Academic literature on the topic 'Executive compensation'

PurposeThis study examines the efficacy of compensation in encouraging corporate executives to promote corporate social responsibility (CSR). In particular, it closely examines the effect of a golden parachute (GP) on an executive's behavior toward CSR.Design/methodology/approachThis study uses longitudinal data on 1,301 US firms for the period from 1993 to 2013. The data comes from Compustat, MSCI ESG STATS, RiskMetrics and ExecuComp.FindingsWe find an inverse association between current and long-term compensations and GP on firms' CSR. However, a test on the moderating effect discloses that a GP and long-term compensation jointly and positively increase the firms' CSR performance. This increase supports the idea that executives with a GP seek to maximize their long-term wealth by approving CSR projects that add value. The results also show that female executives are more likely to promote CSR than their male counterparts, and older executives are less willing to engage in CSR projects.Practical implicationsAdding a GP contractual clause to the executive compensation package could encourage greater engagement in CSR projects. The CEO with a GP will ensure that the firm engages in only value-enhancing CSR projects; this should align the interest of the society (greater firm engagement in CSR) with the interest of the firm (value maximization).Originality/valueThis study contributes to the literature by examining the moderating effect of a GP on the association between CSR and executive compensation.

Executive compensation stickiness is a compensation characteristic that links executive pay to company performance, reflecting a tendency among compensation setters to provide generous rewards to executives and relatively fewer penalties. It can be considered an effective incentive mechanism. This paper empirically examines the impact of executive compensation stickiness on stock price crash risk using data from all A-share listed companies from 2010 to 2021. The empirical results show that executive compensation stickiness significantly mitigates stock price crash risk. Further research reveals that in companies with female CEOs, non-financial backgrounds among top executives, and low information opacity, the inhibitory effect of executive compensation stickiness on stock price crash risk is more pronounced. Mechanism tests suggest that executive compensation stickiness reduces agency costs and, thereby, suppresses stock price crash risk. This study extends the understanding of the economic consequences of executive compensation stickiness and factors influencing stock price crash risk, providing practical insights for designing compensation incentive systems for listed companies and maintaining the stability of capital markets.

Executive Compensation refers to the monetary and non-monetary benefits provided to executives as a form of payment or recognition for their completed work. The topic of Executive Compensation is regarded as intricate and contentious, garnering the interest of numerous groups for additional investigation. This research employs a qualitative methodology, specifically utilizing a literature review. The findings of this study indicate that the primary objective of carefully crafted Executive Compensation is to effectively attract, retain, and incentivize top-level management while also addressing issues related to agency conflicts. Nevertheless, these incentives have the opposite effect, leading to the financial collapse of major corporations and giving rise to issues in corporate governance as executives exploit them for their own personal gain.

The corporate board usually influences all important decisions of a firm including setting of its long-term goals, developing a corporate strategic policy, as well as hiring and setting the compensation of the chief executive. Moreover, the organization of the board may have a significant effect on the monitoring and governance of the company. This paper analyses the impact of structure of the board and firm performance on chief executive compensation, in an emerging economy context specifically, Pakistan. Chief executive compensation is one of the controversial and sought after topics in research nowadays. Interestingly, the exploration into the topic has found that there is a significant and positive impact of the non-executive directors serving on the corporate boards on the compensation of chief executive. Furthermore, the size of the board has also showed to have a significant and positive impact on the chief executive’s compensation which logically means that the companies in which the boards are larger than the mean size will relatively pay higher to their chief executives. Also it was found that the performance of the firm does not have a statistically significant impact on chief executive compensation. These results have policy implications and are important to corporate stakeholders. Keywords: corporate governance, board structure, firm performance, Pakistan

Gender pay difference has always been a concern of scholars. Especially in recent years, experts have gradually shifted their research horizons to gender pay difference of executive compensation. This paper takes executive compensation of listed companies as the research object, uses fixed effect model to study gender pay difference of executive compensation of listed companies from 2016 to 2020, and finds that the gender gap of executive compensation of listed companies shows a trend of decreasing first and then increasing, and the proportion of female executives has an insignificant reverse effect. Private enterprises have a significant reverse effect on the gender gap of executive compensation. That is, there is a gender difference in executive compensation of listed companies, and the factor affecting the gender gap is the nature of the company, while the proportion of female executives are not regarded as the influencing factor.

