Francesca Franco

Premium Pay for Executive Talent: An Empirical Analysis

We examine the extent to which executive talent at the time of the hire affects the design of the executive’s compensation contract at the hiring firm. Using a sample of executives who switched jobs at least once between 1992 and 2007, we find that our proxies for executive talent are positively associated with compensation premiums at the new employer, after controlling for the standard determinants of pay. Moreover, tests for the association between pay for executive talent and performance at the hiring firm indicate that it does not always pay off to pay a premium to attract and retain talented executives, and that this association varies with the type of talent (i.e., “perceived” versus “objective”) the hiring firm rewards.

Executive Gender Pay Gaps: The Roles of Female Risk Aversion and Board Representation

Using a large sample of executives in S&P 1500 firms over 1996-2010, we document significant salary and total compensation gaps between female and male executives and explore two possible explanations for the gaps. We find support for greater female risk aversion as one contributing factor. Female executives hold significantly lower equity incentives and demand larger salary premiums for bearing a given level of compensation risk. These results suggest that females’ risk aversion contributes to the observed lower pay levels through its effect on ex ante compensation structures. We also find evidence that the lack of gender diversity on corporate boards affects the size of the gaps. In firms with a higher proportion of female directors on the board, the gaps in salary and total pay levels are lower. Together, these findings suggest that female higher risk aversion may act as a barrier to full pay convergence, despite the mitigating effect from greater gender diversity on the board.Using a large sample of executives in S&P1500 firms over 1996-2010, we document significant salary and total compensation gaps between female and male executives and explore two possible explanations for the gaps. We find support for greater female risk aversion as one contributing factor. Female executives hold significantly lower equity incentives and demand larger salary premiums for bearing a given level of compensation risk. These results suggest that females’ risk aversion contributes to the observed lower pay levels through its effect on ex-ante compensation structures. We also find evidence that the lack of gender diversity on corporate boards affects the size of the gaps. In firms with a higher proportion of female directors on the board, the gaps in salary and total pay levels are lower. Together, these findings suggest that female higher risk aversion may act as a barrier to full pay convergence, despite the mitigating effect from greater gender diversity on the board.

Debt Market Benefits of Corporate Diversification and Segment Disclosures

Theoretical arguments suggest that a firm’s diversification strategy affects its credit risk. The co-insurance theory argues that imperfectly correlated cash flow streams of a diversified firm’s segments reduce the variability of aggregated earnings, thus lowering the credit risk. In addition, the agency theory suggests that agency conflicts specific to diversified firms can increase or decrease the credit risk. We empirically test these theoretical predictions by investigating the effect of corporate industrial diversification on the cost of public debt financing. For a broad set of diversification measures and empirical specifications, we document significantly lower bond yields when firms diversify their operations. Further, we find that the negative relationship between diversification and bond yields is much more pronounced when firms diversify across unrelated industrial segments, and when diversification is associated with a lower inter-segment cash flow correlation, indicating that the results are more consistent with the co-insurance argument. This inference is further strengthened by our finding that the negative effect of diversification on the cost of public debt financing is also present in a sample of syndicated bank loans where agency problems are addressed through strong monitoring features rather than by adjusting the loan spread.

Determinants and Trading Performance of Equity Deferrals by Corporate Outside Directors

This study investigates the determinants and trading performance of outside directors’ equity deferrals, which represent the choice to convert part or all of their annual cash compensation into deferred company stock. Using a large sample of S&P 1500 firms that allowed directors to defer their cash fees into equity between 1999 and 2009, we find significant associations between equity deferral choices and specific features of the director compensation plans, proxies for directors’ outside wealth diversification, and future firm stock market performance. Trading performance analyses indicate that outside directors earn substantial abnormal returns from their deferrals, with a significant proportion of the deferral transactions occurring during blackout periods. These results are consistent with companies structuring director equity deferral plans to circumvent U.S. Securities and Exchange Commission Rule 10b-5’s trading restrictions. This paper was accepted by Mary E. Barth, accounting .

The Effects of Contract Design and Implementation Practiceson Worker Incentive Plan Outcomes

Key issues in the design of incentive plans include the choice of performance measures, the level of pay-performance sensitivity, and the use of individual versus group payouts. In addition, research suggests that implementation issues can also have significant effects on incentive plan outcomes. Using a sample of 462 worker (non-management) incentive plans, we examine a wide variety of measurement, contractual and implementation practices, and investigate their individual and joint effects on incentive plan outcomes. Despite the emphasis on performance measurement choices in past compensation studies, we find evidence that other contractual and implementation characteristics have equal or greater influence on plan outcomes, and that many of these features interact to impact performance in a non-linear fashion.

Compensation and Organisational Performance: Theory, Research and Practice (1-super-st Edition)

Determinants and consequences of compensation design and incentive contracting practices are complex topics and, as such, have traditionally attracted the attention of many academic disciplines, spanning from economics to finance and accounting, organisation theory and strategic management. In the wake of the recent financial crisis, employee pay practices, and executive compensation levels in particular, have sparked an intense debate about the nature of the paysetting process and the outcomes it produces. After at least three decades of intense academic research, the conclusions reached by the literature are generally incomplete, often conflicting and somehow disappointing. This is especially true when considering that the largest portion of the compensation studies have focused on the determinants, rather than consequences, of the pay packages paid to corporate executives. By extensively reviewing the vast literatures on pay and incentives, Compensation and Organisational Performance: Theory, Research, and Practice challenges the reader to think through the fundamental principles underlying current compensation practices and the theoretical linkages between pay strategies and corporate behaviors. The book reviews over 1000 studies from several disciplines as economics, finance, accounting, psychology, and management. In contrast to traditional accounting compensation research, it provides a more strategic perspective on compensation design and emphasises the role of the firm’s strategic contingencies in affecting managerial pay, its importance, and impact on organisations. Although the first part of the book has its origins in the earlier textbook ‘Compensation, Organisational Strategy and Firm Performance’ by Gomez-Mejia and Balkin (Southwestern publishing co., 1992), the book extends this earlier work with a stronger managerial orientation and with topics such as the dynamics surrounding executive pay-setting polices, managerial risk taking behaviour and performance measurement issues. European Accounting Review Vol. 21, No. 1, 183–189, 2012