Equity Stakes
Explaining the Compensation of Superstar CEOs: The Case of Elon Musk
Ivan Marinovic, Jeremy Bertomeu & Mario Milone
Stanford Working Paper, July 2024
Abstract:
While agency theory has strongly influenced real-world compensation plans, most observed compensation plans are not explicit about their economic assumptions. In this study, we derive closed-form expressions to infer the cost of effort, the manager's surplus, and the contribution of effort to the firm based on the mapping between pay and performance described in real-world CEO contracts. When the agent is near risk-neutral, these primitives can be recovered from a linear regression of performance on pay. We apply the model to Musk's 2018 controversial incentive plan and show that Musk (i) did not have significant bargaining power, (ii) was primarily compensated for large opportunity costs, (iii) was expected to generate considerably less value than the firm's ex-post performance, and (iv) inducing effort would have been infeasible or prohibitively expensive without performance vesting options. The model offers a tractable framework to understand the assumptions underlying large, high-powered incentive plans for "superstar" CEOs.
Rank-and-File Employee Stock Options and Workplace Safety
Yangyang Chen et al.
Management Science, forthcoming
Abstract:
We provide robust evidence that rank-and-file employee stock options (R&F options) lead to lower work-related injury rates. This finding is consistent with the view that R&F options improve workplace safety by facilitating employee retention and cooperation. To establish causality, we employ difference-in-differences analysis around the passage of FAS 123R option expensing regulation and instrumental variable estimation. In cross-sectional analysis, we find that the documented effect is amplified among firms with higher labor mobility rates and among firms with greater scope for employee free riding. The results of supplemental analysis suggest that work-related injuries adversely impact firm performance and rule out reduced employee whistleblowing about workplace safety issues as an alternative mechanism driving our findings.
Who Wins and Who Loses when Firms Stay Private Longer?
Leo Stanek
University of Minnesota Working Paper, November 2024
Abstract:
Does reducing the number of firms in public equity markets harm investors? How much has the value firms can get from going public changed in the past few decades? I develop a dynamic supply and demand model of the firm entry to and exit from public markets to relate firm benefits from being public to firm characteristics. Firms face a dynamic discrete choice problem on whether to be in public markets, with the benefits of being public a function of their characteristics, demand elasticities for their characteristics, and various regulatory and cost of capital changes. My structural analysis allows me to not only break down the causes of the transformation in US public equity markets, but also to say what the consequences of them have been for firms and investors. I find that investors would have had slightly higher excess returns but no change in their portfolio Sharpe ratio if firms behaved as they did before Sarbanes-Oxley. I further find that a private firm's implied option value of going public has fallen by over half since the pre-Sarbanes era. The reduction is mostly caused by an increase to fixed costs of being a public company in the post-Sarbanes era.
The Effect of Social Media on Corporate Innovation: Evidence from Seeking Alpha Coverage
Qiyang He et al.
Management Science, forthcoming
Abstract:
Seeking Alpha (SA) is the most popular crowdsourced social media platform specializing in the financial analysis of U.S. firms, and it attracts over 17 million visitors per month. We find that firm coverage initiation on SA significantly promotes corporate innovation activities. SA coverage promotes corporate innovation by disseminating innovation-related information about the covered firm to external investors, thereby alleviating the firm's financial constraints. Moreover, firms with higher information asymmetry, firms facing greater product market competition, and firms having lower levels of managerial short-termism reveal a greater increase in innovation outcomes following SA coverage initiation. Taken together, our findings suggest that third party-generated information on specialized social media mitigates the information asymmetry between firms and investors on corporate innovation activities and encourages corporate innovation.
Do Boards Reward and Punish CEOs Based on Employee Satisfaction Ratings?
Khaled Abdulsalam et al.
Organization Science, forthcoming
Abstract:
We investigate whether boards of directors reward and punish chief executive officers (CEOs) based on employee satisfaction ratings. Using data from Glassdoor, we find that CEOs tend to receive larger bonuses when employee satisfaction ratings increase. Similarly, we find a higher rate of CEO dismissal when employees become less satisfied. Further, we investigate three factors that may amplify the role of employee satisfaction ratings in CEO evaluations: the importance of employees to financial performance, the board's commitment to stakeholders, and the need to preserve firm reputation. We find some evidence that each of these three factors strengthens the relationship between employee satisfaction ratings and CEO evaluations. Finally, we exploit the staggered timing of first-time reviews on Glassdoor and use a difference-in-differences design to strengthen our inferences. Collectively, these findings suggest that boards' evaluations of CEO compensation and retention incorporate employee satisfaction ratings.
ESG Overperformance? Assessing the Use of ESG Targets in Executive Compensation Plans
Adam Badawi & Robert Bartlett
Stanford Working Paper, August 2024
Abstract:
The practice of linking executive compensation to ESG performance has recently become more prevalent in US public companies. In this paper, we document the extent of this practice within S&P 500 firms during the 2023 proxy season and, using a combination of hand coding and GPT-auditing, we extract the unstructured information that details how often executives miss, meet, or exceed the financial and ESG-based targets in their compensation plans. We find that 315 of these firms (63.0%) include an ESG component in their executives' compensation and that the vast majority of these incentives are part of the annual incentive plan (AIA) rather than a part of the long-term incentive plan (LTIP). While executives miss all of their financial targets 22% of the time in our sample, we show that this outcome is exceptionally rare for ESG-based compensation. Only 6 of 247 (2%) firms that disclose an ESG performance incentive report missing all of the ESG targets. We ask whether the ESG overperformance that we observe is associated with exceptional ESG outcomes or, instead, is related to governance deficiencies. Our findings that meeting ESG-based targets is not associated with improvements in ESG scores and that the presence of ESG-linked compensation is associated with more opposition in say-on-pay votes provides support for the weak governance theory over the exceptional performance theory.
Managerial Overextrapolation: Who and When
Dayong Huang et al.
Management Science, forthcoming
Abstract:
Corporate managers overextrapolate past earnings in their earnings guidance, and this behavior is robust after including extensive controls, such as expectation management, earnings management, and overconfidence. The degree of overextrapolation is driven by the persistence of the underlying earnings process and other factors that affect representativeness heuristics, including trend, salience, and volatility. Experience and value diversity among corporate managers help mitigate this bias, whereas demographic diversity does not. Using the Tax Cuts and Jobs Act of 2017, we provide causal evidence that managers overextrapolate past earnings.
Seductive Language for Narcissists in Job Postings
Jonathan Gay, Scott Jackson & Nicholas Seybert
Management Science, forthcoming
Abstract:
Prior research indicates that narcissistic executives engage in earnings management and other negative organizational behaviors, and many studies ponder why firms hire such individuals, especially into corporate accounting positions. Utilizing a selection of terms from real-world job postings that we characterize as describing either a "Rule-Bender" or "Rule-Follower" candidate, we first conduct several validation studies which reveal that these terms vary predictably across types of job postings, that people generally agree with our categorization of these terms, and that Rule-Benders are viewed as possessing worse managerial skills but a higher proclivity for unethical behavior. We then demonstrate that narcissistic job seekers are more attracted to job postings that describe the ideal candidate using Rule-Bender terms for both general positions (Experiment 1) and senior accounting positions (Experiment 2). Finally, we examine firm characteristics that might lead professional recruiters to incorporate Rule-Bender language into Chief Accounting Officer job postings and find that Rule-Bender terms are preferred for higher-growth, higher-innovation firms (Experiment 3), and when more aggressive reporting would benefit the firm (Experiment 4). Our results suggest that recruiters' language choices can attract Rule-Bending narcissists to firms, perhaps even in unintended circumstances.