Executive managers represent a small precentage of one companies workers but they are the most important group of employees. The ideal compensation management policy ensures that the best talent will remain with the organization while attracting new talent and minimizing turnover. Executive compensation normally combines base salary, short-term and long-term incentives, benefits and bonuses. The purpose of this paper is to explore and analyse data about stucture and factors that affect executive compensation determination of top five global brands. The collected data on the hight of executive compensations refer to the period from 2010 to 2015. Selected executives are leaders of the companies that are ranked as the top five global brands on Interbrands 2015 list. CEO pay in the U.S. has grown exponentially since the 1970s. The CEO-to-worker pay ratio trend indicates that the ratio keeps rising over the years, with some CEOs making more than 400 times the median salary of their employees. Some analyst recommend that every company's compensation system should include implementing certain regulatory actions, using different metrics for determining CEO compensation, making board member-CEO relationships transparent to all company stakeholders.

Though numerous empirical and theoretical studies have been conducted on the determinants and effects of executive compensation, empirical evidence regarding the bargaining effect on the monetary compensation decisions of executives, especially in a large emerging economy such as China, remains scarce. In this study, a two-tier stochastic frontier and endogenous correction model was developed to quantitatively estimate the bargaining effect on the monetary compensation decisions of investment bank executives. Our study is the first to provide comprehensive empirical evidence that bargaining between investment banks and executives in China significantly affects the compensation decisions of executives. In the bargaining process, investment banks are more proficient than executives, and the comprehensive bargaining effect tends to lower the negotiated compensation of executives. The bargaining effect exhibited obvious heterogeneity in the characteristics of executives and investment banks. When these characteristics tend to augment the bargaining power of executives, the negotiated compensation exhibits a limited decrease; when these characteristics augment the bargaining power of investment banks, the negotiated compensation decreases substantially. Our results provide deep insight into factors that determine executive compensation and help compensation designers of investment banks better understand and design executive pay packages.

While many studies have explored the issue of women’s representation among top management, little is known about the gender gap in compensation among those who reached the top. Using data on 7,711 executives at 831 U.S. firms, this study investigates social-psychological factors that explain the gender gap in executive compensation. Consistent with theories on social identity and demographic similarity effects, the gender gap in executive pay is smaller when a greater number of women sit on the compensation committee of the board, which is the group responsible for setting executive compensation. However, the presence of a female chief executive officer (CEO) is not associated with the compensation of female non-CEO executives working under the female boss. The findings highlight the need to study women’s representation on corporate boards.

This thesis consists of two studies in the area of executive compensation. The first examines the effect of boards of directors’ characteristics on the degree of compensation efficiency with respect to the use of private information. I predict and find that boards’ competence both in information acquisition and in monitoring influence the extent to which boards use private performance measures in CEO compensation. Specifically, smaller and more independent boards with their CEOs as the board chair are more efficient in exploiting private performance measures. Furthermore, the better a board balances its information role with its monitoring role, the more efficient it is in exploiting private performance measures. No asymmetry is found in rewarding and punishing CEOs based on private information. The second study investigates the mechanism to inflate the value of executive stock options after Sarbanes-Oxley Act Section 403 (SOX 403), which requires that executive option grants be reported to the SEC within two business days following the grant day. As this requirement largely restricts backdating of executive option grants, I examine whether firms that previously backdated resort to alternative strategies after SOX. Using firms that were relatively free from backdating before SOX as a control group, I find that in the post-SOX period previous backdating firms exhibit a significantly larger return reversal around option grant dates, suggesting some sort of opportunistic behavior is still going on in these firms. Furthermore, I find that post-SOX option grant filings of previous backdating firms are as timely as those of the non-backdating control group, and that the large return reversals are associated with a pattern consistent with strategic timing of grants and disclosures; that is, a larger proportion of option grants are issued right after bad news (before good news) than right before bad news (after good news). These findings suggest that firms that previously backdated engage in strategic timing as an alternative mechanism to lower the grant-date stock price in the post-SOX period.

