In the past decade, public scrutiny surrounding rising levels of executive compensation has led to more stringent independence requirements for compensation committees. However, there is little research studying the effects of compensation committees on executive pay from the time these new requirements were implemented. My paper studies the effects of compensation committee chair personal ties to the CEO, economic interests, and group committee characteristics on both the level and structure of CEO compensation. My findings suggest that certain committee chair personal ties to the CEO are associated with both a higher level of CEO compensation and a higher percentage of CEO salary compensation. I also find that the more compensation committee chairs are paid, the less likely they are to create CEO pay plans with strong incentive provisions, but the more likely they are to increase the level of total CEO compensation. The higher the committee chair’s ownership percentage is in the company, the less likely they are to create low-risk CEO pay plans, and the more likely they are to increase the level of total CEO compensation.

This dissertation contains five research projects within the context of two distinctive issues that concern the effectiveness of executive compensation in aligning executive interests with shareholders and how institutional investors play a role in structuring corporate governance mechanisms. The objective of this dissertation is to first determine how institutions should exert their influence if they are serious about alleviating agency problems and improving firm performance. Second, the thesis seeks to determine whether institutional investors use their influence to shape executive compensation and corporate governance mechanisms in a manner consistent with aligning managerial interests with shareholders and increasing shareholder wealth. The thesis finds that CEOs with option incentives increase the likelihood that a firm will increase risk by undertaking both major real investments and acquisitions. Moreover, CEO option grants are positively related to measures of firm valuation and operating performance suggesting option incentives are an important mechanism to align CEO interests with shareholders. This is robust to alternative measures of firm valuation and operating performance, also various estimation techniques. Using these findings to motivate the direction of institutional influence on executive compensation, it is found that institutional investors, particularly smaller activist traders, significantly increase option grant incentives received by executives. Institutional influence also raises CEO pay which is consistent with preservation of reservation CEO utility levels. Addressing the role of institutional investors in the context of other corporate governance mechanisms, it is found that institutional investor influence is also negatively related to board size and positively related to board independence, which is achieved by removal of inside directors. Such actions are consistent with empirical studies that show smaller boards and increased levels of independent directors improve firm performance and board decision making. The main conclusion from this dissertation is that option incentives are an effective mechanism to align CEO interests with those of shareholders. Institutional investors appear to recognise this importance, and effectively use their influence to increase options received by executives. Combined with institutional investors putting in place corporate boards that provide better oversight of management, institutional investors appear to be effective monitors of the firms in which they invest.

This dissertation contains five research projects within the context of two distinctive issues that concern the effectiveness of executive compensation in aligning executive interests with shareholders and how institutional investors play a role in structuring corporate governance mechanisms. The objective of this dissertation is to first determine how institutions should exert their influence if they are serious about alleviating agency problems and improving firm performance. Second, the thesis seeks to determine whether institutional investors use their influence to shape executive compensation and corporate governance mechanisms in a manner consistent with aligning managerial interests with shareholders and increasing shareholder wealth. The thesis finds that CEOs with option incentives increase the likelihood that a firm will increase risk by undertaking both major real investments and acquisitions. Moreover, CEO option grants are positively related to measures of firm valuation and operating performance suggesting option incentives are an important mechanism to align CEO interests with shareholders. This is robust to alternative measures of firm valuation and operating performance, also various estimation techniques. Using these findings to motivate the direction of institutional influence on executive compensation, it is found that institutional investors, particularly smaller activist traders, significantly increase option grant incentives received by executives. Institutional influence also raises CEO pay which is consistent with preservation of reservation CEO utility levels. Addressing the role of institutional investors in the context of other corporate governance mechanisms, it is found that institutional investor influence is also negatively related to board size and positively related to board independence, which is achieved by removal of inside directors. Such actions are consistent with empirical studies that show smaller boards and increased levels of independent directors improve firm performance and board decision making. The main conclusion from this dissertation is that option incentives are an effective mechanism to align CEO interests with those of shareholders. Institutional investors appear to recognise this importance, and effectively use their influence to increase options received by executives. Combined with institutional investors putting in place corporate boards that provide better oversight of management, institutional investors appear to be effective monitors of the firms in which they invest.

