Professor Vikram Nanda from Arizona State University is giving a VGSF
research seminar on "Are Incentive Contracts Rigged by Powerful CEOs?"
on November 30 (Friday, 15:30-17:00), at the Institute for Advanced
Studies(SZ VI), Stumpergasse 56, 1060 Vienna. The paper to be presented
can be downloaded at the VGSF webpage (Activities & Events--> Research
Seminars). The abstract of the paper is attached below.
Vikram will visit BWZ on Nov 30. If you would like to meet him at BWZ,
please let me know as soon as possible.
Kind regards,
Youchang Wu
We argue that powerful CEOs extract rents by rigging the incentive part
of their pay. In particular, we
contend that CEOs induce their boards to shift the weight on performance
measures towards the better
performing measures. The intuition is developed in a simple model in
which some powerful CEOs exploit
superior information and lack of transparency in compensation contracts
to extract rents. Our model
delivers several testable implications: (1) powerful CEOs are more
likely to rig their incentive pay; (2)
rigging is expected to increase with CEO human capital intensity and
uncertainty about a firm’s future
prospects; and (3) firm performance is expected be negatively affected
by rigging. Using measures of
CEO power and board independence on a large panel of firms in the U.S.,
we find support for all our
predictions. Rigging accounts for 57% of the sensitivity of compensation
to performance measures and
is increasing in CEO human capital and volatility of a firm’s future
prospects. Moreover, the portion
of incentive pay that is predicted by power is associated with negative
subsequent future profitability
of the order of 1.7% per year (a drop of 39% from the sample mean).
Overall, our empirical evidence
rejects the theory that incentives serve as a substitute for low
monitoring in firms with powerful CEOs,
supporting instead the theory that CEOs with power can skim rents at the
expense of shareholders.