Contracts and Complexity
Sunday, Jan. 6, 2019 8:00 AM - 10:00 AM
- Chair: Augustin Landier, HEC Paris
I Can See Clearly Now: The Impact of Disclosure Requirements on 401(k) Fees.
AbstractIn 2012, the Department of Labor (DOL) imposed new disclosure requirements concerning the indirect fees earned by 401(k) retirement plan service providers through revenue sharing agreements with mutual funds. This paper examines the impact of these fee disclosure requirements on the level and structure of fees paid by retirement plans. We argue that when revenue sharing is not disclosed in a prominent way, revenue sharing provides a way for service providers to price discriminate between larger, better informed plan sponsors and smaller less sophisticated sponsors. Consistent with this argument, we find that disclosure requirement designed to increase the transparency of indirect fees are associated with a substitution of direct fees for indirect fees and a reduction in total fees paid by smaller retirement plans. We also find that mutual fund providers responded to increased revenue sharing disclosure requirements by introducing retirement fund share classes with lower 12b-1 fees. Finally, we find that disclosure changes are associated with an increase in low-cost mutual funds offered as investment options offered by small plans.
Learning about the Details in CEO Compensation
AbstractI document the richness of CEO compensation packages and show that boards learn about the desirability of the many complex package features through observing how these features are associated with firm performance. I first capture the detailed features of plan-based awards for CEOs of the largest U.S. public firms in a vector with more than 1,300 elements. I then demonstrate the complexity of boards' decisions on adding and dropping the detailed features. I hypothesize that boards learn about the efficacy of complex features by observing their correlation with performance---both at their own firms and at other firms. To test these hypotheses, I measure the similarity between any two compensation packages using a metric that assigns a shorter distance to more similar packages. My results support my learning hypotheses: firms that perform well in the current year award similar packages to their CEOs in the following year, whereas firms that perform poorly significantly change their packages in the following year; moreover, firms adjust their own CEO compensation packages to be more similar to that of well-performing firms, and less similar to that of poorly performing firms. These results hold after controlling for the effects from compensation peer firms, compensation-consultant sharing firms, board interlocking firms, and product market peers. I further show that a focal firm experiences better performance when its CEO compensation package becomes more similar to those used by its well-performing compensation benchmark firms. This paper demonstrates the importance of capturing the multi-dimensional details of CEO plan-based awards and studying changes in compensation packages in a holistic manner.
- G3 - Corporate Finance and Governance