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Corporate Governance (Executive Compensation)

Paper Session

Monday, Jan. 4, 2027 8:00 AM - 10:00 AM (EST)

Westin DC Downtown
Hosted By: American Finance Association
  • Chair: Anh Tran, City University of London

The Value of Non-Value-Maximizing Managers

Pierre Chaigneau
,
Queen's University-Kingston
Alex Edmans
,
London Business School
Nicolas Sahuguet
,
HEC-Montréal

Abstract

Companies pursue multiple goals, such as financial returns and environmental and social performance. Conventional wisdom suggests they should appoint managers who share investors' preferences across these different goals. We show that, when performance measurement is asymmetric, appointing a manager who is biased towards the worse-measured activity ("impact") may instead be optimal. Doing so allows for stronger incentives on the better-measured activity ("profits") without distorting resource allocation towards the other activity. Strong financial incentives need not indicate that the manager lacks intrinsic motivation; instead, they counteract his intrinsic motivation for impact. Similarly, strong financial incentives need not imply that a mission-focused firm is greenwashing; it pursues its mission by appointing a biased manager rather than through the incentive contract. In a market equilibrium with a continuum of managers, we characterize the optimal level of bias and how it affects the level and structure of pay. The framework offers new insights into executive incentives, corporate purpose, and organizational culture.

Trade Associations and Shared Industry Governance

Felipe Cabezon
,
Virginia Polytechnic Institute and State University
Gerard Hoberg
,
University of Southern California
Ekaterina Neretina
,
Bocconi University

Abstract

We propose that trade associations induce member firms to adopt executive compensation schemes that put higher weight on industry performance relative to firm performance. An extension to classical managerial effort theory predicts this outcome. We empirically test theoretical predictions and find strong support along five dimensions: (1) plausibly exogenous shifts in trade association memberships leads to less relative performance evaluation (RPE), (2) TA members avoid other members as RPE benchmarks but prefer them as compensation peers, (3) these results do not obtain for non-TA industry peers, (4) mechanism tests favor implicit implementation of pay contracts over visible contractual provisions, and (5) a quasi-natural experiment illustrates that the resulting incentive plans are highly effective. These results illustrate a new industry dimension of executive pay that incentivizes collaborative value creation.

Implicit versus Explicit Contracting in Executive Compensation for Environmental and Socia

Roni Michaely
,
University of Hong Kong
Thomas Schmid
,
University of Hong Kong
Menghan Wang
,
University of Hong Kong

Abstract

"Using hand-collected data on the precise structure of environmental and social targets in executive
compensation (“ES Pay”) of U.S. firms from 2006 to 2021, we explore the optimal contracting
structure for linking those targets to compensation. We find that companies with explicit contract-
ing demonstrate better ES performance for targets that can be precisely measured, while implicit
contracting is ineffective for those targets. For targets with less precise performance measures, we
find that both explicit and implicit ES Pay schemes can be effective. These results show that the
contracting structure of ES Pay determines whether it improves ES performance or not."

When the Tax Break Breaks: CEO Pay and Turnover Following TCJA

Ilona Babenko
,
Arizona State University
Benjamin Bennett
,
Texas Christian University
Dragana Cvijanovic
,
Cornell University

Abstract

We examine how firms adjust CEO compensation following the Tax Cuts and Jobs Act (TCJA), which eliminated the tax deductibility of performance-based pay. Comparing firms with different levels of performance-based pay, CEOs with unaffected executives in the same firm-year, and U.S. firms with international firms, we find that CEO performance pay and total compensation decrease following the TCJA relative to the control group. The effects are stronger for more cost-sensitive firms and those requiring firm-specific human capital. Consistent with a moral hazard model, we also find that by raising the after-tax cost of compensation, TCJA created significant labor market disruptions.

Discussant(s)
Paolo Volpin
,
Drexel University
Ana Albuquerque
,
Boston University
Ingolf Dittmann
,
Erasmus University Rotterdam
Charles McClure
,
University of Chicago
JEL Classifications
  • G3 - Corporate Finance and Governance