Mariassunta Giannetti, Stockholm School of Economics
Marcus Hober, Stockholm School of Economics
Abstract: Using a novel global dataset of executive pay contracts, we show that the surge in ESG and other compensation metrics is more about securing shareholder consent than directing managerial effort. ESG metrics – classified according to SASB standards – are often added in areas of existing strength, with negligible impact on overall ESG outcomes. Instead, metrics of any type are added after high say-on-pay dissent and are often chosen to align with proxy advisors’ preferences. Using quasi-random variation arising from metric usage at ISS marginal peers and marginal non-peers, we show that pay metrics increase say-on-pay approval and reduce both shareholder proposals and shareholder dissent on managerial proposals, without affecting a firm’s information environment. These findings challenge contract theory’s prediction that metrics are selected to direct attention to neglected objectives and suggest that the surge in ESG and other metrics reflects the desire to appease shareholders.
Abstract: Relative Performance Evaluation (RPE) awards provide a higher payout when a firm outperforms a selected peer group. Using a unique dataset that includes the ex post performance metric boards use to determine final payouts, we document discontinuities in these performance metrics around key contractual benchmarks that are influential in determining the award payout. Board-selected performance metrics cluster more frequently at or just above these benchmarks than below. The clustering suggests boards exercise discretion at vesting to boost payouts. This pattern is notable given that most RPE awards use Total Shareholder Return as the performance metric - where it is difficult for firms to influence peer performance that could produce a discontinuity in relative stock price performance. RPE awards that are based on total shareholder returns allow us to measure the economic impact of such discretionary adjustments, which we find significantly affect award values and incentives. The discontinuity and economic impact vary based on different features of the RPE contract. While RPE awards are promoted by shareholders and institutions for their formulaic structure that limits discretion, our findings show that boards may still intervene at vesting in ways that materially affect outcomes.
Abstract: I develop a novel structural model and quantify the financial and the real implications of CEO compensation contracts with incentives tied to real, environmental outcomes. In terms of the direct tradeoff in the absence of agency friction, I find that the incentives motivate CEOs to reduce carbon emission intensity by 1.8% per year but at a financial cost of 1.3% of firm value annually. Moral hazard makes the environmental improvement even more costly. As green performance is an imperfect signal of CEOs’ actions toward green outcomes, a "green moral hazard” arises: the CEOs require a premium for the risk added by green incentives. I estimate that this green moral hazard is substantial, accounting for $1.72 million of the total moral hazard cost of $2.05 million. These results suggest that green incentives pose an important economic trade-off: while green incentives can lead to meaningful environmental improvements, they impose substantial costs on the firm.
Abstract: We examine the real effects of a 2009 disclosure reform that requires many firms to restate executives’ total pay from prior years. These restatements change the presentation of pay but provide no new information. When a firm restates prior CEO pay upward (downward), the CEO receives a significant contemporaneous pay cut (raise). These adjustments are not explained by past or current firm performance. Higher-paid CEOs experience larger pay cuts, while firms with greater institutional block ownership grant smaller pay raises. Firms partially reverse pay cuts in the following year but not pay raises. Results hold for non-CEO executives and remain robust to a difference-in-differences design exploiting staggered rule implementation. The evidence suggests that firms adjust executive pay to align with how restated pay may be interpreted by stakeholders, showing that merely re-presenting salient pay information can induce real changes in compensation policy beyond the reform’s intended disclosure objectives.
Discussant: Torsten Jochem, University of Amsterdam