Thesis advisor: Philip Strahan
Chapter 1: Executive Compensation and Aspirational Peer Benchmarking Abstract: Using a comprehensive, hand-collected dataset of explicit peer group relationships, I document that small firms engage in upward compensation benchmarking to a much greater degree than large firms do. In contrast to the prior literature studying larger firms, small firms choose aspirational peers that reflect their executives' shifting opportunity sets. For these firms, compensation benchmarking is indicative of future growth and performance, and the rate at which pay adjusts toward peer levels is sensitive to the transferability of managers' human capital. Overall, the data suggest that growing and outperforming small firms strategically use upward benchmarking to adjust pay in an effort to retain managerial talent. Chapter 2: Common Ownership and Relative Performance Evaluation Abstract: Recent research suggests that large institutional shareholders that simultaneously hold positions in naturally competing firms may influence managers to collude and reduce product market competition. This paper finds that common owners do not alter executive incentive schemes in a way that is conducive to collusion. I find that common ownership is positively related to the use of explicit relative performance evaluation (RPE), which rewards executives for outperforming their peers. Additionally, commonly held firms are more likely to benchmark RPE awards against commonly held peers. My results suggest that the managers of commonly held firms lack the financial incentives to collude with product market rivals
Thesis (PhD) — Boston College, 2018
Submitted to: Boston College. Carroll School of Management
Discipline: Finance

Diese Dissertation stellt empirische Evidenz zu den Fragen der Verguetung von Fuehrungskraeften. Analyse der Daten der US-Firmen auflistet, finde ich eine umgekehrte U-foermige Beziehung zwischen Management Ownership und Unternehmensperformance, aber diese Beziehung verschwindet, wenn Unternehmensperformance von den letzten Jahr kontrolliert wird. Ich finde auch, dass die Executive Option Awards positiv auf Unternehmensperformance bezogen, während Executive Stock Awards hat keinen statistischen signifikanten Einfluss auf den Unternehmensperformance. Statistische Evidenz zeigt auch, dass die Struktur der Verguetung von Fuehrungskraeften Vertraege zu Unternehmen Eigenschaften und Executive persoenlichen Merkmalen zusammenhaengt.
This dissertation provides empirical evidence on the issues of executive compensation. Analyzing data of U.S. listing firms, I find an inverted U-shaped relation between managerial ownership and firm performance, but this relation vanishes when firm performance from last period is controlled. I also find that executive option awards is positively related to firm performance, while executive stock awards has no statistically significant impact on firm performance. Evidence also indicates that the structure of executive compensation contracts is related with observable and unobservable firm attributes and executive personal characteristics.

