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Managerial Power and Rent Extraction in the Design of Executive Compensation Author(s): Lucian Arye Bebchuk, Jesse M. Fried and David I. Walker Source: The University of Chicago Law Review, Vol. 69, No. 3 (Summer, 2002), pp. 751-846 Published by: The University of Chicago Law Review

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ManagerialPowerand RentExtraction
in theDesign
ofExecutiveCompensation
LucianAryeBebchukt
JesseM. Friedtt
David I. Walkerttt
ThisArticledevelopsan accountof therole and significanceof managerialpower and rent extractionin executivecompensation.Undertheoptimalcontracting approach to executivecompensation,whichhas dominatedacademic researchon thesubject,pay arrangements are set by a

board of directorsthataims to maximizeshareholdervalue.In contrast, themanagerialpowerapproach suggeststhatboards do not operateat arm'slengthin devisingexecutivecompensationarrangements; rather,executiveshave power to influencetheirown pay,and theyuse thatpower to extractrents.Furthermore,

thedesireto camouflagerentextraction
mightlead to theuse of inefficientpay arrangements
thatprovidesuboptimalincentives
and thereby
hurtshareholdervalue.The
authorsshow thattheprocessesthatproduce compensationarrangements, and thevariousmarket
forcesand constraints
thatact on theseprocesses,leave managerswithconsiderablepower to shape theirownpay arrangements.
Examiningthelargebody of empiricalworkon executivecompensation,theauthorsshow thatmanagerialpower and thedesireto camouflagerentscan explainsignificantfeaturesof the executivecompensationlandscape,includingones thathave long been viewedas puzzling or problematicfromtheoptimalcontracting

perspective.The authorsconclude
thatthe role managerialpower plays in the designof executivecompensationis significant and
should be takenintoaccount in any examinationof executivepay arrangements or of corporate
governancegenerally.

t WilliamJ.FriedmanandAliciaTownsendFriedmanProfessor
ofLaw,Economics,
and
Finance,
HarvardLaw School;Research
NationalBureauofEconomicResearch.
Associate,
ofLaw,BoaltHall SchoolofLaw,University
tt ActingProfessor
ofCalifornia,
Berkeley.
ttt Associate,Ropes & Gray,Boston,Massachusetts;
JohnM. Olin ResearchFellowin
Law,Economic-,
andBusiness,
HarvardLaw School,1999-2000.
A substantially
different
versionofthisArticlewascirculated
earlierunderthetitle"ExecutiveCompensation
in America:OptimalContracting
or Extraction
of Rents?"We havebenefitedfromthevaluablesuggestions
ofvariousindividuals,
including
Franklin
Ballotti,
Lisa Bernstein,VictorBrudney,
BrianCheffins,
SteveChoi,Mel Eisenberg,
CharlesElson,AllenFerrell,
Jeff
Gordon,AssafHamdani,SharonHannes,HenryHansmann,
MarcelKahan,LouisKaplow,
ReinierKraakman,
MichaelLevine,Saul Levmore,
KevinMurphy,
RichardPainter,
MarkRoe,
David Schizer,
SteveShavell,EricTalley,RandallThomas,DetlevVagts,MichaelWachter, Ivo
Welch,DavidYermackandparticipants
in twoHarvardseminars,
theAmerican
Association
of
Law SchoolsBusinessLaw Panelon ExecutiveCompensation,
and the University
of Chicago
Law ReviewSymposium
on Management
and Controlof the ModernBusinessCorporation.
NicholasHecker,Matthew
Heyn,RyanKantor,
JasonKnott,Matthew
and Selena
McDermott,
Medlenprovided
excellent
research
assistance.
Forfinancial
support,
we wishto thanktheJohn
M. OlinCenterforLaw,Economics,
andBusinessat HarvardLaw School,theBerkeley
Committeeon Research,
andtheBoaltHall Fund.
751

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TABLEOF CONTENTS

Introduction
..............................................
I.

753

TheOptimalContracting
...........761
ApproachandItsLimitations
A. TheOptimalContracting
761
....................................
Approach
B.

The Limitationsofthe OptimalContracting
Approach....764

II. TheManagerial
PowerApproach
783
..............................................
A.
B.
C.
D.
E.
F

PowerandtheExtraction
ofRents..................
784
Managerial
Costs
and
Constraints
786
.........................................
"Outrage"
TheCritical
Role of"Camouflage"
...................................... 789
Consultants
andCamouflage
789
......................
Compensation
TheDesignofStockOptionPlans:TheDevilIs in
theDetails..............................................
791
A Noteon Conforming
toNorms
793
.........................................

Power
III. EvidenceBetterExplainedbytheManagerial
..............................................
Approach

795

A.
B.
C.
D.
E.
F
G.

Executives
forGeneralMarketRises..............
796
Rewarding
Near-Uniform
Use ofAt-the-Money
817
....................
Options
ofOptionExercisePrices....................................
821
Resetting
BroadFreedomtoUnwindIncentives
Executives'
............824
ReloadOptions
831
..............................................
Gratuitous
834
..........................
Acquisition-Related
Payments
Differences
betweenExecutives
withMoreand
Less Power
837
..............................................
H. Differences
betweenU.S.andNon-U.S.Companies
..........842

Conclusion
..............................................

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Powerand Executive
Compensation

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INTRODUCTION

a greatdeal ofattenhas longattracted
Executivecompensation
andthepublicat large.Durthemedia,Congress,
tionfromacademics,
ing the extendedbull marketof the 1990s,stockoptionprograms
gainsforsenior
adoptedbypubliccompaniesyieldedunprecedented
These gainswereaccompaniedby a parallelrisein acaexecutives.1 demicworkon thesubject.2
Indeed,it appearsthattherateofgrowth
rateofexecutive
insuchacademicworkhasoutpacedeventhegrowth
compensation.

3

ThisArticlequestionsthe dominantapproachin the academic
It also seeksto putforward
a sysworkon executivecompensation.
accountofan alternative
approachto the
tematicand comprehensive
study of executive compensation-the"managerialpower appowerin shapingexproach"-that focuseson theroleofmanagerial influence
of manageThe substantial
practices.
ecutivecompensation
bothby
we argue,is suggested
rialpoweron executivecompensation,
a realisticanalysisoftheprocessesthatproduceexecutivepayand by of thesubstantial
an examination
bodyof empiricalevidenceon the
subject.
The dominantapproachto thestudyof executivecompensation
amongacademicshas forsometimebeen whatwe call "theoptimal
Underthisapproach,executivecompensation
approach."4
contracting
tradedcompaniesareviewedas designedto
practices
inlarge,publicly
minimizethe agencycoststhatexistbetweenseniorexecutives(the
1
of S&P 500 CEOs increasedbyapproximately
The mediancompensation
150percent
from1992to 1998,andoption-based
compensation
providedthelargestshareofthegains.See
Tod PerryandMarcZenner,CEO Compensation
in the1990s:Shareholder
Alignment
or ShareholderExpropriation?,
35WakeForestL Rev123,145(2000).
2
Recentsurveys
ofthisvoluminous
literature
includePerryandZenner,35 WakeForest
L Rev 123(citedin note1); JohnM. AbowdandDavidS. Kaplan,Executive Compensation:
Six
13 JEcon Perspectives
145(1999);andKevinJ.Murphy,
Questions
thatNeedAnswering,
ExecutiveCompensation,
in OrleyAshenfelter
and David Card,eds,Handbookof LaborEconomics
L.
2485(Elsevier1999).A noteworthy
survey
froman earliererais MichaelC. Jensen
andJerold
Zimmerman,
Management
Compensation
and theManagerial
LaborMarket,
7 JAcct& Econ 3
(1985).
3 See Murphy,
at 2487(citedinnote2). He demonstrates
Executive
Compensation
graphicallythattheincreasein academicpaperson thesubjectof CEO payoutpacedtheincreasein totalCEO payduring
thelate1980sandearly1990s.
4
whohavedonemostofthescholarThisis theleadingviewamongfinancial economists,
shipinthisarea.Indeed,as we discusslaterintheArticle,
thereis a largebodyofworkinfinancialeconomics
within
an optimalcontracting
thatseeksto comeup withan explanation,
frameforalmosteveryfeature
oftheexecutive
Theoptimal
work,
compensation
landscape.
contracting
viewis also takenbyan important
lineoflegalscholarship.
See,forexample,
FrankH. Easterand Investors'
brook,Managers'Discretion
Welfare:
Theories
and Evidence,
9 Del JCorpL 540
(1984);Daniel R. Fischel,The Corporate
Governance
Movement,
35 VandL Rev 1259(1982);
A Critique
NicholasWolfson,
ofCorporate
Law,34 U MiamiL Rev 959(1980);RobertThomas,
Executive
Is Corporate
in M. BruceJohnson,
Compensation
Excessive?,
ed, TheAttackon Cor276(McGrawHill1978).
porateAmerica

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agents)andshareholders
(theprincipals).
Theboardis viewedas seekingto maximize
shareholder
value,withthecompensation
schemebeingdesignedto servethisobjective.
Financialeconomists,
boththeoristsand empiricists,
have largelyworkedwithinthismodelin atto explainthevariousfeaturesof executivecompensation tempting
arrangements
as wellas thecross-sectional
variation
in compensation
practices
amongfirms.
We seek to contrastthisoptimalcontracting
approachto the
withan approachthatwe label"the
studyofexecutive
compensation
managerial
powerapproach."
Analysisfromthisperspective
focuses
on the abilityof executivesto influencetheirown compensation schemes.Accordingto the consideredapproach,compensation
arrangements
approvedbyboardsoftendeviatefromoptimalcontractare capturedor subjectto influence ingbecausedirectors
by manto management,
or simplyineffectual
in overagement,
sympathetic
As a resultofsuchdeviations
fromoptimalconseeingcompensation.
executives
can receivepayin excessof thelevelthatwould
tracting,
be optimalforshareholders;
thisexcesspay constitutes
rents.5
More
to camouflage
or facilitate
theextraction
ofrents,
importantly,
manathat
gerialpowercan lead to the use of inefficient
pay structures
weakenor distortincentives
and thatthus,in turn,further
reduce
value.Althoughrecognition
of the role of managerial
shareholder
ofcompensapowerlies at theheartof muchof thepubliccriticism
littleattentionlevelsand practices,
thisrolehas attracted
relatively
intheacademicliterature.
tionandanalysis
5
Executivescan extractrentsin ways otherthan throughtheirexecutivecompensation arrangements.
See, forexample,Lucian A. Bebchukand ChristineJolls,ManagerialValueDiversion and ShareholderWealth,15 J L, Econ, & Org 487,487-90 (1999) (analyzingthecostsof permittingmanagersto extractvalue otherthanthroughtheirformalcompensationarrangements); JesseM. Fried,ReducingtheProfitability

of CorporateInsiderTradingthroughPretradingDisclosure,71 S Cal L Rev 303, 348-64 (1998) (explaininghow corporateinsiderscontinueto be able underexistingrulesto make profitsfromtradingon insideinformation); JesseM. Fried,InsiderSignalingand InsiderTradingwithRepurchaseTenderOffers, 67 U Chi L Rev 421,453-70

(2000) (showingthatmanagersare likelyto use repurchasetenderoffersto engage in insider trading).It would be possible,of course,to definecompensationschemesas includingbenefits thatmanagersobtainin anywayas a resultof theirposition,includingbenefitsfrominsidertradand so forth.In thisArticle,however,our focus is ing,the takingof corporateopportunities,

solelyon the benefitsthatexecutivesget and the rentstheyextractfromarrangements thatare
definedand ordinarily
viewedas compensation.
formally
6
Many practitioners,
investors,shareholderactivists,and media commentators
have exin thiswork.See, for
pressedviewsthatare close to theviewwe putforwardmoresystematically example,GraefS. Crystal,In Searchof Excess (Norton1991); ShawnTully,RaisingtheBar, Fortune272 (June8, 1998) (reportingsome of WarrenBuffett'sviewson executivecompensation); RobertA.G. Monks and Nell Minow,CorporateGovemance,221-25 (2d ed BlackwellBusiness 2001).

Althoughacademicscommonlyhold whatwe have called the"optimalcontracting" view,see
note 4, thereis some academic workthatis close in spiritto ours.A numberof legal scholars have been skepticalabout claims that executivecompensationarrangementsare designedto

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Powerand Executive
Compensation

755

Althoughthe managerialpowerapproachis conceptually
quite
fromthe optimalcontracting
different
approach,the formeris not
proposedas a completereplacement
forthelatter.One can takethe
viewthatcompensation
arrangements
are shapedbothbymanagerial
powerandbywhatwouldbe optimal.
Themanagerial
powerapproach
merelyimpliesthatcompensation
practicescannotbe adequatelyexplained by optimalcontracting
alone. Rather,practicesmightbe
adoptedthatdeviatesignificantly
fromthosesuggestedby optimal
Under the managerialpower approach,compensation
contracting.
practicescan be fullyunderstoodonlywithcarefulattention
to the
roleofmanagerial
power.
Our analysisindicatesthatmanagerial
powerand rentextraction
rolein executivecompensation
are indeedlikelyto playa significant
in theUnitedStates.At thelevelof theory,
we arguethata realistic
analysisof the compensation-setting
processindicatesthatits outcomesare likelyto be muchinfluenced bymanagerial
powerand by
in extracting
managers'interest
rents.As an empirical
matter,
we arevidenceon executivecompensation
gue thattheextensiveempirical
is consistent
withthepredictions
of themanagerialpowerapproach.
of
features
Indeed,thisapproachcan betterexplaincertainsignificant
ones thathavebeen
theexecutivecompensation
landscape,including
longregardedas puzzling.
Part I beginsby providing
an accountof the standardoptimal
contracting
approach,and it thenprovidesa detailedanalysisof the
ofthisapproach.Optimalcompensation
limitations
and shortcomings
arm'slengthbargaining
between
contracts
couldresultfromeffective
frommarketconstraints
the board and the executives,
thatinduce
even in the absenceof arm'slength
playersto adoptsuchcontracts
or fromshareholders'
bargaining,
abilityto directly
shape executive
Our analysisindicatesthatnoneofthese
compensation
arrangements.
effecforcescan be expectedto constrainexecutivecompensation
withtheboardis in factfarfromarm'slength.
Martively.
Bargaining
maximizeshareholdervalue. See, forexample,Linda J.Barris,The OvercompensationProblem: A CollectiveApproach to ControllingExecutivePay,68 Ind L J 59 (1992); Mark J.Loewenstein, Reflectionson ExecutiveCompensationand a Modest Proposal for (Further)Reform,50 SMU L Rev 201 (1996); Detlev Vagts,Challengesto ExecutiveCompensation:For the Marketsor the Courts?,8 J Corp L 231 (1983); Carl T. Bogus,ExcessiveExecutiveCompensationand theFailure of Corporate Democracy, 41 Buff L Rev 1 (1993); Charles M. Yablon, Bonus Questions75 Notre Dame L Rev 271 (1999). ExecutiveCompensationin the Era of Pay for Performance,

And several empiricalpapers by financialeconomistshave recentlysuggestedthatsome of their findingsare consistentwith,or indicativeof,"appropriation"or "skimming"by executives.Part III discussessuch studiesby Bertrandand Mullainathan;Benz, Kucher,and Stutzer;Blanchard, Lopez-de-Silanes,and Shleifer;and Yermack.No work,however,has thusfar attemptedto put forwarda fullaccountof a managerialpower approach-includingboth a theoreticalframework forsuch an approach and an examinationusingthisapproach of the large body of empiricalevidence on executivecompensation-as we aim to do in thisArticle.

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to eliminate
subketforcesare notsufficiently
strongandfine-tuned
And shareholders
have
fromoptimalcontracting.
stantialdeviations
suchdeviations.
littlepractical
toprevent
ability
Afteranalyzing
theshortcomings
of theoptimalcontracting
approach,we turnin PartII to providing
an accountofthemanagerial
powerapproach.The veryreasonsforquestioning
optimalcontracting'sability
to explainadequately
compensation
practices
alsosuggest
influence
over theirown pay.
thatexecutiveswillhave substantial
These reasonsalso suggestthatthe greatermanagers'power,the
greater
theirability
toinfluence
payandtoextract
rents.
blockofthemanagerial
One important
building
powerapproach
is thatof"outrage"
costsandconstraints.
Thatexecutives
canexertinfluenceon theirpaydoes notimplythatthereare no constraints on
theirabilityto do so. Although
theneedforboardapprovaland the
presenceofmarketforcescannotbe expectedto producecompensationarrangements withoptimalcontracting,
consistent
theycan and
do providesomeconstraints.
The tightness
of theseconcommonly
straints
depends,in part,on theoutragethata particular
compensationarrangement
is expectedto generate.
Outragecanbe costlyto diandmanagers
rectors
bycausingembarrassment
orreputational
harm,
as wellas byreducing
thewillingness
of shareholders
to supportinin controlcontests.
cumbents
The moreoutragea compensation
arrangement
is expectedto generate,
themorereluctant
will
directors
and themorehesitant
be to approvethearrangement,
will
managers
be toproposeitinthefirst
instance.
ara compensation
Thus,whether
thatis favorableto executives
butsuboptimal
forsharerangement
holdersis adoptedwilldependon howthearrangement
is perceived
on howmuchoutrage(ifany)itis exbyoutsiders
and,in particular,
pectedtoproduce.
of outragecostsexplainsthe imporThe potentialsignificance
tanceof"camouflage,"
yetanotherbuildingblockof themanagerial
fromoutsiders'recognipowerapproach.Because outrageresulting
tionof thepresenceof rentextraction
providesa possiblecheckon
to obmanagers'powerto extractrent,managershave an incentive
to camouflage
-theirextracscureandlegitimize
-or, moregenerally,
tionof rents.Indeed,theextensive
use of compensation
consultants,
whichmight
be viewedas an attempt
to optimize
incentives
underthe
itself
be
ofjustifycan
seen
as
a
means
optimalcontracting
approach,
This
ingand legitimizing
pay underthemanagerial
powerapproach.
willturnout to be quiteusefulin explaining
conceptof camouflage
and puzzlesprovidedbytheexecutive
manyofthepatterns
compensationlandscape.
Thedesiretocamouflage
leadtotheadoptionofinefficient
might
structures
arcompensation
that,comparedwithoptimalcontracting

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PowerandExecutive
Compensation
Managerial

757

or even supplyperrangements,
failto providedesirableincentives,
In our view,the reductionin shareholdervalue
verse incentives.
ratherthantheexcessrentcapturedby
causedbytheseinefficiencies,
of
mightwellbe thebiggestcostarisingfromtheinfluence
managers,
in
Thus,improvement
practices.
managerialpoweron compensation
frombetto shareholders
benefits
thisarea mayprovideconsiderable
andperformance.
incentives
termanagerial
numberofcompenand discussesa significant
PartIII identifies
thatcan be explainedbythemanagerial
sationpracticesand patterns
powerapproachand thatsuggestthatmanagerialpowerinfluences
andfeatures
thatwe analyzeinthisPartare
pay.Someofthepractices
working
ones thathave longbeenregardedas puzzlesbyresearchers
within
theoptimalcontracting
approach.
out
failureto use optionschemesthatfilter
We first
turnto firms'
and generalmarket
stockpricerisesthatare due largelyto industry
Suchfiltrendsand thusare unrelatedto themanagers'performance. opteringcould be done by usingwhatwe call "reduced-windfall" tions-options designedto reduceexecutives'abilityto make gains Suchoptionscouldbe deto theirmanagerial

unrelated
performance.
or someotherfeaturethathas a
benchmarking,
signedusingindexing,
similareffect.
is based on changesin theabsolute
Whenoptioncompensation
shareprice,evenpoorlyperforming
managersmightmakesignificant
spent
The substantial
dollarsthatare currently
compensation
profits.
on rewarding
managersforgeneralmarketrisescouldbe eitherused
to enhanceincentives
(by,forexample,givingmanagersa largernumber of reduced-windfall options)or saved.As we show,the almost
optionsis rather
completeabsenceof anyformof reduced-windfall
difficult
to explainfroman optimalcontracting
approach.We explore
a numberof alternative
waysto filterout generalmarketand sector
it is thatnotusinganyformoffilterrises,and we showhowunlikely optimal.
ingis generally
ofgeneralmarketor industry
The absenceofanyfiltering
effects
is notpuzzling,
underthemanagerialpowerapproach.Unhowever,
derthisapproach,compensation
schemesare designedwithan eyeto
executiveswhilereducingoutragecostsby stayingwithin
benefiting
therangeof legitimacy
and acceptability.
Giventhattheuse of conventionaloptionsis well establishedand generallyconsidereda leis or benchmarking
formofcompensation,
and thatindexing
gitimate
formanagers,
thelack of anyreal
likelyto be costlyor inconvenient
movementtowardreduced-windfall
optionsis consistentwiththe
managerial
powerapproach.
PartIII nextconsidersthe nearlyuniform
use of at-the-money
designedoptionschemewouldseek to provide
options.An optimally

