Brian D. Cadman

Compensation Peer Groups and Their Relation with CEO Pay

We examine whether companies select compensation peer groups opportunistically to increase CEO pay. Using 608 firms from the S&P 1500, 2,154 peer firms identified from their proxy statements, and a pool of potential peers representing the firm’s labor market in which it competes for talent, we find limited evidence that firms choose peer groups opportunistically. Although firms select bigger and better performing peer firms relative to other potential peers, only size has any power in explaining CEO pay. On the other hand, inconsistent with opportunism, sample firms select peers that are more similar to them on other economic characteristics, that use the same compensation consultant and that select the sample firm as a peer. Despite subjecting our analysis to a battery of tests, and even in subsamples where opportunism is more likely at play, we find little support for the conjecture that firms strategically select peer firms to influence greater CEO pay. Our evidence is more consistent with peer firms being used to benchmark CEO pay in a competitive labor market.

Executive Compensation Restrictions: Do They Restrict Firms’ Willingness to Participate in TARP?: EXECUTIVE COMPENSATION RESTRICTIONS AND TARP

We examine the implications of regulatory intervention in pay�?setting, by studying whether executive compensation restrictions associated with the Troubled Asset Relief Program (TARP) influence banks’ participation in the program. We find that banks more likely to be impacted by the restrictions are less likely to participate in TARP. Among banks accepting funds, we find that the likelihood of repaying before the end of 2009 is positively related to CEO incentive compensation. We find greater subsequent executive turnover and lower pay increases in banks accepting funds, consistent with concerns about talent drain. We also find that proxies for self�?serving behavior are related to declining funds, suggesting pay preservation as a potential motive. Despite the motives behind declining funding, we find no evidence that the restrictions limited the objectives of TARP based on banks’ financial health or lending and may have allowed the government to allocate funds more effectively.

Economic Determinants and Information Environment Effects of Earnouts: New Insights from SFAS 141(R)

Contingent considerations (earnouts) in acquisition agreements provide sellers with future payments conditional on meeting certain conditions. Prior research provides evidence that acquiring firms use earnouts to minimize agency costs associated with acquisitions. Using earnout fair value information, recently mandated by SFAS 141(R), we provide new insights into the economic determinants to include earnout provisions in acquisition agreements, including motivations to resolve moral hazard and adverse selection problems, bridge valuation gaps, and retain target firm managers. We document variations in initial earnout fair value estimates and earnout fair value adjustments that correspond with these underlying motivations. We also provide evidence that target managers stay longer with the firm after the acquisition when earnouts are included primarily to retain target managers. Finally, we demonstrate that earnout fair value adjustments required by SFAS 141(R) provide valuable information to market participants and are negatively associated with the likelihood of contemporaneous and future goodwill impairments.

Are Ex-Ante CEO Severance Pay Contracts Consistent with Efficient Contracting?

Efficient contracting predicts that ex-ante severance pay contracts are offered to CEOs as protection against downside risk and to encourage investment in risky positive net-present-value projects. Consistent with this prediction, we find that ex-ante contracted severance pay is positively associated with proxies for a CEO’s risk of dismissal and costs the CEO would incur from dismissal. Additionally, we show that the contracted severance payment amount positively impacts CEO risk-taking and the extent to which a CEO invests in projects that have a positive net-present-value. Overall, our findings imply that ex-ante severance pay contracts are consistent with efficient contracting.

Explicit and Implicit Incentives: Longitudinal Evidence from NCAA Football Head Coaches Employment Contracts

We study the role of explicit and implicit incentives in a competitive labor market with no internal promotion opportunities. We find that explicit incentives explain only a small fraction of the total incentives, as the likelihood of new employment and renegotiation of current employment on better terms increases following good performance. We also find the likelihood of renegotiation relative to changing employment on better terms is dependent on the labor market forces. Our findings demonstrate the role of renegotiation and the relative strength of labor market forces compared to ex-ante pay-for-performance in the presence of strong external labor market incentives. Further, our results suggest that conclusions regarding the optimal use of explicit incentives in pay-for-performance may be substantially overstated when not considering implicit incentives from the labor market.

Compensation Disclosures and Corporate Governance through Shareholder Voting

There are several measures of equity compensation that may provide shareholders with distinct and useful information for evaluating CEO pay. We examine whether shareholders consider additional disclosures of equity compensation measures beyond the grant date fair value when participating in corporate governance. We find that CEO equity compensation expense, a distinct measure of equity compensation, is a determinant of shareholder voting for management sponsored equity plans and voting for directors that serve on the compensation committee. After controlling for ISS recommendations, we find that voting outcomes remain significantly related to abnormal equity compensation expense. Consistent with shareholders considering the equity compensation expense, we document that firms shorten equity compensation vesting periods when they are no longer required to disclose the equity compensation expense. Our findings suggest that shareholders rely on multiple, distinct measures of equity compensation when participating in corporate governance.Proxy statements have reported two measures of annual equity compensation: the grant date fair value and the ASC 718 expense. We examine how investors use equity compensation disclosures in proxy statements to evaluate CEO equity compensation schemes, and the contracting consequences of disclosure regulation changes. We find that both the grant date fair value and ASC 718 expense provide unique information that investors use to evaluate executive compensation schemes. We also find that investors do not change their use of the grant date fair value after the Proxy Disclosure Enhancements rule adopted in 2009 removed equity compensation expense disclosures from proxy statements. However, we find that firms change contracting schemes in response to changes in required disclosures. Our results provide insights into how shareholders incorporate compensation disclosures when participating in corporate governance, and informs current deliberations by the SEC regarding a proposal to require additional equity compensation disclosures.

Inducement Grants, Hiring Announcements and Adverse Selection for New CEOs

We examine how adverse selection problems when hiring new external CEOs affect contractual features of inducement grants. Focusing on the sensitivity of inducement grants to the new CEO announcement return (

Academics vs. Athletics: Career Concerns for NCAA Division I Coaches

Sensitivity), we find that firms provide inducement grants that are more sensitive to the new CEO announcement return when information asymmetry about the new CEO is more severe and the costs of adverse selection problems are higher. We also find a positive relation between the market reaction to the appointment and

Executive Equity Divestitures and Equity Granting Patterns

Sensitivity. We consider factors that reduce information asymmetry (engaging a search firm or appointing internal CEOs) and find they are associated with lower sensitivity of the inducement grant to the announcement.

The Incentives of Compensation Consultants and CEO Pay

We analyze the promotions and firings of NCAA Division 1 college basketball and college football coaches to assess whether these coaches are rewarded for the academic performance of their players in promotion and retention decisions. We find that an increase in Academic Progress Rate, as measured by the NCAA, for a college team in either sport significantly reduces the probability that the coach is fired at the end of the season. We find little to no evidence that an increase in the Academic Progress Rate enhances the chances of advancement (in the form of outside job offers) for these coaches.