This doctoral thesis is made of three empirical research papers focused on executive compensation topics. The first chapter is a solo paper, while the second and third papers are co-authored with Antonio Parbonetti. The first chapter answers to Bushman and Smith’s (2001) call for research on compensation of executives other than CEOs. Specifically, using a sample of 586 firm-year observations over the period 2000-2009, I investigate the economic determinants and effects on shareholder value of the equity incentives given to the Chief Marketing Officer (CMO). The paper shows that, when companies invest more in marketing activities, they also give the CMO more equity incentives. I also find that CMOs’ equity incentives are positively related to shareholder value and that this positive relationship is incremental to that between CEOs’ incentives and firm value. Finally, I document that the positive impact of CMOs’ equity incentives on firm value is not limited to those firms that invest more than the industry average in marketing, suggesting a strategic role for the CMO that is not linked only to the size of the marketing budget. These findings, which help to advance our understanding of the determinants and effects of executive compensation, have considerable practical implications. Specifically, I challenge the mainstream view that the CEO’s compensation captures all first-order effects and that the consequences of the compensation structure of executives other than the CEO are negligible. In fact, I document that the Chief Marketing Officer plays a central role in delivering shareholder value when she is properly incentivized. I also show that companies do not simply rescale the CEO’s incentives when they decide how to incent the CMO, but they take a proactive role in detecting other economic determinants in order to set the appropriate level of incentives. Therefore, findings reported in the paper warn companies not to focus only on setting the CEO’s incentives, while neglecting to incent other key top executives such as the CMO. The second chapter, instead, analyzes how CEO’s equity incentives, risk incentives and career concerns drive the trade-off among earnings game strategies. Accounting literature documented that managers, in order to meet earnings targets, may engage in the numbers game by making choices among three non mutually exclusive strategies. Specifically, executives can alter reported earnings through real or accrual earnings management, and/or guide analysts’ expectations downward in an attempt of avoiding negative earnings surprises. Previous literature showed that stricter regulation (i.e. the passage of the SOX), and firm’s specific characteristics, influence the relative costliness of each earnings game strategy (Cohen et al., 2008; Zang, 2012). Nonetheless, literature fails to recognize that earnings game strategies are decided and executed by the CEO, who is going to consider, in the choice of how meeting/beating targets, also her personal costs and benefits. Using a sample of 4,471 quarterly observations, from 1,088 U.S. firms that are likely to have engaged in the earnings game over the period 2003-20010, I show that CEOs trade off the different earnings game strategies according to their personal benefits and costs. Specifically, I find that CEOs with high equity incentives and high career concerns engage less in real activity manipulations than executives with low incentives, and substitute this earnings game strategy with other alternatives. Additionally, I document that firms using real activity manipulation to meet/beat targets have lower future market performances than firms using accrual earnings management or analysts’ guidance. This result indicates that earnings game strategies that mostly rely on the alteration of real activities, impose very high costs on shareholders. CEOs appear to understand and anticipate this effect and, when their interests are aligned with those of shareholders in terms of equity incentives and career concerns, they avoid to choose real earnings management strategies. Overall, this chapter contributes to a well established research stream such as earnings management, by analyzing the trade-off among earnings game strategies from a new prospective. Finally, the last chapter focuses the attention on CEO’s compensation in the financial industry, which has attracted an increasing interest in recent years. In fact, executive compensation has been blamed of being one of the most fundamental causes of the recent credit crisis, providing CEOs with incentives to take too many big bets that turned out to be extremely costly (Solomon and Paletta, 2009). Specifically, the paper investigates the role of CEO’s equity and risk incentives in boosting securitizations in the financial industry and in motivating executives to reduce the perceived risk while betting on it. Using a sample of US financial institutions over the period 2003-2009, the paper documents that CEOs with high equity incentives have systematically engaged in securitization transactions to a larger extent than CEOs with low incentives. It also shows that CEOs with high equity and risk-related incentives engaged in risky securitization activities and used securitization for transferring risks to outside investors. Finally, the paper shows that executives incentivized on risk provided outside investors with low quality disclosure about losses recorded on securitized loans, thus contributing to increase the opacity of securitization transactions undertaken. Overall, I interpret these results as evidence that CEOs foresaw in securitizations under US GAAP an opportunity for hiding risks while bearing them and generating profits and cash flows because of the risks. In additional analyses, I document that before the collapse of the subprime mortgage market in 2007, financial institutions involved in the securitization of subprime loans largely over performed other banks in terms of market returns and earnings. On the contrary, starting from 2007 subprime securitizers have recorded worse performances than other financial institutions that were not involved in subprime securitization. This indicates that, by securitizing risky loans, CEOs were successful in boosting stock price and earnings, but the risks undertaken turned out to be extremely costly. This paper, therefore, adds to the large stream of research warning about possible side effects of equity compensation, and uncovers a determinant of securitization transactions that has been overlooked by previous literature