This dissertation contains five research projects within the context of two distinctive issues that concern the effectiveness of executive compensation in aligning executive interests with shareholders and how institutional investors play a role in structuring corporate governance mechanisms. The objective of this dissertation is to first determine how institutions should exert their influence if they are serious about alleviating agency problems and improving firm performance. Second, the thesis seeks to determine whether institutional investors use their influence to shape executive compensation and corporate governance mechanisms in a manner consistent with aligning managerial interests with shareholders and increasing shareholder wealth. The thesis finds that CEOs with option incentives increase the likelihood that a firm will increase risk by undertaking both major real investments and acquisitions. Moreover, CEO option grants are positively related to measures of firm valuation and operating performance suggesting option incentives are an important mechanism to align CEO interests with shareholders. This is robust to alternative measures of firm valuation and operating performance, also various estimation techniques. Using these findings to motivate the direction of institutional influence on executive compensation, it is found that institutional investors, particularly smaller activist traders, significantly increase option grant incentives received by executives. Institutional influence also raises CEO pay which is consistent with preservation of reservation CEO utility levels. Addressing the role of institutional investors in the context of other corporate governance mechanisms, it is found that institutional investor influence is also negatively related to board size and positively related to board independence, which is achieved by removal of inside directors. Such actions are consistent with empirical studies that show smaller boards and increased levels of independent directors improve firm performance and board decision making. The main conclusion from this dissertation is that option incentives are an effective mechanism to align CEO interests with those of shareholders. Institutional investors appear to recognise this importance, and effectively use their influence to increase options received by executives. Combined with institutional investors putting in place corporate boards that provide better oversight of management, institutional investors appear to be effective monitors of the firms in which they invest.

Shareholders can utilize internal and external governance mechanisms to minimize agency costs. Internal governance mechanisms purport to improve the alignment between shareholders' interests and those of management by empowering the board of directors, setting value-maximizing compensation packages, employing leverage, and using other internal policies. Extensive discussion on corporate governance and regulations has motivated financial experts to conduct research on governance mechanisms and their relations to firm value. This study is focused on one particular aspect of corporate governance, which is executive compensation. Specifically, this study investigates executive compensation restrictions during the regulatory period and their effect on the performance of firms that received Troubled Asset Relief Program (TARP) funds. TARP is a U.S. government program intended to restore the U.S. economy by purchasing assets and equities from troubled institutions. This study is important since it showcases the efficacy of government regulations to revamp unsound executive compensation and governance practices. It also contributes to the governance and regulatory literature by showing whether the public and shareholders benefit from the compensation rules. Using a clean sample of 84 public TARP firms that received at least $50 million from the government, with the period of analysis from 2003 to 2010, I find that firm performance is positively and significantly related to total compensation as well as to both of its components, i.e., equity-based pay and cash-based compensation. However, the magnitude of the relationship between cash compensation and firm performance is much lower than that for equity-based compensation. Testing the pay-for-performance sensitivity in three sub-periods of analysis, the findings show that the relationship between executive compensation and firm performance was significantly positive in the pre-crisis period. However, during the financial crisis and the regulatory periods, this relation was not statistically different from that during the pre-crisis period. During the crisis period, TARP firms did not make necessary adjustments to executive compensation despite the fact that they had been faced with financial difficulties. I also find that the change in firm value is negatively and significantly related to the change in total compensation for TARP firms that have paid back their debts to the government by December 11, 2009, but this relation is less negative than that for TARP firms that have not repaid the bailout money.

abstract: Relative performance evaluation (RPE) in Chief Executive Officer (CEO) compensation contracts entails the use of peer performance to filter out exogenous shocks and reduce exposure to risk. Theory predicts that high-quality peers can effectively filter out noise from performance measurement, yet prior empirical studies do not examine how differences in peer quality affect the use of RPE in practice. In this study, I propose a model to select peers with the highest capacity to filter out noise and introduce a novel measure of peer quality. Consistent with the theory, I find that firms with high quality peers rely on RPE to a greater extent than firms with few good peers available. I also examine the extent to which peers disclosed in proxy statements overlap with the best peers predicted by my model. I find that the overlap is positively associated with institutional ownership, use of top 5 compensation consultants, and compensation committee competence. / Dissertation/Thesis / Doctoral Dissertation Accountancy 2020

