How did the Sarbanes–Oxley Act affect managerial incentives? Evidence from corporate acquisitions

We examine the impact of incentive compensation on the riskiness of acquisition decisions before and after the passage of the Sarbanes–Oxley Act (SOX). Before SOX, equity-based compensation was positively related to changes in risk around acquisition decisions, but this relationship weakened after the introduction of SOX. The drop in post-SOX acquisition-related risk stems from how managers respond to compensation-based incentives in the new regulatory environment. We show that executive stock options and pay-risk sensitivity drive post-SOX managerial responsiveness to risk-taking incentives. We also document a post-SOX value-enhancing effect on long-term stock-price performance and total factor productivity through these same incentive compensation mechanisms. The results are robust to selection bias, simultaneity, measurements of risk, and the definition of incentive compensation.

Contracting with Controllable Risk

We examine how executives' ability to control their firm's exposure to risk affects the design of their incentive-compensation contracts. Our natural experimental evidence shows that exchange-traded weather derivatives allow executives to control their firm's exposure to weather risk. Once these derivatives became available those executives who use them to hedge experience relative reductions in their total compensation and equity incentives. The decline in compensation is consistent with a reduction in the risk premium that executives receive for exposure to weather risk. The decline in equity incentives is consistent with the relation between risk and incentives shifting in a complementary direction when executives can better control their firm's exposure to risk. Collectively, our findings provide evidence that executives' ability to control their firms' exposure, and by extension their own, to an important source of risk influences the design of their incentive-compensation contracts.

Impacts of Top Five Executives’ Compensation on Employee Wages

This paper studies the impacts of incentive compensation to top five executives on employee wages. We employ pay-performance sensitivity to measure executive incentive compensation. Using the sample during 1992 – 2017, we find that executive compensation has negative impacts on employee wages. In addition, we examine the impacts of executive incentive compensation on employee wages in different industries and find that the impacts are more severe in technology firms than in non-technology firms. Finally, we show that the executives with higher incentive compensation are more likely to suppress employee wages in financially safe firms. Our results suggest that while top management teams are compensated as a team on average, they are compensated as isolated individuals on other aspects. Furthermore, firm performance may not always improve in the long run by granting high incentive compensation to top executives.

Unrestrained chief execs

Purpose This paper aims to review the latest management developments across the globe and pinpoint practical implications from cutting-edge research and case studies. Design/methodology/approach This briefing is prepared by an independent writer who adds their own impartial comments and places the articles in context. Findings Overconfident CEOs are more likely to push organizations towards unacceptably high levels of corporate risk when given high incentive compensation. Originality/value The briefing saves busy executives, strategists and researchers hours of reading time by selecting only the very best, most pertinent information and presenting it in a condensed and easy-to-digest format.

Corporate risk: CEO overconfidence and incentive compensation

PurposeThe purpose of this study is to investigate the association between corporate risk and the interaction between CEO incentive compensation and CEO overconfidence.Design/methodology/approachThis empirical study performs random and fixed effect (FE) regression analysis. It uses option-implied measures of CEO overconfidence.FindingsThe authors contribute to the existing literature by showing (1) that the positive association between high CEO incentive compensation and corporate risk only exists in the sphere of overconfident CEOs and (2) that the positive association between overconfident CEOs and corporate risk only exists in the sphere of high CEO incentive compensation. The authors show that the combination of high CEO incentive compensation and CEO overconfidence is associated with an increase in corporate risk of approximately 6% while the individual effects are for all practical reasons negligible. The results imply that only the combination of high CEO incentive compensation and CEO overconfidence is associated with a significantly elevated level of corporate risk.Research limitations/implicationsThe findings are based on S&P 1500 non-financial firms in the period 2007–2016.Practical implicationsThe findings have important implications in terms of CEO selection and compensation.Originality/valueThis study provides empirical evidence on the importance of the dual presence of high CEO incentive compensation and CEO overconfidence for corporate risk. The previous literature has primarily investigated these phenomena in isolation.