Il presente lavoro è costituito da tre articoli accademici, di natura empirica, focalizzati sul tema della remunerazione dei manager. Il primo capitolo è un paper a firma unica, mentre il secondo e terzo paper sono co-autorati con Antonio Parbonetti. Il primo capitolo analizza la remunerazione di manager diversi dall’amministratore delegato (CEO), come suggerito da Bushman and Smith’s (2001). In particolare, utilizzando un campione di 586 osservazioni dal 2000 al 2009, lo studio analizza le determinanti economiche e gli effetti sul valore aziendale degli incentivi azionari forniti al Direttore Marketing (Chief Marketing Officer, CMO). I risultati mostrano che, quando le aziende investono maggiormente in marketing, forniscono al CMO maggiori incentivi azionari. Inoltre, lo studio rivela che gli incentivi azionari forniti al CMO sono positivamente correlati al valore aziendale e che tale effetto è incrementale rispetto a quello dovuto agli incentivi monetari del CEO. Infine, il capitolo rivela che l’impatto positivo sul valore aziendale riconducibile agli incentivi azionari del CMO non è limitato esclusivamente alle aziende con elevati investimenti di marketing. Questo suggerisce che il CMO riveste un ruolo strategico nell’azienda che non è esclusivamente legato all’entità del budget di marketing. I risultati riportati nello studio hanno considerevoli implicazioni pratiche. In particolare, essi sono in contrapposizione con la tradizionale percezione che la remunerazione del CEO catturi tutti gli effetti rilevanti e che, quindi, sia di marginale importanza studiare la struttura di incentivazione di executive diversi dal CEO. Infatti, lo studio documenta che il CMO, quando propriamente incentivato, riveste un ruolo strategico chiave nel creare valore aziendale. Inoltre, i risultati suggeriscono che le aziende, nel determinare gli incentivi dei manager diversi dal CEO, non ridimensionano semplicemente la struttura di remunerazione dell’amministratore delegato, bensì cercano di identificare delle determinanti economiche rilevanti per definire l’appropriato livello di incentivi. Il secondo capitolo, invece, analizza come gli incentivi azionari, gli incentivi al rischio e i career concern del CEO influiscono sul trade-off tra le diverse strategie di earnings management. La letteratura di accounting ha documentato che, al fine di raggiungere determinati obiettivi di performance, i manager possono scegliere di 1) manipolare gli utili contabili utilizzando la flessibilità concessa dai principi contabili (accrual-based earnings management), 2) manipolare le decisioni di investimento dell’azienda (real earnings management), 3) abbassare le aspettative degli analisti per evitare di non raggiungere le loro stime (analysts’ expectation guidance). La letteratura ha mostrato che una regolamentazione più severa, e caratteristiche intrinseche dell’impresa, influenzano il costo delle menzionate strategie di earnings game (Cohen et al., 2008; Zang, 2012). Tuttavia, non si è prestata la dovuta attenzione al fatto che la scelta della strategia di earnings game da utilizzare viene effettuata, in ultima istanza, dal CEO dell’azienda il quale considererà nella scelta anche i propri incentivi. Utilizzando un campione di 4,471 osservazioni dal 2003 al 2010, il secondo capitolo mostra che il CEO sceglie quale strategia di earnings game utilizzare anche in funzione di costi e benefici personali. In particolare, i risultati indicano che i CEO con maggiori incentivi azionari e con più elevati career concern, utilizzano di meno le strategie di real earnings management e le sostituiscono con le altre due alternative. Inoltre, lo studio mostra che le aziende che utilizzano in misura maggiore il real earnings management registrano performance future di mercato significativamente inferiori a quelle aziende che invece utilizzano altre strategie di earnings game. Tale risultato suggerisce che quando i manager manipolano le decisioni di investimento dell’azienda, al solo fine di raggiungere alcuni target di performance, impongono alti costi agli azionisti. I manager sembrano comprendere ed anticipare questo effetto e, quando i loro interessi sono maggiormente allineati con quelli degli azionisti in termini di incentivi azionari e career concern, utilizzano in misura minore le strategie di real earnings management. In conclusione, il secondo capitolo contribuisce ad un filone di ricerca già ben sviluppato andando ad analizzare il trade-off tra le strategie di earnings game da una nuova prospettiva: quella dei manager. Infine, l’ultimo capitolo si focalizza sulla struttura di remunerazione del CEO nel settore finanziario; tematica quest’ultima particolarmente dibattuta negli ultimi anni. Infatti, la struttura di remunerazione degli executive nel settore finanziario è stata accusata di essere una delle principali cause della recente crisi finanziaria, poiché avrebbe fornito ai manager incentivi ad assumere eccessivi rischi (Solomon and Paletta, 2009). In particolare, il capitolo analizza il ruolo degli incentivi azionari e degli incentivi al rischio nel motivare i CEO ad intraprendere operazioni di cartolarizzazione dei mutui, riducendo i rischi percepiti dagli investitori esterni ma, al contempo, scommettendo su di essi. Utilizzando un campione di istituzioni finanziarie statunitensi dal 2003 al 2009, lo studio documenta che i manager con elevati incentivi azionari hanno sistematicamente cartolarizzato una quantità maggiore di mutui. I risultati indicano altresì che i manager con elevati incentivi azionari ed incentivi al rischio, sono stati maggiormente coinvolti in operazioni di cartolarizzazione di mutui subprime, utilizzando in tal modo lo strumento della cartolarizzazione per trasferire i rischi ad investitori esterni. Inoltre, lo studio documenta che i manager incentivati al rischio hanno fornito una disclosure di qualità peggiore agli investitori esterni ed hanno pertanto contribuito ad aumentare le asimmetrie informative. Nel complesso, le analisi svolte suggeriscono che i manager hanno intravisto nelle operazioni di cartolarizzazione dei mutui la possibilità di nascondere i rischi generati ed incrementare i profitti delle proprie istituzioni finanziarie. In analisi aggiuntive, il capitolo mostra che, prima del crollo del mercato dei mutui subprime avvenuto nel 2007, le istituzioni finanziare coinvolte nella cartolarizzazione dei mutui subprime hanno registrato performance significativamente superiori ai propri concorrenti. Tuttavia, una volta che la crisi finanziaria è emersa, tali istituzioni ne hanno subito le conseguenze in misura maggiore. Pertanto, i risultati suggeriscono che, grazie alla cartolarizzazione dei mutui subprime, i manager delle grandi istituzioni finanziarie statunitensi hanno avuto successo nell’incrementare i profitti delle proprie istituzioni; tuttavia ciò è avvenuto assumendo rischi eccessivamente elevati. Il capitolo, pertanto, contribuisce all’ampio dibattito in letteratura riguardo ai potenziali effetti distorsivi causati dalla struttura di remunerazione dei manager