Nonprofit hospitals are under increased pressure to maintain financial stability and compliance with Internal Revenue Service (IRS) net community benefit requirements. Boards of directors are not always confident that the compensation packages awarded to executives stimulate them to act in the organization's best interest. The principal-agent theory formed the basis of this correlational study. Archival data from National Center for Charitable Statistics, Guidestar, and the Center for Medicare & Medicaid Services were collected from 117 nonprofit urban hospitals for the fiscal year 2013. Regression analysis was used to determine the significance of relationships between return on assets (ROA), change in net assets (profit), and net community benefits expense and average executive compensation (AEC). ROA and profit demonstrated a significant relationship with AEC. The direction of the relationship between profit and AEC was positive while the relationship with ROA and AEC was negative. There was no significant relationship between net community benefit and AEC. The implications for positive social change include improved understand of executive compensation alignment, job creation, and IRS net community benefits expense requirements. Lawmakers may use the information to create legislation related to net community benefits expense requirements.

This thesis examines three important topics in corporate governance: the relationship between activist hedge funds and other institutional investors, the role of perks in the market for CEO talent, and public scrutiny and the changing nature of perks. First, I provide an in depth study of the interaction between activist hedge funds and other institutional investors. Hedge funds are more likely to target firms with high levels of institutional ownership, and demonstrate a preference for short term focused institutional investors. Hedge fund activism generates short run and long run abnormal returns without increasing stock return volatility. Regardless of investment horizon, volatility is inversely related to prior period institutional ownership. The trading behavior of institutional owners with different investment horizons is consistent with hedge fund activism creating value. These findings hold regardless of whether investment horizon is based on portfolio churn rate or type of institution. Overall, the results suggest a mutually beneficial relationship between activist hedge funds and other institutional investors. Second, in a coauthored paper with Drs. Seungijn Han and Jiaping Qiu, I provide the first comprehensive analysis on how CEOs’ wage and perks are jointly determined in a competitive CEO market. The underlying theory shows that in equilibrium, firm size, wage, perks and talent are all positively related. Perks are more sensitive than wage to changes in firm size. The more perks enhance the CEO’s productivity, the faster perks increase in firm size. Closed form solutions allow the recovery of the cost function of providing perks. I examine the determinants of CEO perquisite compensation using hand-collected information for S&P 500 companies and find consistent empirical evidence. Third, I examine the impact of public scrutiny on CEO compensation using the unique opportunity provided by the 2008 financial crisis, government support, and legislated compensation restrictions. I introduce novel data on executive perks at S&P 500 firms from 2006 to 2012. Overall, my results are consistent with increased public scrutiny having lasting impact on perks and temporary impact on wage, and with legislated compensation restrictions having temporary impact on wage. Changes in specific perks items provide evidence on which perks firms perceive as excessive and which provide common value. / Thesis / Doctor of Philosophy (PhD)

Executive compensation and its potential importance in aligning shareholder and management interests has been an extensively researched area within corporate finance. We study executive compensation while addressing several unresolved issues in the literature. In essay one, we examine CEO compensation following spin-offs. We find that CEOs are rewarded for undertaking a spin-off. Change in compensation for CEOs of spin-off firms following spin-offs is significantly higher than that for matching firms. We also find that the increase in compensation following spin-off is negatively associated with the change in firm size following the spin-off. Unlike mergers and acquisitions through which increases in executive compensation seem to be more related to size than performance, we show that CEO compensation increases following spin-offs even though spin-offs reduce firm size. In the second essay, we study changes in CEO salaries and their relation to firm performance. We document that changes in CEO salaries, which are a more permanent form of compensation change, are related to long term measures of performance. We find that CEO salaries change much more in relation to long term stock returns than short term stock returns. We also study the asymmetry in the relation between salary changes and firm performance. We find that while short term negative returns are related to changes in CEO salaries; only long term positive returns are significantly associated with CEO salary changes. This asymmetric relation is also present between total CEO compensation changes and stock returns. In essay three, we examine managerial decision horizons for target and acquirer firms in mergers and acquisitions. We find that acquirer CEOs have longer decision horizons than target firm CEOs in stock financed mergers. Acquirer CEOs in cash financed mergers and acquisitions also have longer decision horizons than target CEOs. Acquirer CEOs in both stock and cash financed mergers have significantly higher proportions of equity based compensation and significantly lower proportions of cash based compensation than target CEOs. In logistic regressions, measures of decision horizons for target and acquirer CEOs are not significantly related to the odds of stock financing in mergers and acquisitions. Our results do not offer strong support to the implications from the Shleifer and Vishny theory on the rationale for stock financed acquisitions.

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