive compensation policies are intended to align the executives’ or directors’ interests with shareholders. As required by Section 955 of the Dodd-Frank Act, these proposed rules attempt to accomplish this by adding new paragraph (i) to Item 407 of Regulation S-K, to require companies to disclose whether they permit employees and directors to hedge their companies’ securities.

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Long-term Incentive Grant Practices for Executives

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday January 5, 2015 at 2:00 pm
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Editor’s Note: The following post comes to us from Frederic W. Cook & Co., Inc., and is based on a publication by James Park and Lanaye Dworak. The complete publication is available here. An additional publication authored by Mr. Park on the topic of executive compensation was discussed on the Forum here. Research from the Program on Corporate Governance on long-term incentive pay includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried, discussed on the Forum here.

The use of long-term incentives, the principal delivery vehicle of executive compensation, has long been sensitive to external influences. A steady source of this influence has come under the guise of legislative reform with mixed results. In 1950, after Congress gave stock options capital gains tax treatment, the use of stock options surged as employers sought to avoid ordinary income tax rates as high as 91%. Some forty years later, Congress added Section 162(m) to the tax code in an attempt to rein in excessive executive pay by limiting the deduction on compensation over $1 million to certain executives. Stock options qualified for a performance-based exemption leading to a spike in stock option grants to CEOs at S&P 500 companies.

Fast forward twenty years and the form and magnitude of long-term incentives continues to be a hot button populist issue. The 2010 Dodd Frank Act introduced U.S. publicly-traded companies to Say on Pay giving shareholders a direct channel to voice their support or opposition for a company’s pay practices. Another legislative addition to the litany of unintended consequences, Say on Pay has magnified the growing number of interested parties, increased the influence of proxy advisory groups such as Institutional Shareholder Services (ISS) and Glass Lewis, heightened sensitivity to federal regulators, and provoked the increased interaction of activist investors.

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Relative Total Shareholder Return Performance Awards

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 14, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Frederic W. Cook & Co., Inc., and is based on the Executive Summary of a FW Cook publication by David Cole and Jin Fu. The complete publication is available here.

Since 2010, performance-contingent awards have been the most widely used long-term incentive (LTI) grant type among the Top 250 companies [1] and are now in use by 89% of the sample. The prevalence of performance awards and investor preferences have spurred considerable interest in relative total shareholder return (TSR) as a performance metric. Relative TSR measures a company’s shareholder returns [2] against an external comparator group and eliminates the need to set multi-year goals. Use of relative TSR performance awards among the Top 250 companies has increased from 29% in 2010 to 49% in 2014, and relative TSR is now the most prevalent measure used to evaluate company performance for performance awards.

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APG Asset Management Issues Remuneration Guidelines

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday October 17, 2014 at 9:06 am
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Editor’s Note: The following post comes to us from David Shammai, Senior Governance Specialist and Martijn Olthof, Senior Portfolio Manager, both at APG Asset Management. APG’s remuneration guidelines are available here.

One of the world largest fiduciary asset managers, APG recently issued remuneration guidelines that will be applied to its portfolio of European listed companies. APG believes that the innovation in the new guidelines is twofold. First in that they are based on its practical experience of company engagements and therefore reflect an integrated investment and governance outlook. More specifically, the guidelines place a clear emphasis on value creation. By issuing the guidelines APG is aiming to make its ongoing discussions with companies around pay more effective, thus freeing up time for it to focus on other important corporate governance areas such as board structure, succession and nominations.

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Socially Responsible Firms

Posted by Allen Ferrell, Harvard Law School, on Wednesday August 6, 2014 at 9:02 am
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Editor’s Note: Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. The following post is based on the paper co-authored by Professor Ferrell, Hao Liang and Professor Luc Renneboog.

