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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.

Thesis (doctoral)--Université de Genève.

Thesis (Ph. D.)--University of Texas at Austin, 2004. / Supervisor: Kenneth A. Lawson. Vita. Includes bibliographical references.

Thesis (M.B.A.)--University of Hong Kong, 1997. / Includes bibliographical references (leaf 71-74).

Thesis (M.Soc.Sc.)--University of Hong Kong, 1981. / Also available in print.

This dissertation consists of three essays on director compensation, CEO compensation, executive dismissal, and Delaware incorporation. Delaware incorporation is popular among publicly traded firms. However, the question of whether Delaware incorporation favors shareholders is an on-going debate. In the first essay, if Delaware incorporation indeed favors shareholders, it is expected that directors in Delaware firms are more likely to be encouraged to perform monitoring roles than those in non-Delaware firms. By using a sample of 620 Delaware firms and 437 non-Delaware firms from 2002 to 2005 in ExecuComp, we first find that Delaware firms pay their directors more compensation than non-Delaware firms. Second, Delaware firms tend to hold more meetings per year than non-Delaware firms. Finally, pay-performance sensitivities of cash compensation, equity compensation, and total compensation to shareholder wealth in Delaware firms are greater than those in non-Delaware firm. Therefore, Delaware incorporation appears to encourage effective board monitoring. This essay is the first attempt to examine director compensation by considering the role of state of incorporation. The findings support the view of "race to the top" (Winter, 1977) on Delaware incorporation. The second essay examines the impact of Delaware incorporation on how effectively directors monitor CEOs and protect the interests of shareholders. If directors do effectively monitor CEOs, the excess CEO compensation is expected to be positively related to firm performance. Following the method described in Brick et al. (2006), we find evidence that director excess compensation is significantly and positively related to CEO compensation in both Delaware and non-Delaware firms. However, unlike excess CEO compensation in Delaware firms, excess CEO compensation in non-Delaware firms is negatively associated with firm performance. Therefore, director compensation in non-Delaware firms may not be a more effective incentive for these directors to monitor CEOs than that in Delaware firms. The dismissal decision that a firm makes may be affected by state corporate law. The third essay examines the impact of Delaware incorporation on a firm's choice of top management dismissal decisions. If Delaware incorporation indeed favors shareholders, we expect Delaware firms are more likely to dismiss their management members than non-Delaware firms when firms experience poor performance. We use the classification of top management dismissals defined in Boeker (1992). Our sample includes 388 firms that dismiss neither CEOs nor any lower-level executives (Type 1), 55 firms that dismiss CEOs but let lower-level executives stay (Type 2), 134 firms that dismiss lower-level executives but let CEOs stay (Type 3), and 59 firms that dismiss both CEOs and lower-level executives (Type 4) from 1993 to 2005. First, we find that a Delaware firm is more likely to dismiss at least one executive, either its CEO or a lower-level executive, than to dismiss neither the CEO nor any lower-level executive in a poorly performing year. However, this result only holds if we compare Type 1 firms with Type 3 firms. Second, Delaware firms are not more likely to dismiss their CEOs than non-Delaware firms. The results suggest that Delaware firms do not act significantly differently from non-Delaware firms on the choice of top management dismissal decisions when the firms experience poor performance. Therefore, Delaware incorporation alone may not be an effective external corporate governance mechanism to discipline poorly performing executives.