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incentives
to
cost-effective
managerswiththe strongest
risk-averse
decisions.
The optimalexerand makevalue-maximizing
exerteffort
offaccisepriceundersucha schemeshoulddependon a multitude
to executive,
fromcompany
torsthatarelikelyto varyfromexecutive
might
includethedeandfromtimeto time.Suchfactors
to company,
by
riskaversion(whichin turnmightbe affected
greeofmanagerial
themanager'sage and wealth),theprojectchoicesavailableto the thevolatility
ofthecompany's
stock,theexpectedrateofincompany,
contract,
amongotherthings.
flation,
andthelengthoftheexecutive's
Thereis no reasonto expectthatthe same exercisepriceformula
at all firms
in all industries
at all
wouldbe optimalforall executives
issuedat-the-money
The factthatoptionsare almostuniformly
times.
perspecto explainfroman optimalcontracting
is thusratherdifficult
tive.
howoptionsis not puzzling,
The uniform
use of at-the-money
powerapproach.Given
ever,whenexaminedunderthemanagerial
fromlowerexerciseprices,
therewillbe a dethatexecutives
benefit
generatsireto pushexercisepricesas fardownas is possiblewithout ofplans
Thereis thuslittlereasonfordesigners
ingtoomuchoutrage.
to
raise
the
exercise
is,
options-that
to award out-of-the-money
pricesabove the marketpriceat the timethe optionsare issuedOn is availableforat-the-money
options.
giventhatsomejustification
as a windfall
be regarded
theotherhand,in-the-money
optionsmight
thegrantofin-theand thereby
generateoutragecosts.Furthermore,
andthis
a chargeto accounting
earnings,
moneyoptionswouldtrigger
one of theexcusesfornotusingreduced-windfall
mightundermine
options-thattheuseofsuchoptionswouldgiveriseto an accounting or costly
thusbe difficult
optionsmight
charge.Becausein-the-money
to obtain,and at-the-money
formanagers
optionsare theonesmost
a
favorableto managerswithintheremaining
rangeof possibilities,
withthe
use of at-the-money
uniform
optionsis quite consistent
powerapproach.
managerial
fortheoptimalcontracting
Another
approach-and one
problem
thathas been littlenoticedby researchers
despiteits importancefreedom
to undothefinancial
incenconcerns
widespread
managers'
Under
arrangements
tivesprovidedto themby theircompensation
with
whenvalueis spenton providing
managers
optimalcontracting,
on
limits
it mightwell be desirableto place substantial
incentives,
to unwindthem.But existing
practicefailsto do
managers'freedom
so.

vestonlyaftera specified
Stockoptionsgenerally
period,which
walk
out
with
the
shares
cannot
that
the
executive
underlying
ensures
firstserving
thecompanyforthespecified
without
period.Although
to theawardedoptionsoncetheirvestbecomesentitled
an executive

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Compensation
Powerand Executive
Managerial

759

couldprecludetheexcontract
ingperiodis over,thecompensation
ecutivefrom"cashingout"thevestedoptions-thatis,fromexercising the optionsand thensellingthe acquiredshares.Such a limitation foran additionalperiodandthusavoidthe
incentives
wouldmaintain
need to grantnewoptionsto replacetheonesthathavebeen cashed
wouldgenerout.Thereis no reasonto expectthatoptimalcontracts allymakethevestingdate and the cash-outdate thesame.Yet,the
twodatesare almostalwaysthesame.
an
An optimalcontractalso mightprohibitmanagersreceiving
effects
the
incentive
not
eliminating)
(if
optiongrantfromweakening
oftheoptiongrantbysellingan equivalentnumberofsharestheyaland executives readyown.Standardpracticefailsto do so,however,
newoptionsoftenrespondbyheavilysellingalready-owned
receiving
fromhedgexecutives
also do notprohibit
generally
shares.Contracts
oftenhedgetheir
and executives
ingvestedor evenunvestedoptions,
exposureto thefirmwhendisposalis eithernotpossibleor too costly froma taxperspective.
even if it wereoptimalin some cases to grantan
Furthermore,
in order
executivebroadfreedomto cashout and unwindincentives
needs,therewould
or diversification
liquidity
to servetheexecutive's
controloverthetimbe littlereasonto givetheexecutiveunrestricted needshardlycall for
ingof stocksales.Liquidityand diversification
theexecutiveto cash out positionson anygivenday that
permitting
the executivechooses.Althoughsome firmsuse "tradingwindows," manyfirmsplace no limitson thefreedomof executivesto timethe The evidenceindicashingout or hedgingof theirequitypositions. in
coupledwith
such
timing,
to
freedom
engage
catesthatexecutives'
enables executivesto make substantialtrading
insideinformation,
(at theexpenseofpublicshareholders).
profits
ofstockselling,
on theamountandtiming
The lackofrestrictions
is
perspective,
to explainfroman optimalcontracting
whiledifficult
easilyexplainedunderthe managerialpowerapproach.Underthis
by
plansis partlyinfluenced
approach,the designof compensation
benefits
on
such
unwinding
restrictions
managerialpower.Avoiding
managersand does so in a waythatthusfarhas been largelyunder theradarscreen.
and rePartIII also examinesthephenomenaofoptionrepricing
loadable options.Repricingrefersto the loweringof the options' strikepricewhenthestockpricefallsbelowtheoriginalexerciseprice. thattheexercisepricewillbe loweredex postifthe
The possibility
To be sure,suchdownstockpricedeclinesdilutesex anteincentives. inand providing
be usefulforretaining
wardrepricing
can,in theory,
centivesto good managerswhenthestockpricefallsforreasonsbeyondmanagers'control.However,indexingwouldalso solve thein-

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centiveproblemthatariseswhenthemarketpricefallsmuchbelow
or sectordetheexercisepriceoftheoptionsdueto a generalmarket on
on theupsideand theuse ofrepricing
cline.The lackofindexing
the downsideensuresthatmanagersreceiveboththe fullvalue of
orsectorrisesandprotecthatareduetomarket
stockpriceincreases
andsectordeclineson thedownside.
tionagainstmarket
who
Reloadableoptionplansareplansunderwhichan executive
exercisesoptionspaystheexercisepricebyhandingoverfirmshares
thathe alreadyowns,and receivesa newoptionforeach sharetendate as theold optionsbeingexerderedwiththesame expiration allow
to profit
fromsharepricevolatility
These
executives
cised.
plans
shareperformance
is flat.Theonlypossiblejustievenifthelong-term
thatcanbe givenforreloadableoptionsis that-givenexecufication mightbe desirableto havea
tives'freedom
to unwindincentives-it
could
Butthisproblem
thoseincentives.
mechanism
thatwillreplenish
addressedbyplacing
havebeen,ofcourse,moreeasilyandeffectively
Thepuzzling
comincentives.
freedom
to unwind
limitson executives'
offreedom
tounwind
incentives
andreloading
optionsaimed
bination
to correctit,we argue,can bestbe explainedunderthemanagerial powerapproach.
Anothersignificant
practiceexaminedbyPartIII is thatof"graCEOs of acquiredfirmsin tuitous"acquisition-related
payments.
fromtheirfirmor the acquiringfirm
manycases receivepayments
in thattheyare notrequiredunderthetermsof
thatare"gratuitous"
if
contract
thegoldenparachute,
(including
theCEO's compensation
inincluding
forms,
takea numberofdifferent
any).Thesepayments
payoutandseparatecash
creasesin thecontractual
goldenparachute
aremuchmoredifficult
we
show,
payments,
Suchgratuitous
payments.
approachthanunderthe
to explainunderthe optimalcontracting
powerapproach.
managerial
we showin PartIII thatthemanagerial
andimportantly,
Finally,
as well as crosspowerapproachcan help explaincross-company
in executive
differences
powerapproach
pay.The managerial
country
in whichtheyhave
thatmanagers
willbe paidmorein firms
predicts
we show,is confirmed
byemmorepower.Thisprediction,
relatively
on CEO compensaliterature
theempirical
piricalstudies.Surveying
wheretheCEO is
tionin theU.S.,we findthatpayis higherin firms
theboard,in firms
withantitakeover
morepowerful
vis-a-vis
provia
in
with
firms
from
hostile
that
incumbents
sions
takeovers,
protect
wherethereis no
andin firms
investor
smallerinstitutional
presence,
We also explainhowthemanagerial
power
largeoutsideshareholder.
in paybetweenU.S.and nonapproachcan shedlighton differences
U.S.companies.

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Compensation
Managerial

761

The conclusionthatmanagerial
playa
powerand rentextraction
has important
implications
rolein executivecompensation
significant
We
and practiceof corporate'
governance.
forthe study,regulation,
in subsequentwork.Here,
plan to explorefullytheseimplications
a sysstep:to putforward
however,
we focuson a priorandimportant
to
forthestudyof thissubjectand,furthermore,
tematicframework
powerand
showthattheevidencesupportsthe.viewthatmanagerial
compensation.
roleinexecutive
rentextraction
playan important
I. THE OPTIMAL CONTRACTING APPROACH AND ITS LIMITATIONS

Our analysisfocuseson publiccompaniesthatlacka controlling
powerand
shareholder.
Managersofthesecompanieshavesubstantial
ofthefirm's
butgenerally
ownonlya smallfraction
discretion
equity.7
of the shareholder-principals
are
and manager-agents
The interests
The
notperfectly
convergent,
andthusthereexistsan agencyproblem.
twoapproachesto thestudyof executivecompensation
thatwe disthatthereis an agencyproblem,
cussbothstartwiththerecognition
but theytake thatrecognition
in different
directions.
This Part disamongacademics:that
cussestheapproachthatis moreconventional
arrangements
can generallybest be underexecutivecompensation
stoodas instruments
thattheboarduses in theshareholders'
interest
to addresstheagencyproblem.
PartL.Adescribestheoptimalcontracting
approachto executive
In PartI.B,we discussthelimitations
andshortcomings
compensation.
ofthisapproach.An optimalprincipal-agent
contract
wouldgenerally
withtheexecutives
be chosenif(i) theboardwerebargaining
at arm's
by market
length;(ii) the directorsor executiveswere constrained
forcesfromdeviatingfromoptimalcompensation
or (iii)
contracts;
could use the courtsor anothermechanismto force
shareholders
contracts
thatmaximize
shareholder
managersto adoptcompensation
commonly
value.We arguein PartI.B thatnoneofthesepropositions
theoptimalconholds,and thusthereare reasonsto doubtwhether
tracting
approachcan fullyor evenlargelyexplaintheexecutivecompensationlandscape. A. The OptimalContracting
Approach
Thereis no contractthatwouldperfectly
of
alignthe interests
The optimalcontract
theone
is therefore
managersand shareholders.
costs,
thatminimizesagencycosts (thatis, the sum of contracting
in achievinga certainlevelof
monitoring
costs,othercostsincurred
7 In 1996,forexample,
CEOs ofS&P 500manufacturing
companies
ownedan averageof
fewerthan1 percentof theirfirms'
shares,
whilemedianownership
wasonly0.11percent.
See
at2490-93(citedinnote2).
Murphy,
Executive
Compensation

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compliance
withtheprincipal's
interest)
andthecostsoftheresidual
divergence.8
Underthe optimalcontracting
approach,thisis exactly
whatexecutive
compensation
packagesaredesignedto do.Theboard,
tomaximize
attempting
shareholder
wealth,
seeksto establish
optimal
incentives
forthe executives.
This approachis capturedin various
formal
modelsthatviewtheboardofdirectors
as selecting
an optimal
compensation
programforshareholders.
As we willdiscuss,a great
dealofempirical
workhasbeendonefromthisperspective.
The designerattempting
to optimizean executive
compensation
program
wouldbe concerned
with:(1) attracting
and retaining
high
qualityexecutives,
(2) providing
withincentives
to exert
executives
sufficient
effort
and to makedecisionsthatserveshareholders'
interoverallcosts.We willconsiderbriefly
ests,and (3) minimizing
these
ofan optimalcontract.
elements
1. Inducing
theexecutive
totakeandretaintheposition.
A successful
CEO of a largepubliccompanyundoubtedly
posofskillsand instincts.
The CEO mustmansessesa rarecombination
witha largenumberof employees,
age an organization
providethe
direction
forthefirm,
anddecidewhenor whether
thecomstrategic
or be acquired.Individuals
whopospanyshouldacquireotherfirms
attributes
andcompetition
sessthenecessary
mightbe scarce9
among
be intense.
forrising
Ofcourse,compenfirms,
particularly
stars,
might
sationis nottheonlyfactorin attracting
and retaining
talentat the
butitis an important
one.
verytopofthecorporate
pyramid,
To inducean executive
to takeandretaina position,
then,a firm
mustofferan overallpackageof benefits
thatmeetsor exceedsthe
executive's
cost.Call thisopportunity
costtheexecutive's
opportunity
value."An executive's
reservation
valueis inparta func"reservation
executionofherappetiteforrisk.A firmthatrequiresa risk-averse willhave to provide
tiveto acceptriskyelementsof compensation
moretotalcompensation
on an expectedvalue basis to offsetrisk8
A thoroughreviewof theoptimalcontracting
literatureis beyondthescope of thisArticle. Importantworkson the subjectincludeStephenA. Ross, The Economic Theoryof Agency: of InThe Principal'sProblem,63 Am Econ Rev 134 (1973); J.A.Mirrlees,The OptimalStructure centivesand Authoritywithinan Organization,7 Bell J Econ 105 (1976); Bengt Holmstrom, Moral Hazard and Observability,

10 Bell J Econ 74 (1979); StevenShavell,Risk Sharingand Incentivesin the Principaland AgentRelationship,10 Bell J Econ 55 (1979); Bengt Holmstrom, Moral Hazard in Teams,13 Bell J Econ 324 (1982); SanfordJ.Grossmanand OliverD. Hart,An Problem,51 Econometrica7 (1983); and Dilip Mookherjee,OpAnalysisof thePrincipal-Agent timalIncentiveSchemeswithManyAgents,51 Rev Econ Stud433 (1984). 9 See CharlesP Himmelbergand R.G. Hubbard,IncentivePay and theMarketfor CEO's: An Analysisof Pay-for-Performance

Sensitivity
at 20, workingpaper (1999), available online at
(visitedMay 4,2002) (arguingthatthereis not an unlimited

supplyofCEOs who are able to runlargecompanies).

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Managerial
Compensation

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worksfora
bearingcosts.For example,ifa CEO candidatecurrently
firmthatpayshera cash salaryof $500,000,anotherfirmwishingto hireherand payherin partwithoptionswillhaveto provideher-if
sheis risk-averse-compensation
withan expectedvaluegreaterthan
$500,000.
Undertheoptimalcontracting
approach,inducingtheexecutive
to takeandretaina positiononlyprovidesa lowerboundon compensation.A firmcannotpay less thantheexecutive'sreservation value,
butitmight
wishto paymoreinorderto providebetterincentives.
2. Incentives
to managewell.
Thereare twodimensions
to theexecutiveincentive
A
problem.
firmmustprovideincentives
thatinducetheexecutiveto expendeffortas well as incentives
thatmotivatethe executiveto make decisionsthatadvanceshareholders' interests.
As in anyagencyrelationship,
thereis theriskthattheagentwill
expendtoo littleeffort
on the principal'sbehalf.Thatis,executives
to workless thanis optimalforshareholders
mighthavean incentive
as a group.Thisdistortion
arisesbecauseexecutivesenjoyall of the
benefitsof theirleisuretime(or othernon-work
activities)butcaptureonlya fraction
ofthevaluetheirworkgenerates
forthe'firm.
The secondagencyproblemin mostpubliccompaniesis thatexecutivesmightmakedecisionsthatmaximize theirownutility
butthat
failto maximizeshareholder
value.Suchdecisionsmightincludethe
erectionoflavishofficebuildings
to housecorporate
staff
or otherexcessive perquisiteconsumption;
the selectionof low-riskbusiness
to blockvalue-adding
strategies;
attempts
takeoverattempts;
thefailure to reorganizeand reducethescope of operationswhendownsizingis called for;and the refusalto firean incompetent subordinate
becausehe is a closefriend.
The variety
ofcriticaldecisionsthatmay
be facedby a CEO is extremely
device
large,and thecompensation
thatproperly
in one case maybe lesseffective
alignsincentives
in another.Moreover,thenatureof thekeydecisionsin thecomingyears oftenwillbe unforeseeable,
thuscomplicating
further
the designof
theoptimalcompensation
plan.
3. Costs.
The executive'sreservation
value places a lowerboundon the
valueofa compensation
packageandthusitscostto thecompany.
But
a firmmaywishto pay executivesmuchmorethantheirreservation
value to create incentivesforbehaviorthatincreasesshareholder value.Underthe optimalcontracting
approach,shareholders
should
continueto givevalueto executives
untiltheincremental
costofdo-

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A
produced.
oftheincentives
benefit
theincremental
ingso outweighs
to maximizeshareholder
plan designerattempting
compensation
bothin termsof theirinstructures
valuewouldconsideralternative
No schemewouldbe
and theircoststo thecompany.
centivebenefits
schemecouldproducethesameor
chosen,ofcourse,ifan alternative
at a lowercosttothecompany.
betterincentives
oftheOptimalContracting
Approach
B. TheLimitations
There are three mechanismsthat mightproduceexecutive
(1) the
programsthatare optimalforshareholders:
compensation
the
at
arm's
selects
arrangement
compensation
length,
board,acting
theboardactsunder
shareholder
value;(2) although
thatmaximizes
are constrained
by market
of management,
executives
theinfluence
that best serves
arrangement
forcesto select the compensation
can use theirrightsunder
or (3) shareholders
shareholder
interests;
thatare not optimalfor
corporatelaw to blockpay arrangements
that
whichforcesexecutivesto adopt arrangements
shareholders,
in
turn
of
these
each
value.Belowwe analyze
shareholder
maximize
mechanismsand show that they are unlikelyto be sufficiently
closelyfollowthe
toensurethatcompensation
arrangements
powerful
itisworth
Beforeproceeding,
modelsuggested
byoptimalcontracting.
are uselessin
thatour viewis not thatthesemechanisms
stressing
As will be explained,these
executivecompensation.
constraining
do
theboardofdirectors
and market
forces,
particularly
mechanisms,
these
executive
on
However,
compensation.
imposesomeconstraints
mechanismsare generallynot strongenough to preventlarge
indirections
thatfavormanagers'
fromoptimalcontracting
deviations
interests.
modelofboards.
ofthearm'slength
1. Limitations
assumesexplicitly
orimplicitly
literature
The optimalcontracting
take
an
directors
adversarial
executives'
compensation,
that,insetting
It is acpositionvis-a-visthe executives.
(or at least independent)
dataandprothatmanagement
playsa roleinsupplying
knowledged
interests
shareholder
posals.However,theboardis viewedas serving
in an
withmanagement
in thisprocessand bargaining
exclusively
of corporategovernarm'slengthfashion.
Althoughsome students
theirfullforcehas
ofthisview,"'
thelimitations
ancehaverecognized
intheliterature
on executive
compennotbeengenerally
appreciated
sation.