This study investigates the relationship between CEO pay and firm performance, the asymmetric nature of pay-performance sensitivity, and the effect of CEO participation on the pay-setting process, for publicly-listed New Zealand firms during 1997 to 2002. The research is conducted using a unique hand-collected panel data set containing information about executive compensation, firm performance, ownership, firm governance and CEO participation in the pay-setting process. The sample covers the six-year period following the introduction of mandatory disclosure requirements that were imposed on executive and director compensation in 1997. An initial descriptive analysis of the data reveals a large pay difference between worker and CEO pay. In addition, pay-performance indexes for the highest and lowest paid CEOs document differences between the change in pay relative to real shareholder returns. An examination of the sensitivity between growth in CEO pay, and contemporaneous and lagged firm performance using a firm fixed-effects model, shows that not only is pay significantly related to firm size and performance but also board size, compensation risk and director share ownership. Models of the relationship between growth in CEO compensation and firm performance indicate the pay-performance sensitivity generated by cash and the change in the value of stock option holdings is reported to be three-times the magnitude of the sensitivity due to salary and bonus payments alone. In addition, growth in CEO compensation is asymmetrically related to changes in firm performance. CEO cash compensation is positively related to increases in firm value only. Total compensation is related to contemporaneous returns and positive lagged returns. Change in CEO wealth is positively related to contemporaneous returns but is more sensitive to losses. However, change in wealth also increases when lagged returns are positive and negative, implying that CEOs are able to extract pay in excess of that which is optimal under the contracting view of executive compensation. Furthermore, firms in which CEOs demonstrate a low level of participation in the pay-setting process earn higher levels of pay, which also grows at significantly greater rates than their high-participation counterparts. In particular, growth in low-participation wealth is more sensitive to positive and negative contemporaneous returns as well as being negatively related to negative lagged excess returns. This finding is opposite to theoretical predictions and can be explained by the tightly held nature of the high-participation firms which typically have fewer directors, are exposed to higher return volatility and have greater director and CEO beneficial share ownership. Consistent with the trickle-down effect, there is a positive relationship between growth in the non-performance related cash compensation awarded to CEOs and the growth in pay earned by their executive directors and employees. In addition, growth in non-CEO executive pay is not related to firm performance when there is an overpayment effect and CEOs exercise a high level of participation in the pay-setting process. Consistent with the contracting view, growth in non-CEO executive pay is positively related to firm performance with no benefits from CEO overpayments when stock option awards are included in the CEO pay contract.

