Critical Finance Review > Vol 3 > Issue 1

Incentive Contracts are not Rigged by Powerful CEOs

Kam-Ming Wan, School of Accounting and Finance, The Hong Kong Polytechnic University, kmwan@polyu.edu.hk
 
Suggested Citation
Kam-Ming Wan (2014), "Incentive Contracts are not Rigged by Powerful CEOs", Critical Finance Review: Vol. 3: No. 1, pp 99-152. http://dx.doi.org/10.1561/104.00000016

Publication Date: 09 Jan 2014
© 2013 K.-M. Wan
 
Subjects
Corporate governance,  Executive compensation
 
Keywords
G34G38J31J33
CEO compensationRiggingStock optionsRepricing
 

Share

Download article
In this article:
1. Introduction 
2. Sample and Data 
3. Replicated Results 
4. Why do Firms Alter Incentive Contracts of Top Executives ex post? 
5. Discrepancies to Measure Industry-adjusted Performance 
6. Conclusion and Future Research 
Appendix A: Robustness Tests 
Appendix B: Measurement Errors 
Appendix C: Sampling Bias 
References 

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.

DOI:10.1561/104.00000016