10 See, forexample,VictorBrudney,The Independent
Director-HeavenlyCityor PotemkinVillage?,95 Harv L Rev 597 (1982).

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Managerial
Compensation

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In exploring
theselimitations
it willbe helpfulto beginwitha
of the processof settingexecutivepay.In a large
briefdescription
is responsible
fordetermintheboardofdirectors
publiccorporation,
Typically,
oftheCEO and othertopexecutives.
ingthecompensation
for
program executhe boardwilladopta multi-year
compensation
tives,includingan optionplan thatprovidesboundson the total
awardsthatcan be madeto seniorexecutives
amountof stock-based
The optionplanmightbe putto a shareand lower-level
employees.
holdervoteand ratified
Operatingwithintheplan,
byshareholders."
to fixthecompensation
of any
theboardhas fullauthority
however,
on a periodicbasis."2
givenseniorexecutives
The directors
of essentially
all largeU.S. publiccompanieshave
committees
to whichtheydelegatethisreestablished
compensation
A compensation
committeetypicallyis composedof
sponsibility.13
4 In mostfirms,
all or almostall ofthedirectors
threeor fourdirectors.
on thecommittee
are"independent."15
serving
Threeprimary
factorshaveled to theincreasing
use ofcompensationcommittees
composedentirelyof (at least nominally)indehave long
First,investoradvocacyorganizations
pendentdirectors.
in corporategovernance.'6
Second,the
pushedforthisimprovement
taxcode nowprovidescorporations
witha strongincentive
to estabpayin excessof
Since1994,CEO andtopofficer
lishsuchcommittees.
$1 millionannuallyper executivehas notbeen deductiblebya pubconsistsof opunlesstheexcesscompensation liclyheldcorporation
11 Ratification
oftheseoptionplansis virtually
certain.
Incumbent
facea meanmanagers
ingful
chanceoflosinga voteonlyifthereis an activeproxycontest
forcontrol
oftheboard.See

Lucian A. Bebchuk and Marcel Kahan, A FrameworkforAnalyzingLegal PolicytowardsProxy

78 Cal L Rev 1071,1074(1990).Thequestionofratifying
Contests,
stock-based
awardsis notsufficiently'weighty
to inducea challenger
to wagea campaign
to replacetheboard.Fora discussionofshareholder
onoptionplans,see PartI.B.3.b.
voting
12 See StaceyR. Kole,TheComplexity
of Compensation
43 JFinEcon 79,101
Contracts,
(1997)(finding
thatshareholder-approved
thatarelarger,
optionplansincompanies
morediverandmoreresearch-intensive
sified,
tendtoprovidedirectors
greater
flexibility).
13 See Kenneth
A. Bertsch,
RachelLeahey,andHawieHaun,BoardPractices
(1998):The
Structure
and Compensationof Boards of Directorsat S&P Super 1500 Companies 19 (Investor

ResearchCenter1998).
Responsibility
14 See id at 6 (reporting
thattheaveragecommittee
sizerangedfrom3.3 directors
among
to4.2directors
S&P SmallCap 600firms
amongS&P 500firms).
15 Bertsch,
Leahey,and Haun reportthatin 1998theaveragepercentage
ofindependent
directors
on compensation
committees
rangedfrom83.5 percentamongS&P SmallCap 600
firms
to 91.9percent
amongS&P 500firms.
See id.Directors
intheirstudyas indearedefined
iftheyarenotemployed
or"affiliated."
A director
is considered
pendent
bythefirm
"affiliated"
ifshe is a former
employee,
a relative,
a representative
ofa charity
thatreceivescontributions
from
thefirm,
a serviceprovider,
a supplier,
a customer,
oran interlocking
director.
16 Thecurrent
TeachersInsurance
andAnnuities
Association/College
Retirement
Equities
Fund("TIAA/CREF")policy,
forexample,
statesthatcompensation
committees
shouldbe inandwilling
dependent,
knowledgeable,
to use an outsidecompensation
consultant
innegotiating
CEO compensation.
See FundToughens
on Executive
Rel Bus (Apr3,2000).
Pay,Investor

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goals that
of performance
tionsor is based upon the achievement
committee
composedsolely
havebeenestablished
bya compensation
Third,theuse of an independent
outsidedirectors.'7
of independent
recommittee
would,in theeventofa legalchallenge,
compensation
program."
sultinmoredeferential
reviewofthecompensation
comof mostcompensation
Despitethenominalindependence
thereare severalreasonsto be skepticalthattheprocessof
mittees,
executivecompensation
thearm'slengthideal.
approximates
setting
of management,
particuThe keyproblemis thepervasiveinfluence
Belowwe will
process.'9
larlytheCEO, on all facetsofthepay-setting
fromarm'slength
discussseveralreasonsto expectlargedeviations
of independent
theappointment
outcomes.
First,managersinfluence
whichin manycasesenablesthemto blocktheappointment
directors,
at arms'
ofdirectors
whoarelikelytotryto bargainwiththemanagers
areinfluenced
directors
onceappointed,
independent
length.
Secondly,
forthemto dealwithmanagthatmakeitdifficult
byboarddynamics
haveno inifotherdirectors
arm'slength
way,especially
ersin a truly
evenifdirecovertheirpay.Finally,
themanagers
terestinconfronting
on theissueofexto challenge
inclined
managers
torswereotherwise
inthefinancial
ecutivecompensation,
theywouldlikelyhaveneither
to do so. We willdiscusseach of
information
centivenor sufficient
inturn.
theseproblems
Managea) Managementinfluenceover directorappointment.

ofthecompensation
processbeginswiththeselecment'sdomination
for
whoformthepoolofcandidates
tionofthecorporation's
directors,
has
dominated
committee.
the CEO
the compensation
Traditionally,
17 See InternalRevenue Code ("IRC") ? 162(m),codifiedat 26 USC ? 162 (Supp 2001). The employeeswhosecompensationis coveredbythisruleincludetheCEO, or individualacting otherthanthe CEO, whosecomin thatcapacity,and thefourmosthighlycompensatedofficers pensationmustbe reportedunder the SecuritiesExchangeAct of 1934. See 26 CFR ? 1.16227(c)(2) (2002) (definingthe employeescoveredunderIRC ? 162(m)). Non-employeedirectors fromthefirm

who serveas consultantsor who otherwisereceivedirector indirectremuneration in a capacityotherthanas a directordo not qualifyas outsidedirectorsforthe purposesof Section162(m).See 26 CFR ? 1.162-27(e)(3). The enactmentof Section 162(m) has appeared to reduce some salaries and salarygrowth See Tod Perryand Marc Zenner,Payfor

ofpay to performance.
ratesand increasethesensitivity
Government
Regulationand the Structureof CompensationContracts,62 J Fin Performance?:
Econ 453-88 (2001).
18 See RobertCharlesClark,CorporateLaw ? 6.1 at 194 (Little,Brown1986). 19 Even the timingof stockoptionawardsmaybe influencedto favorseniormanagement. favorYermackfindsthatthatthe timingof CEO optionawardstendsto precede immediately able movementsin companystockprices.See David Yermack,Good Timing:CEO StockOption 52 JFin 449,450 (1997). Managerscan also release

Awardsand CompanyNewsAnnouncements,
bad news priorto the grantdate of optionsin orderto reduce the strikeprice of the options (whichis almostalwaysset to the grant-datemarketprice). See Keith W. Chauvinand Cathy Shenoy,StockPriceDecreasesPriorto ExecutiveStockOptionGrants,7 JCorp Fin:Cont,Gov & Org 53 (2001) (reportingabnormalstockpricedeclinesduringthe 10-dayperiodprecedingthe grantdate).

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2002]

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Whilemostboardsemploya nominomination
thedirector
process.2
theCEO oftenformally
serveson thecommittee.
21
natingcommittee,
A 1998surveyfoundthatonly27 percentofS&P 1500firms
had fully
committees.22
And evenwhentheCEO does
independent
nominating
hisinfluence
notsiton thenominating
on thenomination
committee,
processis stillgenerally
thought
to be considerable.23
The CEO canuse
his power and influenceto encouragethe appointment
and reapofindependent
whoarenotlikelyto challengehis
pointment
directors
compensation.
Mostdirectors
believethattheirprimary
reb) Boarddynamics.
sponsibility
is to monitorthe CEO's performance
and,if necessary,
firehimand hirea suitablereplacement.Outsideofthisunfortunate thedirectors
areexpectedtosupporttheCEO.
circumstance,
however,
Those who cannotdo so in good faithare expectedto stepdown.25 Overall,board meetingsand processesare characterized
by an emanddeference
phasison courtesy,
politeness,
to theCEO.26
(i) The "supportor fire"model.The role of the board of direc-

is to focuson thebigpictureand entors,as it is normally
conceived,
sure thatthe personneland strategies
necessaryforthe company's
successare in place.Althoughsettingexecutivecompensation
clearly
is a board responsibility,
the level or formof executive
scrutinizing
CEO (or his compensation
compensation
proposedby an effective
20 See Brian G.M. Main, et al, The CEO, theBoard of Directors, and ExecutiveCompensation: Economic and PsychologicalPerspectives,11 Indus & Corp Change 293, 302-03 (1995);

Brudney,
95 HarvL Rev at 610 n 39 (citedin note10); BenjaminE. Hermalinand MichaelS. Weisbach,EndogenouslyChosen Boards of Directorsand TheirMonitoringof thcCEO, 88 Am

Econ Rev 96,97 (1998).Fora reviewoftheeconomicliterature
on boardsofdirectors,
see Ben-

jamin E. Hermalin and Michael S. Weisbach,Boards of Directorsas an EndogenouslyDeterminedInstitution: A Surveyof theEconomic Literatureat 10-12,NBER WorkingPaper No 8161

(2001),availableonlineat (visited
Apr27,2002).
21 See Anil Shivdasani
and David Yermack,CEO Involvementin the Selectionof New

Board Members:An EmpiricalAnalysis,54 J Fin 1829,1834 (1999) (reportingthat78 percentof

341 publicly
tradedFortune500firms
in 1994had a nominating
committee,
and thatin 33 percentofthosefirms
theCEO wasa member
ofthenominating
committee).
22 See Bertsch,
at 18 (citedinnote13).In thestudy,
Leahey,andHaun,BoardPractices
directors
are classified
as employees,
or independent.
A director
affiliated,
is deemedaffiliated
ift
as disclosedintheproxystatement,
he or sheis a former
a relative
ofan executive,
a
employee,
representative
ofa charity
thatreceives
contributions
fromthefirm,
ora designated
interlocking
director.
Id at9-10.
23 See Main,11 Indus& CorpChangeat 293,302-03(citedin note20) (suggesting thatdirector
nominations
are"dominated
bytheCEO").
24 See Crystal,
In SearchofExcess(citedin note6); JayW.LorschandElizabethM. Ma-

cdver,Pawns or Potentates?:The Realityof America's CorporateBoards 64 (Harvard Business

School1989).
25 See Main,11 Indus& CorpChangeat 304 (citedin note20) (documenting thesocial
ondirectors
nottoactively
theCEO).
pressure
challenge
26

See Michael C. Jensen,The Modern IndustrialRevolution,Exit,and theFailureof Inter-

nal Control
48 JFin831,863(1993)(notingthattheboard's"politeness
Systems,
andcourtesy"
andfrankness").
comesattheexpenseof"truth

This content downloaded from 194.80.219.188 on Fri, 15 Nov 2013 12:59:40 PM All use subject to JSTOR Terms and Conditions

768

ofChicagoLaw Review
TheUniversity

[69:751

"supportor fire"model
runscounterto thepredominant
consultant)
are thuslikelyto be
directors
Independent
oftheboardofdirectors.27
theamountof his
to confront
an effective
CEO regarding
reluctant
Thisreluctance
mightstemfroma notionthat
pay and perquisites.
or indeare betterfocusedon policymatters,
andscrutiny
theireffort
pendentdirectors'perceptionthattheyare not as knowledgeable
or thecompensation
issuesas themanagement
aboutcompensation
consultant.
Althoughthe use of a compensation
(ii) Social dynamics.
directors
somemitigates
solelyofindependent
committee
comprised
of theCEO on executivecompensation,
it is no
whattheinfluence
of the board,the membersof which
panacea.The social dynamics
8
play
havebeenselectedin largepartbytheCEO or withhisinput,
role in deterring
objectionto executivecompensation
an important
programs.
withina groupfeel
working
It is wellknownthatindividuals
oftenat theexpenseofinterests
pressureto placategroupmembers,
The relationship
beat thetable.29
thatare not directly
represented
dytweentheCEO andtheboardis also likelyto produceadditional
Main,O'Reilly,and Wade
setting.
namicsspecificto thatparticular
auareinfluenced
havefoundthatdirectors
bynotionsofreciprocity,
executive
in
their
deliberations
and
concerning
thority, similarity
committee
1 Specifically,
theyfindthatcompensation
compensation.
tendtorecipaftertheCEO takesoffice
whoareappointed
chairmen
Theyalso finda sigrocatebyawarding
higherCEO compensation.31
27 There is evidence indicatingthat boards do in factsometimesfirepoorlyperforming CEOs. See David J.Denis and Diane K. Denis, PerformanceChangesFollowingTop ManagementDismissals,50 J Fin 1029,1055 (1995) (findingthatforcedCEO resignationsare rare and such as

of those thatoccur are caused by factorsotherthan board monitoring, thattwo-thirds
blockholderpressureor a takeoverattempt);Mark R. Huson, Robert Parrino,and Laura T. A Long-TermPerspective,
56 J Fin
Starks,InternalMonitoringMechanismsand CEO Turnover:
in largepublicU.S. firmsduringthepe2265,2279 (2001) (findingthat23.4 percentof turnovers boards are
Not surprisingly,
firmswithoutsider-dominated
riod 1989-1994were involuntary).
more likelyto removethe CEO on the basis of poor stockperformancethanare significantly
boards.See MichaelS. Weisbach,OutsideDirectorsand CEO Turnfirmswithinsider-dominated over,20 J Fm Econ 431, 453-54 (1988). See also WarrenBoeker, Power and ManagerialDismissal:Scapegoatingat the Top,37 Admin Sci Q 400 (1992) (findingthatthe likelihoodthata firmwillbe replaceddecreasesas the percentageof

CEO of semiconductor
poorlyperforming
insidedirectorsincreases).
28 See Main, 11 Indus & Corp Change at 302-03 (cited in note 20) (reportingthe CEO dominationofboardmemberselection).
29 See MelvinA. Eisenberg,The Compensationof ChiefExecutiveOfficers and Directors
SE39 ALI-ABA 103,117-18(1999).
ofPubliclyHeld Corporations,
30 Main, 11 Indus & Corp Change at 304 (cited in note 20). For otherresearchon small group dynamics,see generallyJ.S.Coleman, ConstructedOrganizations:FirstPrinciples,7 J L, Econ, & Org 7 (1991); R.B. Cialdini,Influence:The New PsychologyofModernPersuasion(Morrow1993). 31 Main, 11 Indus & Corp Change at 307-08 (citedin note 20). Similarly, CEO pay tendsto

This content downloaded from 194.80.219.188 on Fri, 15 Nov 2013 12:59:40 PM All use subject to JSTOR Terms and Conditions

2002]

Managerial
Powerand Executive
Compensation

769

levelofoutsiders
who
nificant
associationbetweenthecompensation
committee
andCEO pay.2
serveon thecompensation

(iii) Self-servingcognitivedissonance. It has been suggested

whena well-paidCEO ofanotherfirmsitson the
thata CEO benefits
If so,thisphenomenon
committee.33
couldbe viewedas
compensation
fortheevaluated
pureself-interest:
by approving
highcompensation
baseline.AlternaCEO, theoutsideCEO increasesthecompensation
it maybe seen as a formof cognitive
dissonancewhereinthe
tively,
outsideCEO internally
justifieshis highpay and thatof thesubject
datainthemostfavorable
CEO byviewingthecompensation
light.In
committee
1998,25 percentof compensation
memberswere CEOs,
and a numberof highlycompensated
CEOs servedon severalcompensationcommittees.34
c) Insufficient
incentives.CEO controlover the board nomina-

tionprocessand boarddynamics
militateagainsteffective
executive
compensation
oversight
byindependent
directors.
Unfortunately,
outside directorsgenerallylack the economicincentiveto overcome theseforces.The benefitsof attempting
to curbexcessiveexecutive
are
while
compensation low,
thepotential
costsarehigh.
(i) Economicbenefits.
Althoughstock-based
compensation
for
outsidedirectors
is on therise-81 percentofS&P 500firms
awarded
directors
stockor optionsin 199735thedirectbenefit
to independent
directors
ofreducing
theCEO's compensation
remainsinsignificant
in
almostall cases.3Even if excessiveCEO pay resultsin somewhat highercompensation
throughout
themanagerialranks,theimpactis
to be feltbya director
whoholdsoptionsto purchaseonlya
unlikely
of thecompany'sshares.37
verysmallfraction
Further,
as we willdisbe higher
andtheCEO is morelikelyto havea goldenparachute
whenmoreoftheoutsidedirectors
havebeenappointed
bytheCEO.
32 ...

