Ana M. Albuquerque

Peer Choice in CEO Compensation

Current research shows that firms are more likely to benchmark against peers that pay their Chief Executive Officers (CEOs) higher compensation, reflecting self-serving behavior. We propose an alternative explanation: the choice of highly paid peers represents a reward for unobserved CEO talent. We test this hypothesis by decomposing the effect of peer selection into talent and self-serving components. Consistent with our prediction, we find that the association between a firm’s selection of highly paid peers and CEO pay mostly represents compensation for CEO talent.

Do Growth-Option Firms Use Less Relative Performance Evaluation?

The use of relative performance evaluation (RPE) in compensation contracts for CEOs at growth-option (GO) firms that operate in more volatile environments can provide insurance against common exogenous shocks and thus reduce the amount of risk that CEOs face. However, the implementation of RPE for high GO firms can be impaired by these firms’ inability to find a peer group that captures common risk exposure. This paper studies GO firms’ reliance on RPE and finds that the use of RPE in CEO compensation contracts varies negatively with a firm’s level of growth options. The tests use three proxies for growth options: the market-to-book value of assets, research and development expenses scaled by assets, and a factor obtained from a principal component analysis. The results are robust to controlling for the impact of other firm characteristics on pay-for-performance sensitivities.

The Impact of Risk on CEO Equity Incentives: Evidence from Customer Concentration

This paper uses a novel empirical setting to explore the association between a firm’s operational risk, managerial monitoring costs, and the level of CEO equity incentives. We investigate a sample of supplier firms that rely on a few large customers for the bulk of their revenues. We predict that supplier firms with higher customer concentration face both higher exogenous idiosyncratic risk and lower monitoring costs and, as a result, will rely less on equity-based managerial incentive compensation contracts. Our empirical results support this prediction. JEL classification: G30; D81; M40

The Impact of Risk and Monitoring on CEO Compensation

This paper uses a novel empirical setting to explore the association between a firm’s operational risk, managerial monitoring costs, and how managers are compensated. We investigate a sample of supplier firms that rely on a few large customers for the bulk of their revenues. We predict that supplier firms with higher customer concentration face both higher exogenous idiosyncratic risk and lower monitoring costs and, as a result, will rely less on equity-based managerial incentive compensation contracts. Our empirical results support this prediction.

Do Boards Exercise Discretion to Reduce Costly Ex Post Settling Up

This paper examines whether boards exercise discretion to reduce costly ex post settling up of having to recover CEO cash compensation for unrealized gains that fail to materialize. We predict and support three empirical findings. First, we document greater cash pay-performance sensitivity for firms exhibiting unrealized losses (proxied via negative stock returns) relative to firms with unrealized gains (proxied via positive stock returns). We use a sample of firms selected to maximize their likelihood of falling within the incentive zone; this research design addresses concerns in the literature regarding possible attribution of findings to mechanical application of bonus formula. Second, we find that future salary revisions are more sensitive to unrealized losses than to unrealized gains, consistent with Fama’s (1980) notion of ex post settling up occurring via salary revisions. Finally, we provide cross-sectional evidence that this asymmetric sensitivity is greater for firms with stronger corporate governance, less timely accounting earnings, and a larger proportion of total pay in the form of cash compensation.