The desirability of corporations engaging in “socially responsible” behavior has long been hotly debated among economists, lawyers, and business experts. Two general views on corporate social responsibility (CSR) prevail in the literature. The CSR “value-enhancing view” argues that socially responsible firms, such as firms that promote efforts to help protect the environment, promote social equality, improve community relationships, can and often do adhere to value-maximizing corporate governance practices. Indeed, well-governed firms are more likely to be socially responsible. In short, CSR can be consistent with shareholder wealth maximization as well as achieving broader societal goals. The opposite view on CSR begins with Milton Friedman’s (1970) well-known claim that “the only social responsibility of corporations is to make money”. Extending this view, several researchers argue that CSR is often simply a manifestation of managerial agency problems inside the firm (Benabou and Tirole, 2010; Cheng, Hong, and Shue, 2013; Masulis and Reza, 2014) and hence problematic (“agency view”). That is to say, socially responsible firms tend to suffer from agency problems which enable managers to engage in CSR that benefits themselves at the expense of shareholders (Krueger, 2013). Furthermore, managers engaged in time-consuming CSR activities may lose focus on their core managerial responsibilities (Jensen, 2001). Overall, according to the agency view, CSR is generally not in the interests of shareholders.

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Performance Terms in CEO Compensation Contracts

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday April 25, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from David De Angelis of the Finance Area at Rice University and Yaniv Grinstein of the Samuel Curtis Johnson Graduate School of Management at Cornell University.

CEO compensation in U.S. public firms has attracted a great deal of empirical work. Yet our understanding of the contractual terms that govern CEO compensation and especially how the compensation committee ties CEO compensation to performance is still incomplete. The main reason is that CEO compensation contracts are, in general, not observable. For the most part, firms disclose only the realized amounts that their CEOs receive at the end of any given year. The terms by which the board determines these amounts are not fully disclosed.

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Executive Compensation Under Dodd-Frank: an Update

Editor’s Note: Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. This post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

The Dodd-Frank law took effect July 21, 2010. [1] Subtitle E of Title IX of Dodd-Frank addresses “Accountability and Executive Compensation” (§§951-957). Since the enactment of the act, the Securities and Exchange Commission (SEC) has adopted final rules as to two of the provisions, proposed rules as to two others and has not yet proposed (but has announced it will be proposing) rules as to another three provisions. This post summarizes the current status of regulation projects under Dodd-Frank Sections 951 through 957.

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The Labor Market for Bankers and Regulators

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday April 8, 2014 at 9:16 am
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Editor’s Note: The following post comes to us from Philip Bond of the Department of Finance and Business Economics at the University of Washington, and Vincent Glode of the Department of Finance at the University of Pennsylvania.

The financial industry is heavily regulated. Whether it is in terms of spending or number of employees, financial regulation represents more than a third of all business- and industry-related regulation in the United States (De Rugy and Warren, 2009), even though the financial sector only contributes to 10% of the country’s GDP. However, many commentators express grave doubts about the current efficacy of financial regulation. For example, The Economist published a 2010 article entitled “Finance’s other bosses” in which it asked: “Does it really matter who is in charge of the regulators? The grunt work of supervision depends on more junior staff, who will always struggle to keep tabs on smarter, better-paid types in the firms they regulate.”

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Are Female Top Managers Really Paid Less?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 24, 2014 at 9:24 am
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Editor’s Note: The following post comes to us from Philipp Geiler of the Department of Finance at EMLYON Business School and Luc Renneboog, Professor of Corporate Finance at Tilburg University.

In our recent ECGI working paper, Are Female Top Managers Really Paid Less?, we focus on the gender wage gap of executive directors in the UK. In particular, we ask the question whether female top managers are paid less than their male counterparts, whether the gender wage gap is higher in male dominated industries (such as financial services etc.), and what effects female non-executive directors and remuneration consultants exert on pay.

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Risk Choice under High-Water Marks

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday March 20, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from Itamar Drechsler of the Department of Finance at New York University Stern School of Business.

High-water mark (HWM) contracts are the predominant compensation structure for managers in the hedge fund industry. In the paper, Risk Choice under High-Water Marks, forthcoming in the Review of Financial Studies, I seek to understand the optimal dynamic risk-taking strategy of a hedge fund manager who is compensated under such a contract. This is both an interesting portfolio-choice question, and one with potentially important ramifications for the willingness of hedge funds to bear risk in their role as arbitrageurs and liquidity providers, especially in times of crises. High-water mark mechanisms are also implicit in other types of compensation structures, so insights from this question extend beyond hedge funds. An example is a corporate manager who is paid performance bonuses based on record earnings or stock price and whose choice of projects influences the firm’s level of risk.

…continue reading: Risk Choice under High-Water Marks

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