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Keywords

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aremoresecur aremuchmoredifficult arenot arenota arenotclaim arenotget arenotseri areoptim areout areout-of-the-money areperceiv areperfect arerisk arerisk-avers areseena areso aretaxedwhentheyexercisemostopt arethos areunlik arevidenceon areworseformanag argu arguedin arguedthat arguedthatboardsdo arguedthatgoldenparachut arguedthatin arguedthatu.s arguedthatu.s.ceos arguein arguethat arguethata arguethatmanyof arguethatthecompani arguethatthereloadfeatureencouragesexecuproach.proponents arguethatthetaxadvantag arguingthat arguingthatexecut arguingthatgrantingstockto arguingthatindex arguingthatmanagerswho arguingthatmarket arguingthatopt arguingthatoptionsthatar arguingthatout arguingthatout-of-the-money arguingthatsomefirm arguingthatth arguingthattherei argument aris ariseevenifthefirmadopteda arisefromtheposs ariseif arisesbecauseexecutivesenjoyal ariseunexpect arm aronsonv arrang arrangements-th arrangementsandtoextract arrangementsbythemanageri arrangementsthatar articleha articlesappearingin ary aryarrang aryor ask askedbi askingsomequest aspiringto aspractition assafhamdani assets.options assetsthatmightoftenoffermoreimport assist assoc associ associatedwith associatedwithbeinga associatedwithconrequir associatedwithmanagesharehold associatedwithpoor associatedwithsignific associatedwithth associatedwiththefirm association/college associationbetweenthecompens assumedthatencourag assumesexplicit assumesthatthecostofconvent assumethat assumethatth assumpt at-the-money at-thesharepricei at20 at2490 at2497 at25 at262 at272 at3 at43 at567 at577 at658 at70 at74 at9 ate attempt attemptbi attemptedto attemptsto attemptto atthetimeitapprov attitud atto attract attribut auareinfluenc aug australiafindsthatceo author authoritywithinan authorsalso authorsconclud authorsexamin authorsof authorsshow authorsstudythre automat avail availableand availableforat availableforat-the-money availableonlin availableonlineat avenuesfor averag average1.3percentofexner 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becausemostmanag becauseof becauseofchangesbeyondtheir becauseofinertia becauseofpersonalgratitud becauseoftheir becauseoftheiraccessto becauseon becauseplaintiff becauseplandesign becausesharehold becausesuchan becauseth becausethedetermin becausetheplaintiff becausetheyar becausetheybelievetheincreasedsalienceofthecharg becausethiswouldremov becomeexercis becomeopportun becomesdifficult becomeseffici becomingceo beenarguedthatindex beenselected.finally beensuggest beforedescrib beforemovingon beforeproceed beforethed beforethepriceof beforetrad begin beginsbi beginwith beginwith.moreimportantly beginwitha beh behalf behalfof behavior behaviorand behaviorin behaviorproducescompetit behaviorthathavearisenand behind.64 beholdento beingbelowaverage.to beingchalleng beingequ beingexposeda beingextract beinghireda beingloyalto beingtappedforhigh beingtappedforhigher-level believ believesthattherear believestherei believethat believethatinmostcasestheceo believethatmanagerialrentextract believethatrentextract believethattheabsenceofsuchrestrict believethattheiroutcomesmightwelldevi believethattheirprimari believethatthemanageri believethattherei believethatthevalu believethatthevalue-maxim bell belliveau belljeconat below-industri below50 beloww ben benchmark benefici beneficialto benefit benefitfromtransi benefitidentifi benefitsof benefitsthatexecutivesget benefitsthatmanagerswilllos benefitthes benefitto benegoti beneintocash.but bengt benjamin benz berkeley bernstein bertrand bertrandand bertsch best bestalignmanageri bestb beth betheysophist bethfor bethwillhavean beto better betterabc betteraligntheirinterest betterexplaincertainsignific betterexplaintheseand betterfocusedon betterforsharehold betterfortheceo betterincent betteroff betteroff-sucha betteroff.the betteroffer.however betteroffin betterpaid betterti betterwayto betterworkingrelationshipbetweenth between1992and1996alone.see betweenceo betweenconvent betweencoo betweenexecut betweenforfeit betweenhi 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broadstockpriceincreases.considera brook brought brown1986 brucejohnson brudney brunarski buff buffett buffett.3 build burden bus busi businessact businessand businesscomment businessconshrink businessjudgmentrul busiobtainedbi busito buslaw921 busweek111 buta butalso butar butcaptureonlya butcertainoptiondesignsmight butconsist butensur butevenifindex butfind butfoundno butgener buti butifmanag butimposs butitdo butithard butiti butitmight butjunior butleaveit butlow butlower-level butmightscreenout butmostceo butnotleg butrath butratherreflect butratherto butse butsuboptim butth butthat butthatareconsist butthateffect buttheparticular butthisi butthisproblem butthiswouldb butto butusuallynotanyth butwho butwillne butwithin butwould buy buysgovern buystockat buysucha buythisportfolio bya byan byanweak byanyconsid byarm byblanchard byboarddynam bycausingembarrass bycondit bycounteringanyoutsideoff bycross bycross-countri byemmorepower.thisprediction byfirm byforc bygener bygivinghiman byhowcompensationarrang byimprov byindepend byinsid byitself bylevmor bymakinga bymanag bymanageri bymarket bynewtakeov bynotionsofreciproc byoptimalcontract byotheroffic byoutsid byoutsideobserv byrecentstudi byreduc bysafeguard bysharehold byt.boonepickens bytheamountbywhich bytheceo bythecomposit bythefactthatth bythefirm bytheiremploye bytheirrc bythemanageri bytheposs bythetenthdayof byviewingthecompens byvirtueofa bywayofhispersonnel c c14 cago cal calculateda call callaghan callingforindex callon calloptionwiththesameexpectedvalue.thus cametoth camouflag camouflaged-sothat camouflagerentextract camouflagerentscan campaign canalwaysoffset canb candidatecurr candidatein candidatein-housebecausethatinhousecandidatedo canexertinfluenceon canextract cannot cannotb cannotdo cannoteasilyexoffirm cannotexplaintheabsenceoftheseopt cannotexplaintheus cannotexplainwhi cannotexplainwhyw cannotprev cannotprovidea cannotus cantlyredistribut cantradeinthesharesinordertoreducetheposs canus cap capacityotherthana capit capitalat capitalmarketshypothesi capitalstructur captur capturedin capturedor capturetheexpectedincreasein card care care.therefore care.this career carl carpent carpenterand carriedout case cases.3even casesexamin casesinvolv cash cash-outd cashcompens cashedoutduringthetwo cashedoutduringthetwo-year cashingout cashout cashouttheoptionson cashsalaryand cashthana casualti catesthatcorpor catesthatexecut catherin cathi caus causea causedbi causedbytheseineffici causeexecutivestotakeon causingtoomuchoutrag cch cdver ceiv ceiveenoughvotesforpassag centiv centivebenefit centivenor centiveproblemthatariseswhenthemarketpricefallsmuchbelow centivesand centivesbylink centivesto ceo ceo-interlock ceo.13 ceo/director certain certainamountof certainbenchmark certaincas certaincaseswouldb certaincompens certainfeatur certainfract certainlevelof certainnumberof certainpoint certainsitu cfos cfr chael chairmen challeng challengea challengeexecutivecompens challengeforthisviewi challengehi challengesto challengeto chalposit chanc chanceoflosinga chandrasubrama27 chandratat chang change.the changein changeovertim changesbi changesi changesin changesof changesthatar changingoutragecostsand character characterist charg charge.becausein charge.indexedoptions chargeagainstearn chargedagainstaccount chargedwithmakingsuchdecis chargereflect chargesagainstearn chargesto chargeto chariti charl charlesa charleselson charlesj.hadlock charleso charlesp charlesr charter chauvinand cheaper cheaperand checkforan cheffin cheffinsand chi chicago chicagolaw chief chiefexec chiefexecut chiefexecutivecompens chiefexecutiveoffic chiefof chifrom chil choe choi choic choiceofproject chongwoo choos chooseriskan choosetheamountand choosetheexacttimingof choosetheextentto choosethetim choosethetimeofsuchunwind choosewhichcompens choosingthecompani chosen chosenif chosenwithan christinejol christma christoph cialdini cialinterest cialli cidesthatitwantsthefirmto cientand cin cipal cipal-agenttheori circumst cise cisepriceofoptionstomarketorsectorindexesi cite citedin citedinnote10 citedinnote109 citedinnote13 citedinnote137 citedinnote141 citedinnote16 citedinnote162 citedinnote171 citedinnote179 citedinnote183 citedinnote185 citedinnote19 citedinnote2 citedinnote20 citedinnote204 citedinnote209 citedinnote211 citedinnote216 citedinnote26 citedinnote37 citedinnote4 citedinnote5 citedinnote57 citedinnote6 citedinnote8 citedinnote86 citetheus citigroup citigroup-thatreduceoptionwindfal claim claim.ifthesefail claimingthatin clarendon1997 class classifi classifiedboard clawsonand clear clearincent clearlya clearlyapparentto clearlymoreconsist clearpictureofa clearthatindex clientsnewoptionfeatur cliffordholdernessand cline.the close closefriend closelyfollowth closelymonitor closerto closetocontrol closetothatwhichwouldariseunderoptimalcontract closurethedayafterthesale.butevenfirms co coat code codifiedat cognit cohes cole collabor colleagu colleaguesfounda collectedth collectiveapproach collegi collusionamongfirmsin collusiontheori colum columl com comalthoughnotunivers comb combatingth combin combinewithherindexedopfundsin comconsult come comeat comeprotectetd comesattheexpenseof comesto comeup comfirm comincent comingfrominsidethefirm comingfromoutsideof comingfromoutsideshouldnotb comment commit committe committee.33 committee.50 committeemembership committeeon committees.22 committees49 committeetypicallyi common commonapproachto commonfora commonin communic communicagain comof comofexecut compafract compani companies.165 companiesclaimthattheseadjust companiesclaimthattheyus companiescontrol companiesexercisetheiroptionsand companiesg companiesmightwel companiesthathav companiesthatresetth companiesto companieswheremanag companieswhichhav companieswhos companieswithcontrol companieswithdispersedsharehold companieswithmoreconcentr companieswithout companieswithouta company-specif companydisclosingoptionsexpens companyi companynewsannounc companyperform companyresourcesintomoreprofitcondit companystock companystockprices.see companythatadoptstheseoptions.are companythatsignsa companywhosesharepricesagsshouldbecom compar comparedwithoptimalcontract compareharley compareintern comparejudith comparescompanieswithandwithout comparethisrestrict comparethisrestricted-unwind comparison compath compatheycr compel compeloptimalcontract compen compenexecut compenfirm compeninvolv compennotbeengener compens compensaliteratur compensapossiblerisksassoci compensarecommend compensarevenuecod compensashipof compensateemploye compensatehimfortheextrariskimposedbi compensateor compensateth compensatingth compensation-set compensation-th compensation.223 compensation.240 compensation.31 compensation.72 compensation.a compensation.but compensationand compensationar compensationarrang compensationat compensationbutrathersetout compensationcommitte compensationcommitteeinfluenceceo compensationcontract compensationdecis compensationdifferenti compensationexce compensationfor compensationi compensationin compensationlandscap compensationneednotb compensationof compensationpractic compensationpracticesbi compensationprocess compensationprocess-intern compensationshiftingmechanismat compensationstat compensationunderirc compensationwa compensationwhenthebenefitsof compensationwhenthepotentialcost compenthatceo competit complet completeabs completeabsenceof completeexplan completelyfilterout completelypreventexecutivesfromtradingon completereplac complexand complexcompens complianc compon composedentirelyof composedof composedsol composit compositionand compow comprehens compris compromis comput comtojustifi conceiv concenin concentr conceptof conceptu concern concernedabout concernedaboutretent concernedthattheceo concernthatinvestorsmay conclud concludedthatboardshavebecomemoreeffect concludedthatsom concludethat conclus conclusionthatmanageri conclusionthatmarketforcesdo concould condioptionsbecaus condit conduct conductand conductedth confirm conflict conflictand conflictin conform conformto confront congress coni conjunct conless connect conpowerapproachthanwithoptimalcontract consequ consequenceofindex conserv consid consider consider-forexampl considera considerable.23 considerableevid consideran considercas consideredapproach consideredundesirablebecaus considerth considerthecas considerthefirst considerthemarketforcorporatecontrol considertwo considhasattract consist consistentwith consistentwithth conspicu constant constitut constitutea constrain constrainexecutivecompens constraint constructedorgan consult consultantsor consulti consumpt cont contact contendingthatan content contest contestforcontrol context contextof continueto contrac contrac-tu contract contract-sharehold contractdesignedto contractshould contractthatmaxim contractthatwouldperfect contradict contrast contrastthisoptimalcontract contribut contributedto control control.however control.optimalcontracting controlandexecut controlcontest controldo controllingexecutivepay controlmarket controlof controloth controlov controloverthetimb controlthetimingof controlversusrisk conundrumof conveni convenmet convent conventionalopt conventionaloptioni conventionaloptions.however conventionaloptionsdo conventionaloptionsi conventionaloptionsrequiresthat conventionaloptionthati converg convers convertthem convinc convincetheboardto cooper cor cor276 core coreandguay corp corpchangeat corpor corporain corporatebehaviorat corporateboard corporatecontrol corporatecultur corporateculturethan corporatefin corporategovem corporategovern corporategovernarm corporateinsiderscontinueto corporateinsidertradingthroughpretradingdisclosur corporatelaw corporateopportun corporateownership295 corporateownershiparoundtheworld corporatepolici corporationlaw correct correctforsector correctforsector-wid correctit correl correlatedwithaggregateperform correlationbetweenmanageri correspond correspondencewithprofessorbrian cost cost-effect cost.call cost.it costcollar costincur costlyand costlyforthem.in costlyor costlythanshareholdersr costlyto costof costofdo costofthesedepartur costs-du costsandconstraint costsarehigh costsassociatedwiththeexecutivehavingweakerincent costsforthedirector costsitmustb costsofcr costson coststo costtheexecut costto cotterand could couldadopta couldalso couldarguethatmarket couldb couldcreatethesameincent coulddesigna couldeasilydesignan couldeasilylead couldemploya couldextractaddit couldhav couldimprov couldinsteadeffect couldjusta couldnotus couldoveral couldprecludetheexcontract couldreducethecashcompens couldreflect couldrep couldrequireenhanceddisclosur couldrequireth couldresultfromeffect couldsimplytietheexercisepriceoftheceo couldstilleasilyreducecertainwindfal couldstillindextheexercisepricebutdo couldthenb couldtieth couldus counterfactu counterpart countingresultsar countri coupledwith couragemanag couragemanagersto cours coursereducestheirincent court courtesi courtmightwel courtshav courtsnev courtsor courtssever courtsto courtto coveredbi coveredbythisruleincludetheceo coveron coverth coverthesharesthatmustb cowherdand creasesin creasinginfluenceov creasingratchet creasingratcheting-up creasingth creat createa createan createdbycompetit createdbyimprov createindexedoptionsinthefirst createproperexecut createsharehold createsucha createtheimpress creatinga creationand creationof criteto critic criticalrol criticssay critiqu critiqueof cross cross-countri cross-ownership crosspowerapproachcan crystal cumbent curb curbceo curbexcessiveexecut current currentfirm.see currentvalu curryfavorwithth curryfavorwiththeceo curtail cuseson cussbelow cussbothstartwiththerecognit cussestheapproachthati custom cutmanageri cyert d daley dame daniel daringapproachto data dataandprothatmanag datainthemostfavor datathathelpmakethecas date date.even date.if datemarketpric dateoftheinitialopt dateoftherepr david davidm davidm.schizer davidyermack davidyermackandparticip day dayperiodprecedingth dayperiodthatbeginsf daysof de de-emphas deal dealingwithpoliticaland dealofempir dealwithmanagthatmakeitdifficult debatein debateoverwheth debt decidedto decidingwhetherto decis decision.because decisionandtherebi decisioncontrol decisionmak decisionsar decisionsarenotdrivenbymarketorindustri decisionsthatadvancesharehold decisionsthatar decisionsto declinedabsolut declinedand declinedsubsequentlyfortwo declinedsubsequentlyfortwo-third declinein declinesbecaus decreas decreasewith decreasinga dedicatedhierarchi deduct deductiblebya deductibleifan deductoptioncompens deemedaffili defend defens definecompensationschemesa definedand definingth definit defusco del delawar delayexercis delayor delaythecomplet deliber demanagernon demanagernon-performance-bas demand demand-futil demandfortheindustri demandfutil demandfutility-cr demandin demandof demicworkon democraci demonstr demonstratethat denceind dencethatexecut deni denni denoteth denotetheacquisit denotetheacquisition-rel dent deon depart depend dependcrit dependingon dependon dependsmoreuponoverallperin dependson deperspect der derestrict deriv derivativelitigation.even derivativelitigationfocusesprimarili derivativesmarket derivativesuit derivativesuit-a deriveop derminedbi derthisapproach describ describedabov describedbelow design designa designcosts.it designedoptim designedoptionschemewouldseek designedto designedwithan designerattempt designfinanci designof designofstockoptionplan designoptionplansthatat designschemesthatfilterout designscompens desir desirableex desirableforsharehold desirableforth desirableto desiredincent desireof desireon desireto desiretoconform despit despiteit despitethenominalindepend despitethepressurethatboardssupposedlyputon detail detailedanalysisof detailin deter detera determanfarfromoptimalcontract determin determinedthat determinedthatth dethatexecut detheeconomicscenariosthatwillb detlev detlevvagt deto develop developa developmentand developreput deviat deviatefromthestandard deviationsfromoptimalcontract devic devicesbymanag devil devili devis devisingexecutivecompensationarrang devoteto dex dexedopt dexedoptionsbecausetheform dexedoptionsinmostcas dexingmightb dian diandmanag dictsthata dicttheopposit dicttheopposite-that didwith differ differencemodel differencesin differenti differrath difficult diffus diforceswillprev digit dilip diminish dinaryincometaxon diocreceo dips.moreover direc direcceo direcin direct directfinanallyne director director-heavenlycityor directorappoint directordo directorelectionsand directori directors.18 directors.fama directorsa directorsand directorsar directorsat directorscan directorscooperatewithmanageincreasetheircompens directorsgenerallylack directorsor directorsrises.see directorsstudi directorsthataim directorsusuallyrec directorswouldb directorwho directtransf directway direcwouldindirect disadvantag disallowsdeduct disamongacadem disappoint disciplin disclos disclosedintheproxystat disclosedto disclosetheinform disclosetheirtradesto disclosethes disclosur disclosuredo disclosureha disclosureregul disclosureto discount discourag discouragea discouragethemfromseekingsucha discouragingexcessiverisk discov discovery.78 discret discuss discussbelow discussedin discussesa discussessuch discussestheroleofcompens discussionof discussionofsharehold discusslaterinthearticl discussseveralreasonsto discussth discussthelimit discusstherecentfind discussthisstudyfurth discusswhytheyar disdisclosur disexecutiveswil disinterest dismalperform dismiss dismissalwould dismissth dismissthesuit dismissthesuitfor dismissthrough dispar dispers displacea disserveon dissonancewhereinth dissuadea disthattherei distinct distort distortincent distract distress distribut divergence.8 diversiandtheexecut diversif diversifi dividend do.theboard doctrin doctrinethatsheltersalmostal document doesnotappearto doesnotexpecttoremainfortwoyearsaft dollar dollara dollargainedoncetheoptioni dollarscouldb dollarsthatar dollarsto domin dominantapproachin dominantapproachto dominantposit dominatedacadem dominationofboardmemberselect done donebyusingan donei doubt doubta doubtwheth dougla dow downduringth download downsideensuresthatmanagersreceivebothth downsizetheirempir downth draw drawn.to drawthelinebecausetheoutrageproducedbygoingfurth dress drill drive drivenbyoptimalcontract drivenrisesbeyondtheircontrol drivensolelybyfactorsexternalto dropto dual duceoutrag ducetheceo duct due dueon duringmarketbooms.himmelbergand duringth duringthelasttwenti dustri duties.a dutiesbybeinguninformed.81 dutiesbymakingan dutiesbyread dye dynam dytweentheceo e earli earlier earliererai earliermarketslide.so earlierunderthetitl earlierwork earlyin earn earnchangein earnings-per-shar earnings.this earningschargeappearsin earningschargeeveryquarterin earningsin earningswil easili easilyand easilyb easilyexplained.underthatapproach easilyexplainedbi easilyexplainedunderth easilyfollowthemodelcreatedbytheseear easilyfollowthemodelcreatedbytheseearly-adopt easilymonitored.see easterand easterbrook eatingthemtoo echoeffect econ econ301 econ319 econom econometrica7 economi economicbenefit economiccosts.whilethebenefit economicincent economicincentiveto economicsand economieswith economist economy-wideperformindustry-level economyor ecut ecutivecompens ecutivefrom ecutivepay.to ecutiveshad ecutiveswithimport ed edward effecforcescan effect effectof effectofantitakeov effectofstockpricemovementson effecton effectsbeyondmanag effectsof effici effort efpressureat efsharehold ehudkamar ei eisenberg eisner either eithera eitherbi eithercas eitherha eitherit eithernotpossibleor eithertheamountofexecutivecompensationor eitherto eitherus el element elementof elementofcorporatecompens elementofthemanageri elements.56 elementsoftheempir eli eliez elimin eliminateor ellen els elsevier1999 elson emanddefer embarrass emergesa emfortun emphas emphasizei emphasizethatth emphasizethatthecostto emphath empir empiribygoldenparachutesand empiricalanalysesconcern empiricalanalysi