Three Essays on Executive Compensation - KOPS - Universität ...

Profit Sharing with Executives
ments rather than equity ownership. The authors also find that although the empirical
evidence on the link between profit sharing and productivity is mixed, there
is more support for a positive impact of profit sharing on productivity.
Fourth, our study is related to the literature on managerial power and entrenchment,
because we analyze whether the top management’s cash-flow share is related
to managerial power. There is some discussion whether a more powerful management
or a powerful CEO 10 is good or bad for shareholders. Larcker and Tayan (2012)
summarize some of the arguments. Shareholders may benefit from powerful CEOs
because there is greater upward potential for firm performance. On the other hand,
powerful CEOs receive higher compensation and may cause higher turnover in senior
management. Morse et al. (2011) find that compensation of powerful CEOs 11 is
generally higher, and sensitive to either stock returns or returns on assets, whichever
measure is performing better in a given period. They find a negative effect of CEO
power on firm value and operating firm performance.
Bebchuk et al. (2011) measure CEO power by the ”CEO Pay Slice” (CPS),
defined as the fraction of top management compensation captured by the CEO. They
find evidence that higher CPS is associated with lower firm value and inferior firm
performance 12 . The authors conclude that a high CPS indicates agency problems
and managerial rent extraction, which has a negative impact on firm performance.
Finally, Bebchuk et al. (2009) measure managerial entrenchment with an index (”Eindex”)
based on six equally weighted corporate governance provisions which provide
the top management with protection from being removed, or the consequences of
removal, and thus limit the power of shareholders. These include staggered boards,
limits to shareholder bylaw amendments, supermajority requirements for mergers
and charter amendments, poison bills, and golden parachutes 13 . They find that
higher index levels (more pronounced managerial entrenchment) are associated with
lower firm value and negative abnormal returns.
10 CEO power is often used as a proxy for management power.
11 Defined as CEOs who are also board chairman, who are controlled by boards with few outside
directors, and or boards with a higher fraction of board members appointed during the CEO’s
time in office.
12 Specifically, they find that CPS is associated with lower firm value, lower accounting profitability,
lower stock returns around acquisition announcements, lower performance sensitivity of
CEO turnover and a higher likelihood of lucky managerial option grants at the lowest price of the
month.
13 We discuss the E-index in more detail in section 3.5.4.
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