This study considers the determination of the ex ante pay-performance relationship. A single-period partial equilibrium model is used to show that the executive income can be expressed as a function of the firm's return expressed in dollar terms. The executive income is jointly determined by the opening firm size and current return, which function as a managerial talent proxy and self-selection mechanism respectively. Comparing to Jensen and Murphy (1990) wealth-based Pay-Performance Sensitivity (PPS), this research presents an income-based PPS. The alternative PPS not only overcomes a misleading misspecification in Jensen and Murphy (1990), but also corrects Rosen's (1992) argument for only including return in the pay performance relationship. This research finds empirically that both the opening firm size and stock return play a significant role in determining executive income. This study provides supplementary evidence to Murphy's (1986) Learning Model. However, shareholder income may not be an ideal performance measure in capturing the multi-period pay-performance relationship.

This thesis investigates three theoretical problems in executive compensation literature. They involve extension of a standard principal-agent model, incorporating taxation into the valuation of executive stock options, and the pricing of executive stock options in the presence of managerial effort. Empirical literature has long addressed the endogeneity of capital structure and executive compensation. Yet few models, which optimally determine executive compensation, explicitly introduce capital structure choice. Chapter 2 proposes a principal-agent model in which the capital structure, compensation and managerial actions are simultaneously determined. Based on our numerical results leverage has two effects on managerial actions. One is to discipline the manager and the other is to replace the incentive effect of compensation. Two such effects exist because volatility is chosen by the manager. The basic model is also extended to include debt-like compensation. Our results show that for a given leverage level, rewarding the manager with debt makes her work harder but take less risk. But debt compensation cannot limit risk neutral shareholders' risk appetite; we hence conclude that only a combination of capital and pay regulation, which restricts both risk-taking of shareholders and incentives of the manager, can significantly reduce the firm's risk. Taxation is an important consideration in the design of executive (and employee) compensation. It directly affects the firm's revenue as well as the executive's after tax income. Once the compensation is granted, taxes also affect the early exercise strategy of the components of the compensation. Chapter 3 explores the executive (and employees) compensation with tax. Specifically, we build a tax-inclusive valuation model. The new feature of the model is an addition of a tax decision, which allows the executive (and employees) to optimally sell stock to maximize after-tax terminal utility. The stock selling decision is very similar to an option exercise decision. The valuation 'model essentially has two embedded options: one option is when to exercise the stock option and the other option is when to sell the stock. This new feature allows different exercise policies for executive stock options under different tax schemes. We apply the model to the US and the UK tax system. The findings suggest that restricted stock is the preferred form of compensation in the US. In the UK, restricted stock is only preferred when the executive has low wealth. We also investigate incentives of a special tax scheme - section 83b election - which gives employees a choice to pay income tax at grant date. This voluntary election allows the executive to accelerate ta.x on restricted stock. Our results suggest that 83b election is not optimal for the manager, who would get double-taxed. And it is not optimal for the issuing firm either, as restricted stock without the election can provide higher incentives at lower cost. The value of executive stock options (ESOs) should depend on the manager's ability to influence firm value. ESOs are granted under the assumption that the executive could make the firm value increase. However, ESOs are always valued with no managerial influence. Chapter 4 examines valuation of ESOs, with the assumption that the manager can influence the firm value via her effort choice. The manager influences stock prices by exerting effort, which increases the firm's stock expected return. Effort leads to a disutility (which can be regarded as effort cost) to the risk-averse, utility-maximizing manager. In addition to the effort choice, the market asset. is also introduced to the manager's investment set. Effort increases the manager's subjective valuation as well as the cost of ESO. The standard principal-agent model is not strictly speaking consistent with general equilibrium models like CAP1vI. Managerial effort is generally not priced under these equilibrium models, because all managers are pricetakers. For this reason, we assume that CAPM does not strictly hold when effort is introduced. Our results show that the manager's value and the cost increase with the correlation, because the manager delays a value destroying early exercise. We also show that the manager's subjective value of the ESO is higher than the cost only when the manager has low wealth, low risk-aversion, and the stock has a low volatility. Under these scenarios, the manager's marginal utility is high and effort has a large impact on the manager's valuation. As a result, the value is higher than the cost. These results suggest that managers of large public firms are less likely to value their ESOs higher than the cost; while managers of small non-public firms are likely to value their ESOs far higher than their cost. The result may explain why ESO is so popular in small startup firms, where ESO is most likely to be valued higher than the cost.