empiricalevid empiricalevidenceon empiricalexamin empiricalexaminationof empiricalinof empiricalpap empiricalstudi empiricaltest empiricalworkon empiricist employ employan employe employee-interlock employeedirector employeescoveredunderirc employeeswho employeeswhosecompensationi employoutsideconsult employreduc employreduced-windfal employstheconsult employth enabl enablesexecut enactmentof enaffect encedsmallerincreasesintotalcompens encein encount encouragecollusionor encourageexecut encouragemanagersto encourageth end endogenouslychosen endogenouslydeterminedinstitut engag engagein enhancedriskof enhanceexecut enhanceincent enjoy enjoyandmustgiveup enjoyedlargegain enjoyedrapid enjoywithrespect ensur ensureoptimalcontract ensurethatexecutivecompens enteredintowhentrad enterotherin entitl entlyif entor entrenchedmanagersget eqat equal equilibrium equilibriumsuboptim equilibriumto equiti equity-bas equity-basedcompens equity-basedcompensationand equity.7 equityat equitybetweenlow equitybetweenlower-levelemployeesand equitycapital.instead equitycapitalin equitycompens equityexecutivestock equityfinanc equityheld equityholdingsof equityinterest equityownerand equitypositionsand equityswap equityswapsto equival equivalentnumberof equivalentnumberofsharestheyaland equivalentto er era erableattent erat eration.82 erectionoflavishofficebuild eredleg erictalley ers.partii ers.theseinsidertradingprofits ersin ersthemselv especi especiallyclearcas especiallyegregi especiallyinsensationa especiallypow essenfasb essenti est establish establishedand establishnumberofindepend estabpayin estedin estim estimatedthat1998 et etal ettingexercisepricesat eugen eugenef evalu evaluate.despite evaluatingth evaluationcut evaluationfor evan even evena evenassum evenat evendirector evenfacilit evenif evenifdirecovertheirpay.finally evenifga evenifinvestor evenifitcouldb eveniflevmorei evenifon evenifrenegoti evenifreset evenifsharehold evenifshebeatsfewerthan50 eveniftheadverseeffect eveniftheceo eveniftherallysimplyoffset evenifthetakeoverwouldbenefit evenifto eveninthosefirm evenlargelyexplaintheexecutivecompensationlandscap evenlargernumberofjuniorexecut evenmanag evenmanagerswhoadd evenmodestchangesin evenmoreattract evenmorevalu evenon evenpoorlyperform event eventhemanaginstitut eventhoughopt eventhoughsuchincreas eventhoughthedebti eventhoughtheexecutivei eventhoughthemarketa eventhoughthisrewardha eventhoughw eventi eventof eventtheirfirmi eventu evenunvestedopt evenwhen evenwhena evenwhensuch evenwhentheceo evenwhentheexecut evenwhenthesefirm ever everinpercentileof everwishto everyobserv everyon everyotheremployeegetconventionaloptions.see everystockopt evi evid evidence-pres evidence35 evidencebetterexplainedbythemanageri evidenceconsist evidenceinconsist evidenceind evidenceindicashingout evidenceof evidenceon evidencesuggest evidencethatceo evidencethatexecut evidencethatseniormanagersof evidencethatth evidencethattheutil evithatexecutivesmakeat evolutionof ex exact examin examinationof examinationusingthisapproach examinecompanieswithand examinedtwo examinesanotherimport examinesthephenomenaofoptionrepr examineswhatelevenfirm examineth examining1974 examining1974-1986data examiningapproxim examiningten examiningten-yearopt examiningthelargebodi exampl exampleignoresthecompens exat exbyoutsid excannotsu exceed exceedsth exceedstheexpectedcost exceedsthefairmarket exceedtheamount exceedtheamountsreport excel except exceptinnotori exceptionsar excess excessat excesscompens excessiveceo excessivecompens excessivecompensation.71 excessiveexecutivecompensationand excessof excesspaythatexecut exchangeactof1934requiresthatexecutives exchangecommiss exchangeforthechanceofwin exchangeratesbenefit excludean exclus excusefornot excusethatadverseaccount execu execucompdatabasefor1992 execudistributtives.mostofthecashwasretainedbythefirm execut executh executionofherappetiteforrisk.a executive.for executivea executiveand executivebroadfreedomto executivecareersand executivechooses.althoughsome executivecomcritic executivecompens executivecompensapraiseforit executivecompensase executivecompensation-a executivecompensation.to executivecompensation.undertheoptimalcontracting executivecompensationand executivecompensationarrangementsar executivecompensationat executivecompensationbi executivecompensationi executivecompensationin executivecompensationlandscap executivecompensationliteratur executivecompensationusingrel executivecompensationusingrelative-performance-bas executivecould executivedecis executivedecision-mak executivedirectorcontroland executiveextractsi executiveha executivei executivein executiveof executiveofa executiveoffic executiveov executiveover-compensation-aboard-bas executivepay executivepayin executives.103 executives.part executives.see executivesand executivesar executivesat executivesbi executivescan executivescent executivesexercisemanyof executivesexploittheirbroadfreedomto executivesforincreasesin executivesgener executivesgivenstandardindexedopt executiveshar executiveshareholding.183 executiveshav executivesholdstandardindexedopt executivesmightb executivesmightwishto executivesmoreor executivesmuchmorethantheirreserv executivesof executivesoftenutilizecollarsand executivespreferan executivespreferth executivesreceiveconvenwhenth executivessel executivesto executivestock executivestockopt executivestockoptiongr executivestockoptionrepr executivestockoptionsbecamean executiveswer executiveswhilereducingoutragecostsbi executiveswho executiveswhodo executiveswiththoseof executivetheabilityto executiveto executivewhoexercisesnonqualifi executivewhoha executivewithnew exempt exer exercis exerciseand exercisedth exercisein exerciseof exerciseofopt exerciseoptionsearlierand exerciseoron exercisepric exercisepriceand exercisepriceandexpiwhenitissuesan exercisepriceequ exercisepriceformula exercisepricei exercisepricemight exercisepricemuch exercisepriceof exercisepriceof39 exercisepriceofopt exerciseprices.in exercisepricesthatar exercisepricethati exercisepricethatrisesorfallswith exercisepriceto exercisesless exercisesoptionspaystheexercisepricebyhandingoverfirmshar exercisesth exercisestoodat exercisetheopt exercisetheoptionsandsellth exercisetheoptionsifthemarketpriceat exercisewheneverth exercompanystockand exert exerteffort exin exist exit exofsharehold expandthescopeofunwind expansion.theprospect expect expected-valu expectedbenefitof expectedcost expectedcosta expecteddismiss expecteddismissal-rel expectedto expectedtoarisewoulddependon expectedund expectedunderoptimalcontract expectedvalu expectedvalue-and expectedvaluegreaterthan expectedvalueof expectlargedevi expectthatoptimalcontract expectthatth expelledorhisdirectorship expendefforta expenditur expenditureintensitiesand expendtoo expensear experi expert expertdecisionmak expertis expertshav expertsin expir explain explainadequ explainbelow explaincross explaincross-compani explainedabov explainedbyconsider explainedbyinelast explainedbythemanageri explainedearthesegainsrepres explainedin explainedprevi explainedunderth explainedunderthemanageri explainedwithin explainfroman explainhow explainhowthemanageri explainingexecutivecompens explaininghow explainmuchof explainotherfirm explainshowmanagerswithpowerus explainsignificantfeaturesof explainswhyplandesign explainth explaintheabsenceofinconsider explainthefailureof explainthefailureto explainthelackof explainthevariousfeaturesof explainunderth explainundertheoptimalcontract explainvariouspuzzlingfeatur explainwhi explainwhyinsomeemerg explainwhythi explainwithinan explan explanapartii.f explanationforwhytradingwindowsdo explicit explicitrelativeperform explor explorefullytheseimpl exposedtoinanyev exposur exposureto extend extendedbul extens extensiveliteratur extent extentexecutivesretainth extentthatth extentthemarketdoesnotfullynoticethecostofoptionsreport extentto extern exthetaxnortheaccount extra extract extractadditionalr extractat extractionin extractlessr extractmorerentsfromtheirfirm extractr extractrents.23 extractrents.furthermore extractrentsforhimself extractrentsin extractrentsmightlead extractrentsthrough extractvalu extravalueto extrem exwhilethepatternof eyeto eyetowardmaxim f face facea facedbi facetsofthepay facetsofthepay-set faciallyplaus facilit fact factexercisestheoptionsand factfarfromarm factinterpret factor factorcontribut factordriv factorinthesuccessofmanyforeign factorshav factorshavel factorsotherthan factorssuch factorsthatmightb factsind factsometimesfirepoorlyperform factth factthatit factthatoptionsar factthecas fail failsto failto failur failure.70 failureof failureto failuretomak failurewouldforcemanagersto fair fairlyconfidentin fairnumberofsharesof faithar faithor fall fallbelowthegr fallbelowthegrant-d fallin falloutsideofthischarg falloutsideofthischarge-fre fama famaandmichaelc famili far farbeyondwhat fardowna farfromclearthatal farfromthatmodel farin farreceivedlittleattent fasb favor favorablecontractu favorableto favorabletomanag favorand favorseniormanag favoryermackfindsthatthatth feafirm fear fearof featur featurear featurei featureof featuresof featuresofthefeder feb fectiv fecton feder fee feel feelinsult feeloblig feltbya feltbyreleadvers feltthroughout fenc fereda fervalueto fewcompani fewer fewercompani fewerthan1 fewotherjob fewstepsto fewvot fiar ficat fich fierceresisto fifth fiftieth figur figure1 figureout filewithauthor filter filterout fin fin31 fin979 final finaland finalpotenti financ financi financialaccountingstandardsno financialeconomist financialeconomistshav financialeconomistswho financialinstru financialof financialstat finantanceto find finda findand findingsar findingthat findingthat23.4 findingthatceo findingthatexecutiveswithrelativelylow findingthatforcedceo findingthatth findofek findshisfirmrank findsthat findthat findthata findthataccount findthatinal findthatpayi findthatrepr finecon finmgmt36 fire firean fireceo fired.sucha fireexecut firehimand fireloy firetheceo firm firm-specif firm.once firm.thus firma firmask firmbyway firmcancelstheold firmcannotattractthemwithoutcompens firmcannotpay firmcould firmdo firmformanymoreyears.suppose firmfundsto firmgainsa firmit firmleverag firmmaywishto firmmustprovideincent firmoutperform firmperform firmperformboostedthesensit firmprofit firmprovidesa firms.the firmsa firmsalmostneveremployanyvers firmsalreadyus firmsalso firmsar firmsbetween1992-1997.it firmsdo firmsduringthepe2265 firmsemploya firmsgrantnew firmshad firmsimplygivesexecutivesan firmsin firmsindicatedthattheyus firmspecif firmstak firmsthatwer firmsto firmsus firmswil firmswitha firmswithmoreconcentr firmswithoutsid firmswithoutsider-domin firmthatpayshera firmthatrequiresa firmthatwishedto firmthatwishesto firmto firmus firmvalu firmvalueand firmwillb firmwith firmwould first firstblush firstfindingsuggeststhatoutsidedirectorsar firstmust firstplace.ratherthe firstprincipl firstserv firstsitu firststudi fischel fit fitherei fitsthatcomefromtheexecutiveholdingtheseinstru fittest five five-year fiveor fivesharesof fiveyear fiveyearsin fiveyearsor fiveyearswillhavein fiwhythendo fixedexearn fixthecompens flagesmanag flat.the flat.theonlypossiblejustievenifthelong flation flexibl fli floor florenciolopez florenciolopez-de-silan flow fm focus focusedon focusedtheirattent focuseson focuson focustheirlimit follow followestablishedpractic followth followthatthiseffectwouldb footnot footnotes.153 for20 fora foraddit foral forallowingacboardsto foralmostal foran foranotherfirm forb forc forceo forceof forcesand forcesar forcescannotensurethatexecutivecompens forcescannotensurethatmanag forcesfromdeviatingfromoptimalcompens forcesof forcesto forceswillforcetheboardto forcethefirmto forchangesin forchangesinthesectorandth forclaimsrel forcompens forconclud forcontrol forcorpor fordetermintheboardofdirector fordeterminthecurr fordirectorscreatesincent fore foreachsharetend forego foreigncountriessurveyedbytowersperrinin foreignexecutivepay forestl forevalu forevidenceon forexamand forexampl forexecut forexecutivestockopt forfacilit forfailureto forfinanci forfirm forfirmbehavior forgeneralmarket forgeneralmarketcorrections.but forgeneralmarketris forgeneralor forgothebestprojectsin forher.notdoingso forhi forhigh forincreasesin forincreasingstockgrantsto forless forliquid forluck form formacrossvest formaintain formal formalsalwhichi formanag formanageri formanagers-nam formanc formancedata.2 formanet formanyand formarketris former formeri formof formofcompens formofindex formofpaymight formorerecentevid formulawould foron forourpurpos forprofittakingon forreasonsunrel forrepr forrestraint forrialpowerin forris forrisk forrisk-avers forriskofdismiss forsectornot forsharehold forsharerang forsometimebeen forsomeyearsnowacadem forstructur forsubsequ forsuch forth forth.in forthcom forthealmostcoma forthealmostcompleteabsenceof fortheceo forthedevelop forthedisparatetreat fortheevalu fortheexecutivedu fortheexercisepriceat forthefirm forthefirst forthelackofinbecauseitappliesnotonlyto forthelatter.one forthemanag forthembutgood forthemto forthenear forthenear-abs fortheoptimalcontract fortheproposit forthepurposeofalarrang fortherestrict forthesamereason forthesamereasonsthatreduc forthesamereasonsthatreduced-windfal fortheseincreaseswhenh fortheseopt fortheserestr fortheserestricings-on forthesharepriceincreas forthestudyof fortheus forthisphenomenon forthoseoutsidehireswhoar forti fortun fortune100 fortune272 fortuneat fortwodistinct fortylargecompaniesdetermin forward forwarda forwhatev foundationof foundthattheyaffectmanagerialpay foundto four fourdirector fourth fraction fractionof fractiousand fragileleg framedwillb frameforalmosteveryfeatur framework frameworkforanalyzingleg franci frankh franklin frankmoersanderikpeek free freedom freedomto freedomtodetermin freemanand freerid freeto frequenc frequent fri friedtt friend friendof from1991through from1992to from27 froma fromactingin froman fromappoint fromapprovingan fromarm frombeingeasilyidentifi frombetto fromcompani fromcontrol fromdebtto fromdoingso fromexercis fromexerciseof fromextract fromfirmto fromfullyor fromgrant fromhedgexecut fromitmeansthattheevolut fromitwillb fromlowerexercisepric frommanag frommarket frommarketconstraint fromnumer fromon fromoptimalconseeingcompens fromoptimalcontract fromoptimalcontracting-that fromoutsid fromoutsideofthefirmreceivein fromrapid fromreducingth fromseekingto fromseekingtoincreasetheircompens fromsellingtheirsharesbeforelargestockpricedeclin fromsharehold fromsharepricevolatil fromsuffici fromth fromthat fromthatpartof fromtheadoptionoftoughinsidertrad fromthearm fromthefirm fromtheindexin fromtheirfirmor fromtheirus fromthemanageri fromthepaymightprovidecamouflagebi fromthesepattern fromthesharehold fromthetend fromthosesuggestedbi fromthrift fromwhat fulfil fulincent fullaccount fullaccountof fulladvantageofitandwillpushfirm fullauthor fullexplan fulli fullvalu fullyor fullyunderstoodonlywithcarefulattent func function fund fundtoughen furthermor futil futilebecaus futur futureinvestor g g.m ga gain gainfromwindfallsbeyondtheircontrol gainingoverexecutivecompens gainor gainorloss.see gainsforsenior gainsfroma gainsfroman gainsfromopt gainson gainswereaccompaniedbi gainswhenmarket gainswitha gainthefavorof gap gardenof garner garveyand garveyandtoddt gas gavemorestock gay general generaland generallyar generallybest generallyconsidereda generallyj.s.coleman generallymustfil generallynot generalmarket generalmarketand generalmarketperform generalmarkettrend generalparamet generat generateand generateanyoutrage.the generateoutrage.at generateoutragecosts.furthermore generatesharehold generatesharepriceincreas generatesignific generatetaxableincomeandwhichar generatevalu generatsireto genpricedeclin geofstapledon georg georgebak geraldt geriallabormarketthattheyar gerialpowerapproachpredictsthatmanagerswillextractmorer gerialpowercan geror get getanotherceo getawaywiththeus getdirectorindirect getit getnewjob getsa getsfromhisboardposit getsto getthati gettheboard gettheiroptionsrepr gibbon giblinkedto gift gifton giftreflectsmanag giftto gitim give give-at givea giveeach giveexecut giveherassist givehima givehisor giveindexedoptionsto givemanag givemanagersa givemoreoptionsto given givena givenamountofcapital.ofcourse givenexecuf givenforreloadableoptionsi givenindexedopt givenmanag givenoptionsthatvest givensector givenseniorexecut givenstockwillearnreturn giventh giventhatpattern giventhatsomejustif giventhattheus giventheconsider giventheenormouss giventheprocessof giventheproformadisclosur givento givenwhatev givenwhenthecompani givenyear giverisetooutrageon givesceo givesriseto givethatpayintheformofa givetheexecutiveunrestrict givethemanagerconvent giveto givevalueto givingcontrol givingmanagersa givingmanagersoptionsthatrewardthemon givingriseto givingup gle gleoptimallength global go go.whether goal goalsestablish goe goingto golden goldenparachut goldenparachute.220 goldenparachutearrang goldenparachuteshiftssom goldenparachuteson gomez gomez-mejia good gordon gotiateloweracquisit gov govern governancegener gp gpdenotethegratuit graceo gradual graduallyov graef gram gram.forexample grant grant-dat grant-datemarketpric granta grantan grantdat grante grantedat grantedat-themoneyhasa grantedoptionsto grantedto grantexcessivepaytomanag grantingat grantingat-the-money grantingemployeestock grantnewoptionsto grantof grantthati graphicallythattheincreasein grate gratitud gratuit gratuitouspaymentif gray great greatdeal greatdealofpow greatdealofsupth greater greaterextent.managerswithpowerare greateriftheboardi greaterlikelihoodofpayoutthanconvent greatermanag greateror greatersay greaterthanth greaterthanthatof greaterwillb greatest greeofmanageri group group.12 group.thisdistortion groupbett groupfeel groupon groupor groups-aboutwhoseviewstheexecuwheth groups-sucha groupsin groupsof groupswhoseopinionsareimport grove growth growthof growthopportun guaranteeda gue guethataccount guidelinesthatimpos h habib habibandalexanderp.ljungqvist hadbeenlowerinth hadheldunexercis hadlock hadthechanceto hall halukun hand handbookof handfulofcompaniesto hanka harcent hard hardto harm harmifit harrya hart hartzel hartzelland harv harvard harvardlaw harvesttal harvl hasa hasbeengivento hasbeenusedgener hasconsider hasnothadtheopportun hasnotstop hasprovid haun havea haveadoptedtrad havealreadyadoptedwindfal havealreadyadoptedwindfall-reduc havean haveargu haveat havebecomelessvulner havebeen havebeenappoint havebeenearnedbytheexecut havebeenestablish havebeenno havebeenreleased.id havebeenselectedin havebenefitedfromthevaluablesuggest haveconcludedthattheevidencesupport havecondependson haveconsider havedecidedto havedescrib haveex havefoundthatdirector haveidentifi haveinflu havelarg haveloweredthestrikepricesofopbut havemadethejudg havemisinterpret havemorepowerwhen havemovedin haveneithertheinclinacludingindepend haveno havenot haveonlylimitedtimeand haveprovid haveputforu.s haveputforward haverarelyraisedstrikepricesin haverulesrequir haveseen havesignific havetheinclinaceo haveto havetoissuepoisonpillsandto havevest haveworseaccount havingnoth havingpower.in havingyouroptionsand havioract hazard head headsi heatedresisbasi heavenlycityor heavilyfromhisoptionsbecauseofsectormanagerwhoha heavilyon hedg hedgeawayequityexposurebeforetheseinstru hedgingof hedgingunvest held heldcorbya heldcorpor heldliableforan help helpfromus helpfulto hemmer henc hencethisfactor henryg henryhansmann henryl herabilityto herassist hercurr hereto herfirm herinflu hermalin hermalinand hermarketportfolio heroptionsand herownsatisfact heyn hiddenecutivesor hiddenfromthestockmarket hiddeninsidertrad hide high high-valu higha highand highcompens higher higher-pay higher.10t higher.the higherceo highercompens higherconcentr higherearningsalso higherexpectedvalu higheriftheceo higherin higherlev102 higheroutsideoffer.whenrenegotiation higherpriceand higherrateof higherratesof higherreport highersalari higherthanth higherwhentheboardi higherwhentheceo highlevelsofproductcompetit highlycompens highlycorrelatedwiththevalu highlyunlik highpay highsocialstatusversusotherceo highstil highthat highthatexecutivescan hill6thed himfrombeingforcedto himmelberg himmelbergand himon himwillrefuseto hinder hire hirea hirean hiredbi hiredbyfirm hireddeanoverthedean hiredelsewhereha hiredfromtheoutsidewhoat hiredthrough hireherand hiresduringtheperiod1990 hirshleif hisfirmwouldnotb hisindethemanag hisinflu hislegitim hislik hisliking-islikelyto hispositionforsometim hispowernoton hisprimari hisrelationship hissalaryifh hold holder holdersi holdersmustclaimthatdemandon holdersof holdersthatcouldpos holdersvotedo holdervalue.this holdervoteand holdforfirm holdingeveryth holdingothertermsoftheoptionsconst holdingthenumb holdingtim holdmoreshar holdsharesforsomeperiodpriorto holdup holmstrom holthausen hoodofan horizons219 hostil hostiletakeov hostiletakeover.1 hostiletakeoverattempt hostiletakeovermor housebecausethatinhousecandidatedo housecorpor howev howevermoder howeverslowli howex howfartheywouldb howi howmanageri howmuchoutrag howoptionsi howthearrang howtheissuanceofconventionaloptionsaffect howwhichtheywouldb hub hubbard huddartestim hundredfirm hurdlesareovercom hurtmanag hurtshareholdervalue.the hurttheindepend huson hypothes hypothet hyukcho id id.a id.directors idat205 idat37 identifi identifiescannotexplainthefailureto ie ies-that ifa ifan ifani ifexecut ifh ifindex ifit ifmad ifmanag ifmarket ifmarketparticip ifnot ifnotal ifnotalmostexclus ifnotimposs ifsh ifsharehold ifshegiveslessthan ifshegivesmor ifsuchadjust ifsupportformanag ift ifth ifthecompani ifthecorporatestatutedo iftheexecut iftheexecutiveexpectsto ifthemarketha iftheprospectof ifther ifthesharehold iftheyarenotemploy iftheyhad iftheywish ifw ii iii iii.g illegalfor illegalto illusoryunlesstheexecutivesar imagin immedi imofceo impactof impedetheacquisit impedethefirm impedi implement implic implicationsfor implicit impliesonlythatmov implythat implythattheexecutiveshould imporpackag import importaffect importancefreedom