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.