importantworkson importh impos imposea imposeanyconstraint imposedwhenth imposesignific imposesmuchof imposesom imposesomeconstraint imposetightconstraint imposetoo imposs improv improvecompens in-the-money in-theto ina inabc inabout20 inand inandwil inanyofthefirm inapafteradjust inat incen incencommitte incenconcern incent incentivealign incentivecontract incentivecontractsat incentiveeffect incentiveeffectsand incentiveinstru incentivepay incentives-arebetterexplain incentives.ceo incentivesand incentivesat incentivesforbehaviorthatincreasessharehold incentivesin incentiveswhen incentiveto inclin inclinedto includ includecamouflag includecontractu includejorgeg.aseffandmanuels includeperryandzenn includethedeandfromtimeto includingan includingbenefit includingbenefitsfrominsidertradand includingboth includingon includingth incomeand incomestat incometax incompet inconnect inconsist inconveni incorpor increas increased52trends increasedbecauseof increasedbyapproxim increasedcompens increaseddemandfor increasedfrom46 increasedin increasedth increasein increaseinoil increaseinvalueofabout20 increasemightb increasesceo increasesearningsand increasesin increasessignific increasesthecompens increaseth increasetheexecut increasetheircompens increasethelikeli35jfineconat increasethelikelihood increasethelikelihoodof increasethenumberand increasethenumberof increasethesensit increasewithincreas increasinga increasingexecut incred increment incumb ind inde indear indearedefin indeedexpertsin indeedlikelyto indeedoptim indehav independ independenceof independentboard independentdirectorsi index index.for index.notsurprisingly indexdexingdeservesspecialattent indexedexecutivestockopt indexedexercisepric indexednotto indexedopt indexedoptionin indexedoptionovera indexedoptions-must indexedoptions.74 indexedoptionsand indexedoptionsar indexedoptionswereextrem indexedor indexedtheexercisepriceofoptionsto indexedto indexesitsopt indexi indexing-nam indexing.137 indexing.by indexing.it indexingwouldalso indexne indexopt indexros indexwouldscreenoutnot indic indicatingthat indicativeof indirect indirectremuner individualact individualsforgroup individualsforgroup-level indollarofstrikepricereduct induc inducea inducean inducedbymarketforcesnotto inducemanageri inducingtheexecut indus industri industrialrevolut industrieswheretheirrelativetal industry-specif industry-wid industry.117 industryeffect industryindex ineffect ineffectitakeov ineffici inefficientcompens inefficientpay ineothermethod inequitywithinan inevit inexcess inexcessofa inexecua infactprovid infamili infer inferfromthefailureoftheseresolut influenc influencedto influenceof influenceoffirmitscapitalstructur influenceov influencetheirown influencetheirpay influenceto infootnot inform informa informationappear ing ing.rather ingand ingbecausedirector ingceo ingdat ingi ingof ingperiodi ingperiodsand ingreput ingsdu ingsfromnotreward ingso ingthatthestrik ingthecompens ingthisexercisepric ingtoomuchoutrag ingtreat ingvestedor ingway inifotherdirector inin ininclud initi inits1986 initssectormight injustifi inlarg innegoti inof inorderto inordertolowertheexercis inordertotaketheceo inparta inpayi inq insearchofexcessat229 insensit inset insharehold inshort insid insidedirector insidedirectorsincreas insideinforduringperiodswhentheyar insideinform insidersellingof insidersignalingand insidertrad insidertradingin insidertradingwithrepurchasetenderoff insimilar instanc instantan instatesthatadoptantitakeov instead insteadcontinueto instinct institut institutionalshareownership instrument instrurisk instrurisk-avers insuchacademicworkhasoutpacedeventhegrowth insuchcasesarelikelytohavestilla insuffiand insuffici insulatedfromsectoror insupport intens inter interest interests.tm interlock intern internalgovernancemechan internalmonitoringmechanismsand internalrevenu interoverallcosts.we intervent inth intheacademicliteratur intheaggreg inthebestinterest inthecompens inthedetail inthedirect inthefinanci inthefirst intheindustri intheinterim intheirstudya intheliteratur intheprior intheprocess.9 intheten intheten-firm intheu.s inthevalueoftheoptionovertheindexedexercisepric inthisarea inthiscas inthoseinst intoaccount intoaccountbeforeaward intoaccountex intocompens intoexecut intotheir introduc introduct inturn invantagecannotentir invest investherown investig investin investmentand investor investoradvocacyorgan investordur investorreact investors.in investorsand investorscan investorsen investorsquest investorsto involuntari involv involvedin involvedintheselect involvementin involveseffici involvingpubliclytradedfirm inwhich inwhichout inwhichout-of-the-money inwhichsharehold inwhichtheboardturnstotheoutsid inwhichthissemi inwhichthissemi-index irc irrat irrelev irwinmcgraw irwinmcgraw-hill6thed is.theyalso islikelyto issu issueaddit issuedat issuedat-the-money issuedon issuedto issuedundertheplan.thus issuesa issuesthenew isthrough isthusconsist it.ifthereis itdo itdoesnotreducethereward itedmay4 itform iti itisworth itmight itnecessari itscontract itscurr itsdutyofcar itseffect itselfto itselfwouldnot itsfootnot itslimitedcompens itsownership itsprocedur itssector itssector.thus itssensit itwouldb itwouldnotmakesensetogivea ity-even ityofusingoptionsto iv ivo j j.a.mirrlees j.barris j.carrbettis j.denis j.hall j.loewenstein j.lowenstein j.lynch j.martin j.murphy j277 jacct jack jackhirshleif jagannathan jal jame jamesb jamescrow jamin jan14 janakiraman jasonknott jat jayc jayhartzel jayw.lorschandelizabethm jbus jcorp jcorpl jecon jeff jeffrey jen jennif jennifercarpenterand jensen jensenand jensenhav jensenmightarguethat jensenmightarguethat-in jereski jess jessem jfin jfin1495 jfin823 jfin831 jfinat jfinecon jfinecon317 jfineconat jfm jfmecon jin jinand jl joann job john johnc johncor johnevan johnm johnson johnsonand join jorg josephf journaland jpolitecon jpolitecon225 jstor judgment judgmentrul judgmentrule-requiresth judgmentsimplyreflect judici july17 june8 juniorexecutivesaccept just justbeengivenoptionsfromimmedi justicetheori justif justifi justifieda justifiedto justifieshi justiitprovidedinfiedto justment k kahan kahanandrock kaplan kathyb katz keep keepingtheircura keeptheconsultexecutivepayconsult keith kellyr kenneth kennethj.martin ket kevin kevinh kevinhallock kevinj.murphy kevinmurphi kevinmurphyha kevinmurphyreportsthat keyproblemi kindsofstockoptionplans.85 klein kluweracademic1999 knoeber know knowledg known knowsbad kole korn/ferry kose kraakman kucher kumar l la label labor laboreconom labormarket labormarketi lack lacka lackofindex lackofrestrict lalithanaveen lambert land landscap landscape.but lane laporta lar larcker larg large.durthemedia largeamountof largeamountofoutragewilloccur largeand largebodi largebodyofworkinfinancialeconom largecompaniesin largecontrolingcashdidso largeexternalsharehold largeextract largefirmsne largegap largegroupsofoutsideobserv largeloss largelyshapedbytheforcesofoptimalcontract largelyto largelyund largelyworkedwithinthismodelin largenumberof largeoutsidesharefewerinstitut largeoutsidesharehold largeoutsidesharelingsharehold largeownershipstak largepartbytheceo largeparton largepercentag largeport largepubliccompani largepubliccompanyundoubt largepubliccorpor largepublicu.s larger largerand largerassign largerbas largerbonusnextyearlesttheir largerconvent largerinstitut largeriskpremium largernumb largersalaryi largerthantheexpect largesalesofstockthat largescale.it largesharehold largeshareholderto largeshareofthenonpecuniari largestinstitut largestsharehold largeto largeu.s larlytheceo larlywhentheboardi larpromot last lastdecad late late-april laterdata lathattakestheviewthatmarket latter laura law law.andevenoncetheseprocedural lawand lawfirm lawfirmi lawrenc lawsinthe1980sthatmade lawsuital lazear lead leadinginvesor leadtotheadoptionofineffici leahey learnedtostop learningcurvewhenit learningfromtheus learnsthateveryotherpartnerat least least10.5percent leasta leastin leastinpartto leaston leastseveralbilliondollar leastsixmonthsand leastsomecas leastsomeestswiththoseofsharehold leastsomepowerandtherefor leastsomer leastto leasttob leasttwoproblemswiththisargu leav leavesthemworseoffoveral led leftfreeto legal legalchalleng legaleffect legallyrecogn legalruleschang legalscholarship legisl legitim legitimaci lei lemmon lemon length lengthbargain leonhardt less lessabl lesseffect lesserdegree.to lesserext lessfavorableto lessforthefirm lessin lessnecessari lessrentsthantheceo lessthan lessthanceo lessthanthedirectbenefit lesswhentheiropt lesswhentheiroptions-bas lesswillingto let letb level level.and level3 levelemployeesand levelofcompens levelofoutsid levelsthatmakeexist leviat levin levinsohn levmor levmorearguesthata lewi li liableforillegalinsidertrad library1992 lic licly-trad liclyheldcorpor lie liebman liebmanhav lier light.in lightofth like likebureaucrat likelihoodthata likelynot likelyto likelytob likelytogo likelytointroduc likelytolimitthedegreetowhichtheindepend likemostconvent liketheoptimalcontract limit limitationsofth limitedevidenceavailabledo limitexecutivecompens limitexecutivecompensation.see limithi limitson limitstheextentto limittight linda line line.moreover lineoflegalscholarship linewiththecurr link linkbetweenmanageri linkedbroadlyto linkedonlyto linkedto linkingpay linkingstock linkthati liquid liquidityand liquidityor lisa lishsuchcommitte list literatur literatureat literaturei litig littl littleattent littleattentionlevelsand littleeffort littleh littlenoticedbi littlepract littlereasonnotto littlereasonto ljungqvist load loadabl loadableoptionswitha loadoptionswitha loan loathto locationof lock lockon locksin loewenstein long long-term long-termperspect longa longand longattract longbeenregardeda longerb longmatur longpuzzledresearch longregardeda longtim longtimefromwhatparticip lopez lopez-de-silan lorschand lose losehiscompensationandothereconomicandnoneconom losetheirposit loss losttheirvalue.anysuchbenefitwouldtherefore lot louiskaplow love low low-riskbusi lower lower-level lower.see lower.we lowerboundon lowercost lowercosttothecompani loweredex lowerexerciseprice.in loweringof loweroutragecost lowerpayin lowerpric lowersalarywhentherei lowerstrikepricewithoutcancelingtheold lowerthanthecurr lowertheexercisepric lowest lowestpossiblecost lowestpossibleexerciseprice.each lowestpossibleexercisepriceconsist lowvolatil loyalbutincompetentsubordin luann lublin lucian luciana lucianaryebebchukt luck luck-bas luck.the lucki luigi lutionof lyon m m.p ma machlin maclver made madea madebetexplainedearli madeto madewithrespecttooptionssubjecttoperform madewithrespecttooptionssubjecttoperformance-condit madeworseoffwhentheindexincreas madhar magnitud main maining70 mainpoint mainpointw maintainrestraint maintainth major majorityof majorityshareholdersin make makedecisionsthatservesharehold makedemand makedemandon makedemandor makeit makeno makerecommend makesanymov makesclearthatmanag makesdirectorcompens makesensefora makesensegiventhepragmat makesenseofit.as makesharehold makessharehold makesthemmoreofa makestheoptionmorevaluableto makesubstantialprofitstradingon makesuchprofit maketheexist maketheircalcul maketrad makevalu makevalue-maxim makingcompens makingsupracompetitivereturnsposs makingth mallyar manag managea managementdismiss managementinfluenceov managementteam manager-ag manager-specif managergivenindexedoptionscan manageri managerialbehaviorex managerialbewillbriefli managerialchang managerialchange-in-control managerialcompens managerialdismiss managerialeffortessenti managerialincent managerialincentive-align managerialincentivesto manageriallabormarket managerialoptimalcontract managerialownership managerialpow managerialpower.avoiding managerialpowerand managerialpowerapproach managerialpowerapproach-outrag managerialpowerapproach.23 managerialpowerapproach.these managerialpowerapproach.underthis managerialpowerapproachcan managerialpowerapproachfocuseson managerialpowerapproachi managerialpowerapproachoffersa managerialpowerapproachsuggeststhatmanagerswith managerialpowerapproachsuggeststhattherei managerialpoweron managerialriskavers managerialriskaversionand managerialstockoptionsshouldb managerialvaluedivers managerialwealthaffectsth managersa managersand managersar managerscan managersconsci managersenjoyprivatebenefit managersforchoosingprojectswith managersforgeneralmarketrisescouldb managershav managersin managersinflu managersleav managersmightmakesignific managersmorepow managersof managersofthesecompanieshavesubstanti managerson managersstillhav managersthan managersthati managersto managersus managerswer managerswhenthestockpricefallsforreasonsbeyondmanag managerswhodo managerswillhav managerswillhavelesspow managerswillseekto managerswithconsiderablepow managerswithintheremain managerswithmorepowercan managerswithth managerswould managerswouldb managerthistypeofnon managerthistypeofnon-performance-bas manageth managewel managfavor managin manathat manconstraint mandelk mandrequir mani manipul mann mannerthatapproachesth manto manufactur manway manycas manycasesenablesthemto manycasestheconsumpt manycompani manyfirm manyfirmsdo manyfirmsplac manyoftheoutsidedirector manyofthepattern manyopt manyoptionsar manyu.s mar mar-apr1999 marc marcel marcelkahan marcelkahanandedwardb margaretr margin marginalincent mariannebertrand mariannebertrandand marilynf mark marka market market-and market-b market-wid marketa marketand marketaverag marketaverage.the marketbeyondhiscontrolcouldb marketboom marketchang marketcorrect marketdisci marketdownturn marketeffect marketfor marketforc marketforcescannotensurethatmanagersand marketforcorporatecontrol marketforcorporatecontrol.the marketindex.undersucha marketlevelsduringboom marketmov marketnois marketof marketor marketparticip marketperform marketperwidelypraisedbi marketportfolio marketpressurewillmov marketpric marketprice.in marketprice.it marketprice.within marketpriceand marketpriceat marketpricei marketpricemaxim marketpriceon marketriskdisclosur marketse marketsor marketto markro marshal martinj.conyonand martiv marxvak maryellencart mass massachusett massof materi mation mation-forexampl matsunaga matter mattera matterand matthew matthiasbenz matur mauraa maxim maximizesharehold maximizeshareholdervalu maximizeshareholdervalue.in may may5 mayb maydiscourag maylead mayopposereduc mayopposereduced-windfal mayprovideconsider maywellb mayworkin mcdermott mcgrawhill1978 mean meanlevelof meanmanag meansofalign meansofcamouflag meanthatthefirmshouldus meanvalu measur mechan mechanismsand mechanismsar mechanismsthat mechathatmarket media median medianceo mediancompens medianvalu mediocrei medlenprovid meetingsand meetingsless mejia mel melvina member membersof membersto memberswer menachembrenn ment ment.216 mentat mentforriskofdismiss mentin mentinconnect mentor mentreput mentsagainsttheneedto mentsintheirportfolio mentturnov mer merelyimpliesthatcompens merger met.id method methodof methodolog metonlybythesesal meulbroek mgmt41 mgmt5 mgmtj1568 miamil michael michaelc michaeljensen michaellevin michaelwacht michiganworkingpap micro microsoft might mightagainvoteagainsttheoptionplan mightalso mightarexplan mightaris mightask mightassistin mightb mightbecomesuffici mightdeviatefromthatsuggestedbi mightdiff mightexpectfirm mightfeelinsult mightfollowa mighthavean mightincreasesignific mightjeopardizenotonlyth mightlead mightmak mightne mightnot mightnotinvolvefilt mightoccurto mightpermit mightpref mightpreferincent mightproduceexecut mightprohibitmanagersreceiv mightprovid mightproviderentsto mightprovideth mightseek mightsimplywanttheirfirm mightstemfroma mightthereforebeliev mightundermin mightviewsuchcompenor mightwel mightwellb milbourn mile militateagainsteffect million millionand millionandthattwo millionandthattwo-third millionannuallyp milliondeduct millionha millioni millionof millionperyear.in millionperyearunlessth millionperyearunlessthecompens minim minimizeth minimum minor minow misledbi missal.buttheriskofbeingfiredalso mitte mobilizedbi modatetheceo model model.the modelof modelofboard modelsthatviewtheboardofdirector modelsuggest moder modern modernbusinesscorpor modest modifyth modon money moneybynotpayingtheexecutiveextra moneyevenifherfirm moneyhardlymeansthatit moneyoptionswouldtrigg moneyor moneytocreateevenmorepow moneyundesir monin monitor monitorth monk monsantoand monsantowillnotallowtheceo month month.instead monthbeforean mookherje moral morck moreapplicablein moreboard morecamouflag morecash morecloselyto morecompens moreconcentr moreconcret moreconvent morecostlyforthesharehold moredecisionmak moredesirablethanhercurr moredetail moredifficult moredispers morediverandmoreresearch morediverandmoreresearch-intens moreeasilyandeffect moreeasilyexplainedunth moreeffort morefavor morefromsharepricevolatilload morefundamentalnaturethatbringus moregener moreimport moreindepend moreindependent.53 morelik morelikelyamongsmal morelikelyto morelikelytoaris moremoder moremoneythan moreof moreoffic moreopt moreoption-and moreor moreothertop moreothertop-rank moreoutragea moreov morepow morepower.thereis morepowerar morepowerfulvi morepowerfulvis-a-visothersharehold morepowerthanthosecom morepowerthanu.s moreprestigi moreprofit morer morescarcethanqualifiedjunior moresensitiveto moresharesar moresharesownedbi moreshareswould morethan25 morethan60 morethanconload morethanotherceo morethantheirnon-u.s.coun morethingsthatar moreto moretopoffic moretotalcompens morevaluableto morevolatiledistribut morevulnerableto mornand morrow1993 mostal mostbenefici mostboardcommitte mostcompani mostcompens mostdirector mostexecut mostfirm mostfirmsimposefew mostimport mostof mostofwhichhadnoth mostprestigi mostpromin mostpubliccompaniesi motion motiv motivemightexplainwhyfirm movei movement movementsin movementtowardreduc movementtowardreduced-windfal moveto movingfromconvent moze much mucha muchaboutth muchaboutthebenefit muchaddit muchadditionalrisk muchbetterincent muchbetteroffwithconvent muchbetterpaid muchbettertarget mucheffect muchgovern muchgreaterthanthatoftheindexedoption.an muchhigherin muchinfluenc muchinterestamongleg muchmorecloselyto muchmoreconcenwhenshareownership muchof muchoutrage.because muchoutragecost.in mullainathan mullainathanpres multi multi-year multiplereload multipli multitud mur161 murphi murphyarguesthattheirhigh murphycalcul murphyfoundthatthes murphyhad murphylookingat murphyprovidesevidencethatnewlyhiredceo murphyus must mustalso mustapproveal mustapprovestock mustb mustbrib mustconsid mustdecidehowmuchto musteith mustmansessesa mustofferan mustputth myer mymindthatmewarrenbuffett n n6 nal nalli nally.6 nallyindepend name namicsspecificto nancescholarship nancialeconomistshav narayananand narrow narrowingth narrowth natingcommitte nationalbureauofeconomicresearch naveen naveenreportthatin nber near near-uniform nearlyuniform necessari necessarili necessaryforth necessaryto need needb neededto needforth neednotpaymanag needs.all needs.for needsareunlik needshardlycal needsofmanag needsto neff negat negativeimpacton negativelyrelatedonlyto negativelyrelatedto negativerelaofinstitut negativerelationship negativeshocksmaketheoptionsworthless negoti negotiatedin neither neitherof nell ness nessopportun netassetvalu network nevertheless neverto new newcompens newequilibrium newjob newlyhiredceo newmanandhaima newmeansofcamouflag newopt newoptionforeach newoptionforeveryoptionexercis newoptionsoftenrespondbyheavilysellingalreadi newoptionsoftenrespondbyheavilysellingalready-own news newsaboutthefirm newsaroundoptiongr newsshort nexta nextconsidersth nextsect niam niamreportthatexecut nice niceoptionifyoucan nicholasheck nicholaswolfson nie niesand nifern nific nine nine-dayperiodthatbeginsf nineti ninety-six nismmighttherefor nohel nohelandtodd noise.shareholders noisyand nomidirectorsar nomin nomina nominomin non non-conflict non-employeedirector non-firmit non-index non-opt non-performance-bas non-traditionalexecutivestock nonapproachcan nonaustralianevidenceat nondeduct none nonlegalrulesof nonpay norholderinterests.42 norm normal normallyth normof norms-and norms-might normsand normscannottellus normsmustb normsthatthedesireof normswillslow norn norton1991 nosignific not-for-profit not.see not.u.s nota notalso notalwaysappli notan notattempt notb notbecauseofmanageri notbeen notbeendeduct notbythemselv notcaughtup notchargedto notclearthat notclearthata notclearthatinveshowev notclearthattheboard notdependon notdeviatefora notdisturbtheconclus notdriven notdu note note1 note10 note109 note111 note17 note183 note185 note2 note20 note203 note204 note211 note37 note4 note5 note58 note6 note61 note62 note9 note91 notedabov notedearli notedearlier.rather notedinpartii.b.1 notedthatsometim notedthattherationaleforrestrict notenjoyhighercompens noteon notequal.although notestheyshouldb noteworthi notexercisedimmedi notexplainwhythesecompani notfeasibleto notfind notfollowthatthelackofreduc notfollowthatthelackofreduced-windfal notfullyconsideredthefirst notfullyconsideredthefirst-thatexercisepricesar notgener notgiveup notgo noth nothav nothavea nothavean nothaveanyincent nothurtsharehold noticeableto noticethecostofmanag notimplythatrentextract notimplythattherear notimposetightconstraint notin notingthat notingthatovercompensationoftheceo notingthattheboard notinvolveindex notionthat notjoin notknowwheretheywouldrank notknowwheth notlikelyto notlimitthenumberof notmakedecisionson notmaxim notmaximizesharehold notmeetcertainperform notmer notnecessari notnecessarili notnorm notobservemorereduc notobservemorereduced-windfal notoccura notoffsetthedesirableeffectcreatedbi noton notonlytheirlocationon notourintent notparticular notpay notperfect notperform notperformance-bas notpreventan notprohibit notpuzzl notquestionthedesirabiloptionsprovidemanexecut notr notreadilyapparenta notreappoint notreceivemorepaythan notreflect notreflectoptimalcontract notrenew notreport notrepricedat notrequiredto notrequiredunderthetermsof notrequiredunderthetermsofhiscontract notresultin notseek notseensolelya notsiton notspecifi notsubstanvolatil notsuffici notsupport notsurpris nottakeintoaccount nottakenreasonablestepsto notthatlargea nottheboardrestrict nottheonlyfactorin nottheonlyposs nottheonlypossibleformof notthought nottoact notuniform notunusualfora notus notusuallyapproachth notusuallyremark notvest notvestunlessexecut notvestunlessperformwhichenhancesharevalue.46 notwanttheirpaytiedentir notwheth notwhythepracthus notyetprofit nov nowfocuson nowprovidescorpor nowrepres number numberof numberofcompenand numberofdiffer numberoffirm numberofotherstudiesthatfindthattheus numberofreasonswhyan numericalsimul nus nw ny o object objectionto objectiveswithinthescop oblig obmanag obpow observ observedintheworldofexecut observedusingthem.however observers-betheysophist observesuchexplicitevalu observevirtu observingthatto obstaclesbeforetheycouldgetto obtain obtainedbi obtainedfrom obthanwhattheywouldgetunderarm obvitionalconsider obvitionalconsiderations-sh occur occuralso occursonlyin oct odd of of1189 ofa ofabc ofacquisit ofamerica ofan ofanotherfirmsitson ofat ofat-the-money ofattenha ofauthor ofawardingexecutivestockopt ofbeinghiredforanotherceo ofcalifornia ofcamouflag ofcapital.takingmanagers ofcashcompens ofceo ofchicagolaw ofcommod ofcompani ofcompaniesthatdo ofcompaniesus ofcompenofdevi ofcompens ofcompensapow ofcompensationcommitte ofcontrol ofcontroltheyenjoya ofconvent ofconventionalopt ofcorpor ofcorporatepowerdo ofcours ofcriticaldecisionsthatmay ofcurr ofdebtinordertoreducetheriskoffinanci ofdesign ofdiffer ofdirector ofek ofekandyermack ofentrench ofex ofexecut ofexecutivecompens ofexist ofexpir ofextern offaccisepriceundersucha offer offernonbind offic officedeclinedfromseven officersand offinancialaccountingstandardsno offirm offirma offirmb offlex offreedom offset offsetani offsetrisk8 offtheboard ofgainsaris ofgeneralmarketor ofgiftorwast ofgiv ofgivforourpurpos ofgoldenparachut ofhedg ofhi ofhighrentsandlowoutrag ofhismanag ofincreas ofindepend ofindexedand ofindexing.142 ofinstitut ofit.alternatively ofjustifycan oflargefirm oflaw ofmanag ofmanageri ofmorepervas ofneedingto ofnewstockopt ofnon ofnon-index ofnormsin ofnotpayinghimself ofopinterest ofopt ofoptionexercisepric ofoptiongr ofoptionsgr ofoptionsin ofoptionsincreas ofotherfirm ofoutrag ofoutsidedirector ofover80 ofpathdependluciana ofpay ofpayout ofpayouta ofpayouti ofpayto ofperformancesucha ofperformi ofplan ofpoisonpillsand ofpubliclyheld ofreduc ofreduced-windfal ofrent ofrentextract ofrentsto ofrentswillnotcaus ofrepr ofreset ofrestrict ofreward ofriskmaninthegoldmin ofriskyprojectsat ofrivalfirm ofsal ofsharepricemov ofsharepricesarecomplex ofsharesh ofsharesownedbyoutsideblockhold ofsitu ofstockoptionsha ofstocksel ofsuchmechan ofsuchopt ofsuchoptionswhentheywerefirst oftakeov oftaxesprovid oftenat oftenconnectedto oftenfoof oftenform oftenhedgedin oftenhedgetheir oftenmad oftenpaidlargeamountswhen oftenrepaywithcompani oftensellstocktheyalreadyholdwhenopt oftenwillb oftenworkforconantin ofth ofthe1997compensation oftheagencyproblem ofthealleg ofthearm oftheaverageceo oftheboard.219 oftheboard.80 oftheboard.see oftheboard.to oftheboardcomposedofoutsid oftheboarditself oftheboardofdirector oftheboardofdirectors.27 ofthebroadermarket ofthecaseswherethetarget oftheceo ofthecompani ofthecompens ofthecorpor ofthecorporation-th ofthedeclinein ofthedigreatmajor ofthedirector oftheeffect oftheeightbestperform oftheexecut ofthefactor ofthefind ofthefirm oftheincent oftheindustri oftheintern oftheir oftheircompens oftheirexecut oftheirfinanci oftheirincenersarepermit oftheiroptionsiftheymeetspecifi oftheirpay oftheirpowerin oftheirsalesi oftheirshar oftheirwealthtofirm ofthelawsuit ofthemanageri ofthenomin oftheoptimalcontract oftheoptiongrantbysellingan oftheoptionswouldhav oftheotherfirm oftheplanthati ofthepow ofthepressureto ofthereasonsmanag ofthereset oftherewardthathasnoth ofthesec ofthesecondworstperform ofthesecur oftheseinstru oftheseopt oftheseoptionplansi oftheseoptionswer ofthesesituaperform ofthesevari oftheshareholder/management ofthesharesi oftheunwind oftheupsidepotential.202 ofthevaluetheirworkgener oftheworstperform ofthisapproach.an ofthisapproach.optimalcompensation ofthisview ofthisvolumin oftotalcompens ofu.s.ceos ofu.s.firms ofunanticito ofunexpect ofunvestedoptionsandrestrict ofus ofusingconvent ofvalu ofvalue-increas ofvariousindividu ofway ofwealthmight ofwhomha oil older olin olincenterforlaw oliverd olivierjeanblanchard ommend onceappoint oncetheconnect ondirector one one-timemoveto one.not oneoutoftwelvefirm onfilewithauissu onfilewithauthor onindexedopt onlikelihood onlin onlineat onlya onlyabout onlyat onlybroadmarketeffect onlyfortheirown onlyif onlyifth onlyiftherei onlyifthestockpriceincreasesabov onlyinsofara onlyon onlyonc onlyotherstudyfocus onlypossibleoptimalcontract onlyreasonto onlytwocas onoptionplan onperform onthetheori ontothesesharesexceedsth opanalysisof oper operateat operatein operatingwithintheplan operation653companylaw operationswhendownsizingi ophowev opindex opinion opjustif opof opopt opoptions.by opoptions.ifthisis opoptionsar opportun opportunist oppos opposesindexingoptionsto oppositedirect opteringcould opth optiallychangeth optim optimal.shareholders optimala optimalarrang optimalcompens optimalconin optimalcontact optimalconth optimalcontract optimalcontractalso optimalcontractwould optimalexerand optimalexerciseand optimalexercisepricedependsin optimalexercisepriceof optimalexercisepricesfor optimalfor optimalforal optimalforat optimalfornearlyal optimalforsharehold optimalforth optimalpay optimalprincip optimalprincipal-ag optimalstructur optimalto optimizean optimumlabor option option-bas option-vest option-wecouldat option.thus optionaccounting.152 optionat optionawardsaccount optionawardstendsto optioncompens optionexercis optionexercisesand optionforabc optiongr optiongrantfromweaken optiongrantssucha optionholdingsoutweighanyotherincentivesto optioni optionin optionoff optionon optionpermit optionplan optionplan.first optionplanmightb optionplansand optionplansi optionplansincompani optionplanswhenev optionplanto optionplanuntiltheceo optionpracticethati optionprogram optionprotiondo optionrepr optionreset options-th options-that options-thattheuseofsuchoptionswouldgiveriseto options-wheth options.a options.an options.if options.repricingrefersto options.the options7 optionsa optionsaccount optionsaffectsth optionsaim optionsalso optionsand optionsandrestrict optionsandstockaredesir optionsandthathavenotbeen optionsar optionsaros optionsat optionsavoid optionsbecom optionsbeingexerderedwiththesam optionsbi optionsbut optionsbyreduc optionscan optionschemesthatfilt optionscomplet optionscouldb optionscr optionscreatemor optionsdo optionseffect optionsenableexecut optionsenablemanag optionsexposethemanag optionsfarout optionsfarout-of-the-money optionsfor optionsgivenat optionsgr optionsgrantedto optionsha optionshavean optionsheld optionshelp optionsi optionsin optionsin1998 optionsinthat optionsissuedbeyondthematur optionsmaydominatebothin optionsmaydominatebothin-and optionsmight optionsmightappearto optionsmightitselfb optionsmightwellprovidethebestcombin optionsneednot.thus optionsof optionsoffermuchhigh optionsordinarili optionsoverindexedoptionsthatcould optionspersist optionsplansthatw optionspromotestockownershipamong optionsratherthanat optionsratherthanat-the-money optionsrecondit optionsreflect optionsreseteachyear optionsrewardmanagersforabsoluteincreasesin optionsseemspuzzlinggiventheirstrik optionsshould optionsstillalign optionsthatacceleratevestingifcer81 optionsthatar optionsthatautomat optionsthatcan optionsthatdo optionsthatmakeno optionsthatmayb optionsthatreduceaccount optionsthatvestinthre optionsthatwouldprovidebetterinstructur optionsthey optionsto optionstoacquirestock optionsvestingov optionswa optionswhentheyappear optionswhoseexercisepricei optionswhosestrikepricei optionswitha optionswithfeatur optionswithoptimalcontract optionswithperform optionswithperformance-condit optionswithperformanceconvent optionsworth optionswould optionswouldb optionswouldcreateworseoverallincent optionswoulddemandindexedoptionsthat optionswouldnotadvers optionswouldprovidemanagerswithlessmoneyorwouldrequirethemto optionswouldrequiremark optionswouldrequiremarking-tomarketand optionthat optionthatbearsth optionthatha optionthati optionthatvestsin optionto optionvaluationand optionvaluesand optionvest optionwitha optionwithan optionwiththesamepayout opunlesstheexcesscompens opunlikelyto ora oran orat order orderofmagnitud ordersof orderto ordertourna ordinari ordinarili ordirector org organ organizationmightalso orimplicit orindustri orleyashenfelt ormanageri orpeerperform orreput orrestrict orsectorperform orsectorrisesandprotecthatareduetomarket orthattheyarebeholdento orto orwheth orwithreloadprogram other otherapeithersectoror otherapproachescouldb otherapproachthatha otheravenuesforrentextract otherbenchmark otherboards.finally otherbusinessinterest otherceo otherceos.41 othercompani othercostsincur othercountri othercountrieshav otherdecisionmanagersin otherex otherexcess otherfactor otherfeaturesof otherfirm otherfirms.62 otherhand otherlong otherlong-term otherlow otherlower-level othermethodsof othernon othernon-work otheroffic otherpubliccorporationtakessucha otherpuzzl otherqu otherrelationships.79 otherresearchon othersector othersextendthetermofthenew othershareholderscomesfromthefactthatthestockpricemightincreaseforreason othershavearguedthat otherslikelyto othersshouldalso othertakeoverdefens otherthan otherthanth otherthanthroughtheirformalcompensationarrang othertheori otherthingsbeingequ othertim othertimesitwillb othertimestherewillb othertopexecut othertypesof otherwiseprotectedbi otherwisereceivedirector otherword ourdiscuss ourfocusisnotontheriski ourhighlylaissez ourhighlylaissez-fair ourinterpret ourmainpointi ours.a ourthesisdo ourview ouslyexcess ouster.however oustervia out-of-the-money out.if outbroaderpriceincreas outbroadmarket outchangesin outcom outcomesar outdat outofaffect outperform outrag outragecan outragecanb outragecost outragecosts.a outragecostsandconstraint outragecostsexplainsth outragecostsi outragedto outragei outrageimposesconon outragemight outragemightaffect outragemightproducevarioussoci outrageouscompens outrageresult outreward outsector outsector-wid outsid outsideceo outsidecompens outsidedirecreput outsidedirector outsidedirectorsand outsidedirectorsforth outsidedirectorsmaywel outsidedirectorswould outsidehiresareoftenceo outsideinvest outsideobserv outsideof outsideoff outsideoftheexecueralmarketdownturn outsidersand outsidersdecid outsidesharehold outstandingoptions.one outweigh overa overag overal overall.in overallforce.even overallpackageof overallperform overbroad overbroad-bas overcom overcometheeffect overcomethepotenti overcompens overcompensationproblem overdirector overdirectorappoint overexecutivecompens overexecutivepay overhalfof overhi overhiscompens overinoptionsar overpaid overpaid.and overpaidceo oversight overtheboard overtheir overthelawtheboardwilltakecontrol overthelitigationback overthepasttwodecad overthethre overthethree-year overtim overtimei overturn overturnboard overwhath overwhelm overwhichh overwhomtheceo owe own owna owncompens ownedan ownedbyunrel owneffort owner ownership ownership.the ownershipand ownershipexecutivessold ownerwilltherefor ownindustri owningmorethan5 ownonlya ownsa oyer p p.janesaly pa packag package.we packageand packageandthusitscostto packagei packagemightalso packagenotto packageon packages.second packagesaredesignedto packagesthatdo packarrang packinst paid paida paidceo paidconsider paidmorein paidto paidwithoptionsdesignedto panacea.the panelon pani paniesissuingindexedoptionsmustmarktheseoptionsagainstth paniesneedto panieswithdispersedsharehold pany.thistendstoundermine panyduringthosetwoyear paper paportha parachut parachutea parachutepay parachutesand parachuteson parachutesto parallelrisein pardemandfutil parrino part parti parti.b parti.b.3.b partial partialexplanationfor partialexplanationforth partialindex particudirectorship particular particularcompensationpackag particulardesignof particustandthattheyalso particuth partiesto partii partii.a partii.b partii.d partii.e partiii partiii.c partiii.g partinggift partl.adescribestheoptimalcontracting partlyfilterout partlyinfluenc partner partof partofobserv partofsuchcommitte parton partwithoptionswillhaveto past.using patedincreasesin pattern patternsprovidea pattersonand patunlik paul pawn pay pay-for-perform pay-perform pay.2 pay.furthermore pay.it pay.schizersuggests pay.see pay.someofthepractices pay.the pay/performance pay2 payalsoincreas payand payandp payandthemarket payandtoextract payarrang payat paybetweenu.s.and payceo paycouldsubstanti paydatathatwould paydiffer paydur payfor payherin payi payinghimselfreasonablecompens payingthemout payisneg payment paymenteven paymenti paymentto paymoreinorderto payoffof payout.butas payoutandseparatecash payoutassociatedwithth payoutpacedtheincreasein payoutswouldb payoutunlessthesharepriceexce paypackag paypackagesdo paypackagethati paypackperform paypractic payraise.neverhimself payraisesi paytaxeson paytendsto paythati paythetaxthati paywithan pect pectedtoproduc peer peer-group peercompens peerfirm peergroupcomparisoni peergroupssetcompens peers.246 penalizemanagersfor penalizingexecutivesforlargertrendsbeyond pendent pendentdirector pendentdirectorship pennsylvanialaw pensat pensationat pensationmustb peopl people.althougha per perannumov perceiv perceivedcostofstockopt percent percent.141 percent.some percentageof percentamong percentdrivenbygeneralmarketconditions.1 percenthad percentil percentiles.theonlysituation percentin percentlikelihood percentmor percentmorethanconvent percentof percentofal percentofthe250largestpublicly percentofthelargest250firms percentoftheotherfirm percentofthosefirm percentreductionin percentsincetheoptionsweregr percentus percentwereinternalhir perceptionthattheyar perdollarofexpectedvaluethanconventionalopt perfect perform performance-and performance-bas performance-condit performance-respons performance-sensit performance-vest performance.155 performancechangesfollowingtop performanceevalu performancerelativeto performancestandardsin performancetargeti performancetreat performitmustreceivesharehold perhap perhapsevenfromfirmto perhapsmuchhigherthanth perhapsotherexecut perhapsthemosteffect period period.although period.supposethatthecompanyseeks period.thisis periodafterquart periodaftertheoptionshavevested.for periodand periodbegin periodi periodicbasi periodreportsthatonly30 periodsshouldb periodstudiedbi perksassociatedwithmembership perksassociatedwiththatboardposit permiss permit permitor permitssharehold permittingmanagersto perquisit perquisiteconsumpt perryand perryandmarczenn perryandzenn persedownership persistedforso persistenceof persistprimarilybecauseactorsobserveon person personalassetsto personalbenefit personalrelationship persondriv personneland personnelinst personwiththeseconcernsmight perspect perspecthanon perspective.the perspecto persuasive.althoughu persuasiveexforthispattern pertheoptimalcontract peryearin peter petera phasison phycal pill piricalstudies.surveying placategroupmemb place place.althoughsettingexecutivecompensation placein placeinthos placeminimum plain plaintiff plainundertheoptimalcontract plainwhytheoverwhelm plan plan.one planat plani planmakessharehold plannedfor plannedtradeforseveralmonth plans.under plansadoptedin1997.see plansarereallya plansbetween1978and plansi plansinthehopeofbeingacquir plansmightb plansprovideadditionalreload plansresultsin planswher planthatwouldembarrass plausibl plausibleat plausibleexplanationforth plausiblejustif plausiblyb play playa playan playeri playersto playsa ple pleas pleteabsenceofin pleteabsenceofin-the-money pliantandinsteadwillforcethemto plinemight ploye plusa plusthewindfal pm point pointformurphi pointi pointment polici policiesinbusinessweek policymatt policytowardsproxi polit politecon pollackprovidesomeevidencethatcompani pollock poor poorerproductquality.see poorly-and poorly.in poorlyperform poorperform porac porat porateamerica porateinsidersat portant portedin porter portfolio portfolioconsider portfromacademicsandothercomment portionof portionofthereturn posals.however pose posesa posit positionalpowerconstitut positionand positioni positiononlyprovidesa positionsbeforeth positionsbyotherfirm positionson positionto positivecorrel positiveforsharehold positivelyrel positivepayouta positiveshock positiveterritori posofskillsand possibl possible.thatis possiblebenefit possiblecheckon possiblestrik possibletaxexplan possiblethattheoptimaldesignof possiblethatthisextrem possibletoshow possiblewithout possiblyin possiblyin-attempt post post-trad postadjust postforadversestockpricemov postifth postin postindex postreset postretent postsgivethem.9 postuoutindustri potemkinvillag potent potenti potentialcostto potentiallyadvers potentialsignific potentialtax power power.89 power.even power.finally power.thus power.underthe powerand powerandbywhatwouldb powerandexecut powerandpay powerandr powerandtheextract powerapapproach powerapproach powerapproach.given powerapproach.interestingly powerapproach.someofthecompensationpracticesand powerapproach.thatapproachsuggests powerapproach.the powerapproachand powerapproachcan powerapproachdo powerapproachexecut powerapproachfocusesupontheconnect powerapproachi powerapproachpartof powerapproachpicksup powerapproachthanbytheoptimalconbas powerapproachthanundertheoptimalcontract powerapproachto powerapproachtoexecut powerbutsimpli powerexplan powerfulincentivesp powerfulincentivesthan powerhypothesi poweri powerin powerinflu powermodeldo powermustfirstb powerof poweron powerperspect powerplaysa powerplaysin powerthanothers.nevertheless powerthanothers.undoubtedly powerthatmanag powerto powervi powervis-a-vi powerwil powerwillalso powerwilldependon powerwilltendto powerwiththeboard powerwiththeboard-to pp prabhala praclikelyplaysa practic practicalmatt practicea practicecan practiceexaminedbypartiii practicefailsto practiceha practicei practiceof practiceofreset practicesar practicescan practicescannotb practicesdeviatefromthos practicesmightb practicesw practicethati practicev practition pre pre52 prearrang precatori preced precededramaticdeclinesin preciat precludetheus predetermin predict prefer prefera preferableto prefercandidateswhoar preferto premiaforsharehold premium presenc presenceof presenceofinstitut presenceofmarketforcescannotb presenceresultsin present presentedand presentedin presentevid presentindustri presentinga presentingevid presentonlyamongcompani presentor presentvalueof presentvalueofth preserv press pressedviewsthatar pressur pressureto prestigeand presum presumablyiftheboard pretrad prettyfast prevent preventan preventdesirableacquisit preventexwindowsand preventlarg preventor preventsfirmsfromdistribut preventsrentextract preventsubstanti preventthemfromus previoushighreachedsinc previouslynegoti price price.anyindex price.id price.theimportant price.we priceand priceandinitialvest pricebeinglowerthanthegr pricebeinglowerthanthegrant-d pricedeclin pricedo pricedrop priceincreas priceincreasesboosttheperform pricemov priceof priceon priceperform priceriskexposureof pricesabov pricesincreaseacrosstheboardcaneasilyb priceson pricespik pricethatar pricewasreducedbutleftabovemarket pricewillfal pricewithout primari primarili princeand princip principaland principalsar principl principlesof princoncludingthatth priorandimport priorsix priorto privat privateinform prize.8 pro proachesa proachstartswithrecognit probabl probablyplaysan problem problem.however problematicfromtheoptimalcontract problemdirectorwhenth problemi problemsspecificto problemswiththetourna problemwithexecut procedur proceduralbarriersthatmak proceduraldu proceed proceedings203 proceedwitha process process.2 process.94 processbeginswiththeselec processdeviatesfrom processdutiesbycomingup processesand processesar processesthatenabletheexstructur processesthatset processi processindicatesthatit processof processthatexecut processthroughwhichpay produc produceaddit producecompensationarrang produceoutcomesequivalentto producesignific producethesameoutcomea product product.conversely productmarket productmarkets.in productqualityand profession professionalceo profit profitbi profitfromhi profitsfromtradingon profitto program programforsharehold programi programsthatar prohibit project projectchoic projectchoicein projectha projectselect projectsselectedbi projectsthathavehighervolatil prolifer promin promot proor propos proposalprovidedbythecompens proposalson proposeda proposedbi proposedin protect protectedbi protection-reset protecttheirown provalof provia provid providea providebetterincent providecashor providedbi providedesirableincent providedisciplin providedthelargestshareofthegains.see provideevenmorevaluewithlittleor provideh provideher-if provideinform provideinputintotheexecutivecompens providesa providesevidencethatsharehold providesmuchmorethandownward providesno providesomeconstraint providesyetancounterpart provideth providethemus providethemwiththeproperamountofincent provis proxim proxybattleor psychologicalperspect psychologyofmodernpersuas pub pubconsistsof public publiccompanieshav publiccompaniesthatlacka publiccompaniestyp publiccorpor publiclyavail publiclydisclosepubliclyin publiclytrad publiclytradedfirmsdur publish purchaseonlya purelya purerisk purerisk-shar pureself pureself-interest purposeincur purposeofstockopt purposesof pursuant pursuantto pursuethelitig pushedforthisimprov pushexercisepricesa pushforanyth put putdiffer putforward putforwardmoresystemat putsit putto puzzl puzzle.underthemanagerial puzzlesbyresearch puzzlesprovidedbytheexecut puzzlingfroman puzzlingpracticei puzzlingstockoptionsand pyramid q qualifi qualifiedceo qualifya qualityexecut quant quarter quarterearningsdroveth quarterlyearningsannounc quartileoftheindustri quatelyexplaintherareus question questioni questionin questions75 quir quirecompaniesthatfailto quit quiteconsist quitehigh quitelimited.67 quitenoisi quitesimple.as quiteusefulin r r.b r.g r6 r8 race rachelleahey rafael raghuramg raid rais raisea raisingthebar rajan rajesh rajgopalandterri ralli rallya ralph raman randal randallthoma rang rangarajank rangedfrom83.5 rangeof rangeofoptimalexercisepric rangeofparamet rangeofpostantto rangethatincludesthecurr rank rank-ordertourna rankedbelow rankingof rappaport rare rare.only5 rarea rarecombin rareevenbeforethi rarelyhaveotherbusinessinterest rareus ratchet rate ratedeclin ratedeclinesthatbenefitth rateofexecut rates.to ratesand ratesandprofit rather ratherindirect ratherinstallthemselv ratherthan ratherthanan ratherthanchangesin ratherthanconvent ratherthanin ratherthanmaximumperform ratherthansector ratherthansector-wid ratherthantheexcessrentcapturedbi ratif ratifi ratio ration rationaland rationaleforvest rationandpaystheexercisepricewithstockthath rationdateand ravi re rea reachfirm reaction readershouldrecal readthefooton readyown.standardpracticefailsto realevidencethatitappliesto realist realisticanalysisoftheprocessesthatproduceexecutivepayand realityof reallypaid realtermsan reap reapofindepend reapthegain rearenonbind reason reasonabledoubta reasonabledoubtabouteith reasonabledoubtthat reasonabledoubtthatth reasonableinvestig reasonableplan reasonableto reasonfortheoptimalexercisepriceto reasons.first reasonsalso reasonsforth reasonsto reasonthemanagersearnedwhattheydid reasonto reasontobelievethatindex reb rebecca receiv receiveadvancepermissionfromth receivean receiveboth receivedon receivedthesedollarsonlyto receivedundera receivehigh receivelargersalariesthantopexecut receivelittlemonetari receivemor receivemuchlargerincreas receiveno receiveopt receivepay receivepayin receiver receivesa receivesan receivestheund receivesubstanti receivetheattent receivetheexin receiveunderoptimalcontractingand recent recentdevelopmentsin recentlysuggestedthatsom recentsurvey recentten recentten-year recentwork recipients.exercisepricesarereset reciproc reciprocallysit recogn recognipowerapproach.because recognizeto recommend recommendsdismiss recommitte reconcilefirm recthatcompens rector redistribut reduc reduceaccount reduced-windfal reduced.one reducedext reducedindexedoptionswouldento reducedofsectorand reducedprob reducedrewardcompon reducedth reduceexecut reducemanag reducemarketbas reducesharehold reducesrewardsforgeneralmarket reducesthevalu reduceth reducethedisciplin reducetheexercisepriceof reducetheexercisepricesomenervousaboutpublicreact reducetheextract reducetheirus reducethepowerofmanag reducetheprob reducethescop reducethesharepricein reducethestockpric reducetheundeserv reducetranspar reducewindfal reducingceo reducingmanagerialrisk reducingmanagerialrisk-bear reducingtheprofit reducingwindfalls.althoughtyingthe reduct reductionin reexecut refer referto reflect reflectionson reflectperform reflectth reflecttheirreduc reform refrain refusalto refusedto refuseto regard regardeda regardlessof regime.suppose regimes.in regul regularbasisandaccruean regulateth regulationand regulatori rehimto reilli reincorpor reingold reinierh reinierkraakman reject rejector rel relat relatedpay relatedto relatedtoth relatestothevolatil relationship relativelyhigh relativeperform relativeperformanceevaluationand relativesuccess relativeto relbus releas releasebad relev relevantempiricaldata relevantforthisquest relevantindicesand relieduponto reload reloadableoptionplansareplansunderwhichan reloaddesigninoth reloadfeaturemakestheoptionsmorevaluablefortheexecut reloadfeaturethesereloadoptionswouldhavebeen reloadfirm reloadopt reloadoptionswithexistingsharesratherthan reloadoptionsworka reloadplanmight reloadprovis reloadprovisionar reloadscan reloadsthat reluct reluctantto relucthisleav remain remainsinsignific remainssmall.for remanag remark remedyto remmer removeor removeth remuner reneg rent rent-seek rent.in rentboardseatsandperhapsjoiningotherboards.as rentexregard rentextracconsist rentextract rents-nam rents.5 rents.and rents.as rents.indeed rents.richardcyertand rents.specifically rents.such rentsandconcealstheirmagnitud rentseasilyvisibleto rentsforhigh rentsforhigh-rank rentsmightwel rentsor rentsrelativeto rentstheycurr rentstheyextractfromarrang rentsthrough rentswillb reof reorganizeand repartiii repay repaytheseloansi repel repercuss replac replaceddecreasesa replacehypothet replacesharessetasideto replacesharesthatwouldhav replacetheboard.fora replacetheceo replacetheonesthathavebeen report reporteddailyin reportedearn reportedthatin reportedto reportedund reportingabnormalstockpricedeclinesduringth reportingon reportingsom reportingth reportingthat reportingthat78 reportingthatan reportingthatceo reportingthatgolden reportingthatin reportingthatshareholderproposalsdo reportingthatth reportingthatthemedian reportsofon reportsundaram reportthatceo reportthatin reportthatth repres repric repriced.see repriceoptions.however repricingexecutivestock repricingi repricingof repurchas repurchasetenderoffersto reput reputacannotproposea reputationsat request requiemfor requir requirea requiredto requiredund requireexecutivesto requiremanagersto requiremucheffort requiresreward requiresth requirestheplaintiff requirethatmanag requiretheirexecucontract requisit rerev rescur research researchand researchcenter1998 researchcenter1999 researchers-might researcherto researchfellowin researchon resecond resent reserv reset reseta resetifthestockpricefal resetthantheywouldb resign resignationsar resista resisttakeov resolut resourcesavailableto respondingto respondsto respons responseto restoreincenwithnewoptionsand restrain restraint restrict restrictedshareshav restrictedth resubmit result resultcomparedwithindex resultfroma resultfromth resultin resultof resultofsuchdevi resultsin resultsthana retain retainan retainand retained-and retainingceo retainthem.allowingstockoption retaliateagainsta retent reth retheirpositionsand retir return returnon returnsandthatthemarket returnsar reunlesstheboardprovidesthemanagerswithan rev rev123 rev271 rev440 revalu revat revat313 revat332 revat442 revat853 revat898 reveal revenu review reviewfailsto reviewofthecompens reviewoftheeconomicliteratur reviewsymposium reviewth reviewthemarketforcesthatbear revisited.reflections reward reward.it rewardedfor rewardedforluck rewardforcreatingvalu rewardmanag rewardmorecloselyto rewardsfromwindfal rewardsmanagerseven rewardson rewardsto rewardto rial rialpoweron richard richarda richardpaint right riod rionemploy rise risen riseof riseovertime.as risesthatarebeyondthemanag riseswhentheeconomi riseup risingmarket risk risk-avers risk-averse-compens risk-averseexecutiveswith risk-premium risk-takingincent risk-takingincentivesat risk.see risk135 riskavers riskaversionand riskbusi riskgeneratedbynon riskgeneratedbynon-index riski riskmanag riskof riskofa riskoflosingon riskofnonpay riskpremium risksubstantially.69 riskthattheywouldhavebeen riskyproject riskyprojectsat rivalfirmperform robert roberta.g robertcharlesclark robertr robertthoma robertw.holthausen robustandcom129 rock rockthatinstitut role role.indeed rolein roleincamouflag roleinexecut roleinsuppli roleofmanageri roleratherthanin rolethatmanageri ronald rope ross roy royalti rsrch rsrch231 rsrch27 rsrch53 rsrchat rule ruletookeffectin run rundownfirmsfollow runlargecompani runscounterto ruxton ryanjr.and ryankantor sabil sabilityto sabotage.see saccessto safe sage said salari salariesand salary.see salary.supportcan salarygrowth salaryi salaryof salarypaid sale saleswithout sali salpercentil salyand samefearofembarrass sampl sampleof773largepubthat8 samwick sandrarenfro sanfordj.grossmanand sanjaibhagatandbernardblack santo sation sationagr sationarrang sationat sationcommitte sationi sationpracticesand satisfi satisfyth saul saved.as savingsharehold savingtaxes.david saw say sbe sbehalf.thatis sboard scapegoatingat scarce.however scarce9 scarciti scarcityargumenti scareer scareer-al scenario scenarioin scfo scheme schemebeingdesignedto schemecouldproducethesameor schemes.accordingto schemesar schemeshoulddependon schemesmightbarvest schemesthatremovesomeor schemeto schemewouldb schemewouldhav schemewouldyield schizer schizeracknowledg schizerha schizerwouldb scholar scholarshav scholarship scholarsin school school1989 schooloflaw schoolofthought schoolsbusinesslaw schrandand schultz sci scompens scompensationwithoutincreasingth sconsentto screen screenedoutbi screenout screenoutmarketeffect scrutin sdecis sdecisioni sdecisionto sdecisiontotermin sdirectorship sdomin se39 searchof searchofexcess searningsinsteadof searningsp sec second second-best secondagencyproblemin secondapproachto secondaryoff secondreasona secondstudi secondstudybybertrand secretthatexecut section section162 sectionsofpartiii sector sector-basedwindfal sector-rel sector-wid sector.butsuchnegativeshocksare sector.one sector.thusabc sectorand sectordetheexercisepriceoftheoptionsdueto sectorfactor sectorincreasesaroseinth sectormov sectoror sectorrises.however sectors.128 sectorsand secur securecompens securetheceo securitiesexchangeact see seek seekingmaximum seekingto seeksto seem seemshighlyunlik seemsto seemto seen seena seffort select selectedth selectionand selectionof selena self self-compens self-deal self-disciplin self-servingcognitivedisson sell sella sellingorhedg sellingth sellingtheacquiredstockeven sellsharesto sellstheund sellthesharestheyreceiveon selveswithr semiconductor sendhilmullainathan seniorexecut sens sense.executives sensit sensitiveto separatingcontrol separationof sertion serv servea servedon serveon serveson servessharehold servesto serveth servetheexecut servethisobject servic serviceprovid servingcognitivedisson sessthenecessari set setasideto setat setsa settingexecutivepay.in settledlawsuit setto sever severalcas severalcompensationcommittees.34 severalfactorswhosepresencewouldtendto severallabormarketmechan severalreasonsto severalserendipit severalyearsago sfeeincreasedfrom sfundsand sgenerallevelofriskavers sgrowth shackel shane shape shapedat shapedbothbymanageri shapingexproach share shareal shareand shareconsult sharedbytwoor shareddirect sharedemandalmostalwaysleadsto sharefirmprovidesthemwithmoreincent sharehold shareholdcount shareholder-friend shareholder-princip shareholder-valu shareholder.29 shareholderactivist shareholderexpropri shareholdermight shareholdermonitor shareholders.42 shareholders.55 shareholders.66 shareholdersapprov shareholderscan shareholdershav shareholdersresultsin shareholdervalu shareholdervotingon shareholderwealth shareincreasemanag shareownership shareperform sharepowerwitha sharepric sharepricedeclin sharepricedown sharepriceevenwhenthoseincreas sharepricei sharepriceto shares.8 shares.contracts shares.executivesgenerally shares.in sharesacquiredtherebi sharesand sharesandopt sharesar sharesat sharesbecausetheshar sharesforeveryon sharesgr sharesheldbyinstitut sharesimmedi sharesin sharesopt sharesp sharespecificeffect sharesprovid sharesrath sharesthatar sharesthatcan sharestheyalreadyhold.yet sharesto sharestockprices.if sharestrademightalso shareswhennewoptionsaregr sharetend sharevalueon sharewhichtheycan sharingand shark sharonhann shawntulli shecan shecouldbecometheceo shedlighton sheehan shei shenoy sherwinrosen shevlin shieldthemfrommarketdisciplin shift shiftawayfromfix shiftbetweenindustri shiftinto shipand shipinthisarea.indeed shipstructur shivaram shivdasani shjuncheng shleifer shock shockswillgener short short-term shortcom shortfal shortrun.or shortruninorderto shouldb shouldconsiderwhethermanag shoulddecreasewithincreas shouldemphasizethatstandardindexingof shouldequ shouldissueoptionsto shouldmakeclear shouldnot shouldnotb shouldpointout shouldtheconsult show showhowunlik showin showingthatmanagersar showingthatth showinvestor shownconclus shownthatdirector shownto showthatsucha showthattheboardhad showthatthedirector showthattheevidencesupportsthe.viewthatmanagerial showthattheyar shumanresourc sibleexercisepricesat side siderablepow sifi sign signalth signalthattheexecut signalto signedusingindex signific significanceof signifiinterest sigrocatebyaward silan similar similararrang similarconventionaloptionswithoutan similareffect similarfirm similarrestrict simon simpli simplyineffectu simplyto simplyworksbetterin sin sinc since1994 since1994theannualpayofa sincetherei sindustri singledesignwouldb sinw sion siresto sisttheacquisit sitiveto sitson situat situationin situationsinwhichmanagersarerel situationswhereexecutivesrec six size sizedwhentheyar sizerangedfrom3.3 sizewouldfitall.theoptimaldesignmight skeptic skepticalabout skepticalofaccount skepticalthattheprocessof skill skillsmorecriticalto skillsof skillsofth skillsor skim slack slength slengthbargain slengthbargaining-manag slengthfashion slengthid slengthideal.rather slengthin slengthmodel.there slengthmodel.we slight small small.245 small.in smallcap smallerdepartur smallerinstitut smallfract smallgroupof smallnumberoffirm smallnumberoffirms-sucha smallpubl smarterforthesam smdesignedto smith smooth smu social socialandprofession socialconnections.39 socialnorm socialrefer socialstatusof soften softformofindex sold soldafteroptionexercisear soldapshar soldor solelyofindepend solelyon solicitotherproposalsorcomeup solid solut solv somecas somecasesandweakerin someceo somecompani somecompaniescontrol somecompaniespowermightb somecountri somedepartur someevidenceregard someevidencesuggest someevidencethatwhenceo someext someextentin somefuturetime.in somehaveclaim somekindofinfluence.for somemitig somenormssimpli someoftheexpectedvalueoftheopt someoftheexpectedvalueoftheoptions-andthereforesomeoftheexpectedcostoftheoptionsto someofthefactorsundermin someofwhich someotherfeaturethatha someothersetof somepoint somepromin somerents.management somesitu sometim sometimesaugmentth somewhat somewhatconstrain sonal soon soon-to-be-hir soona sopportun soption sothat soughtto sound sourc sourceof sources.moreover south sparingly.154 sparka specialaboutthetaxthati specialcashpay specialcommitte speciallitig specif specifi specificlimit specifiedperiod spectiv spell spendson spent spenton sperform spiritto sponsibility.13 sponsibl spotlight sproblem sprojectchoic sreserv ssector.sincethemarketreturn ssharehold ssharepricewa sshares.37 ssharesand ssrn.com ssrn.com/id=252544 sstock sstock.but sstockhold sstockpric sstockpricemerelyreflect st stabl staceyr staf staff stakehold stakeholderpressur standard standardi standardindex standardindexedopt standardindexedoptionsexceedstheadditionalvaluethatwouldb standardindexedoptionsrequiresincreasingth standardoptim stanforduniversitygradu stanjl stanl stantialdevi stantiv star stark starksfindthatthemoreconcentr state statement states-includ statessharehold statesthatcompens statuson statut statuteson stax stayin stayingwithin steepfallinthesharepricemight stepdown.25 stepsarenecessari stermexpires.inside sternschool steve stevechoi stevenj.huddart stevenshavel steventodd steveshavel stewartc sticki still stillcomplaintsabout stillfail stillgener stillmakesharehold stillmakesignific stillunexercis stock stock-bas stock-basedincent stock.although stock.however stock.see stock.thispracticeis stocka stockacquiredbi stockand stockbas stockexchangerulesrequirethatsharehold stockexhibit stockhead stockhold stockholdingsretain stockin stockmarket stockopt stockoptionawardsmayb stockoptionplan stockoptionplanchangesandmanageri stockoptionplans.there stockoptionplanscan stockoptionprogram stockoptionsand stockoptionsand/orreeach stockoptionsgener stockoptionsneverproducea stockoptionsow stockor stockownership stockownership-increasingexecut stockownership.22 stockperformancethanar stockpric stockprice.evenifthisis stockprice.m stockpriceandcashflow stockpricedeclinedu stockpricedecreasespriorto stockpriceexce stockpricegainsdu stockpriceha stockpriceincreas stockpriceon stockpriceperlin stockpriceperline-of-busi stockpricerisesthatar stockprices.1 stockpricesaffect stockpricesfal stockpriceslargelyreflect stockpricesovera stockpricethatar stockproexercisingtheiropt stockpyramid stocksal stocksales.liquidityand stockshort stockthatbecomesunrestrict stocktheceo stockthrough stockto stooda stoodto stoppedshortof storywillresultinindepend stotal straint strategi strategiccompetit strategicconsider strategicfin streetfiguresit strength strengthen stress stressthatit stressthatw strickland strict strictedor strike strikepric strikepriceset strikepricewhenthestockpricefallsbelowtheoriginalexercisepric strong strongandfin strongandfine-tun strongenough strongenoughto stronger strongest strongforcealign strongincent strongto struct structur structureand structureof stud227 stud433 student studi studiedwereworth24 studiesbi studyand studyfindsthatfirm studyfindsthatsucha studyof studyofexecut studysuggeststhatth stutzer stutzerfindthatin stwenti stwenty-f su subdu subject subjectincludestephena subjectof subjectto subketforcesar subordin subramafromgreateragencyproblems.181 subsect subsequ subsequentwork.here substant substanti substantialexpectedvalueforanygivenperiod substantialprotectionfromfiduciarydutysuitsif substantialtrad substantivemeritsof success successar successfunct sucha suchan suchcas suchcircumst suchcompens suchcontract suchdesign suchdevi suchdownstockpricedeclinesdilutesex suchextern suchfiltrendsand suchgratuit suchincent suchmeasuresmightnotscreenout suchoptiondesign suchoptionscouldb suchpay suchproblemsbuton suchrent suchrent-extract suchrestrict suchrewardshavebeenintroduc suchsitu suchthatga suchtrad suchunwind suchvotingcould suffer suffersan suffici suggest suggestedbi suggestedexplan suggestedthattheirjustif suggestedthattheoptimalagencycontract suggeststhat suggeststhatboard suggeststhatcompaniesshouldadjustopt suggeststhatoptionplan suggeststhatoutsid suggestthatth suggestthatthedesignof suit suit.76 suit.the suitablereplacement.outsideofthisunfortunate sult sultingfromth sultingoutragebi sultinmoredeferenti sum summari summer summer1999 sundaram sundaylim super super-risk super1 superior supp supplier supplyofceo supplyperrang support [email protected] supportedbi supportforfirm supportinin supportmanag supportor supportoutsidechalleng supportth suppos supposethat supposethefirmha sure surpris surrelyso surround surthat35 survey surveyof surveysand surveysstrateg surviv survival-of-the-fittest surviveappealbothdaunt suryan susan suse svalu svalue-that sviewson svolatil sweeter swilling switchto sympathet symptom sysstep system systemat sysworkon tabl table-correspond table5 table9 tableof tailsi tain taincondit tainothercondit take takea takeadvantag takeandretaina takedesirablerisk takenaway.butthefactthattheoptionsbelong takenbyan takenintoaccount takenintoearn takenoverar takeon takeov takeoveract takeoverand takeoverattempt takeoverbid takeoverdefensesin takeoverimpedipowerdependingupon takeoverlaw takeoverresult takeoverriskresult takeoversadmitthatcontroltransact takeoverthreat takeoverwillb takeplac takerisk takesoffic takesofficeincreas takestepsto taketh takethenewposit takingaddit takingincent takingincentivesat takingintoaccountth takingof takingplaceif takingstock talentat talentedmanag talenti tanc tanceof tantfactoraffect target targetboardsmakespecialcash targetedfortakeoverwithin targets.becausethisformofperformance targetsar targetscan targetsforfeit targetsmightinvolvean task tax tax-pay taxat taxcod taxconstraint taxesdueon taxeseach taxperspect taxrat taxrulescouldelimin teachersinsur team team.87 team.butagain teamovertheboard technolog tellthatrentextract tematicand tematicframework tempt temptedto ten ten-year ten-yearperiod tendedto tendenc tendencyto tenderoff tenderofferprocess tendsto tendto tendtoprovidedirector tendtorecipaftertheceo tenfirm tenfold tentthata tenur tenureat tenureha tenureof tenyearsector tenyearsector-index terestinconfront term termanageri termin termperspect termsof termsofhowth termsofpay termsto ternofexcessiveself ternofexcessiveself-compens teroffinsuchcasesi terpart terrysherlin testableimpl testablepredict thana thanar thanat thanat-the-money thanceo thanconvent thanforeachsharesurrend thani thanin thanindex thanit thankthejohn thanon thanoptimalcompens thanotherfirm thanothers.insidecandidatesusuallyhavean thanreduc thanreduced-windfal thanth thanthatofexecutivecompens thantheaft thantheafter-tax thantheamountbi thanthebenefit thantheconventionaloptionbi thantheexecut thantheirbritishcounon thantheirbritishcounone-thirdof thantheirforeign thantheirintern thantheirnon-u.s.counterparts thantheirnonth thantheywouldotherwis thanto thanund thanusethefund thanvigil that-givenexecuf that3 that69 that95 thata thataccount thatact thatadopt thatadoptedexecut thatal thatan thatar thatareattribut thatarebestforsharehold thatareboth thatareinterthus thatarelarg thatat thatat-themoneyoptionsareoptim thatauthor thatbasicreof thatbeatthemarketor thatbecausepriceson thatbenefit thatbethatceo thatcan thatcanb thatcapac thatcas thatceo thatchangesin thatcomewitha thatconvent thatcoststhefirm thatcouldenablethemto thatcreatea thatcumul thatcurr thatdesign thatdeviateconsider thatdirector thatdo thatdoesnotshowup thateven thatevenif thateventhesedirectincent thateveryyearthepartn thatexecut thatexecutivepay thatexecutivesmightmakedecisionsthatmaxim thatexecutivesof thatexecutivesus thatexecutiveswillhav thatexercisepriceequalsor thatexercisepricesar thatfamaand thatfavormanag thatfilterout thatfirm thatfocuseson thatforoutrageto thatgivingmanagersout thatgivingmanagersout-of-the-money thatgoldenparachut thath thatha thathaslongbeen thathav thathavea thathavebeen thathavelittleor thathavelongoccupiedresearch thathavenoth thathaveoth thathumanresourcesdirector thati thatimplicit thatin thatin12percent thatincludean thatindepend thatindex thatindexedoptionscould thatinduc thatinducetheexecutiveto thatinstitut thatit thatitprovid thatitself thatitwillb thatitwouldreducetheamountofprofit thatlack thatlackedlargeexternalsharehold thatmak thatmakemanag thatmakereciproc thatmanag thatmanageri thatmanagerialpow thatmanagersdo thatmanagersobtainin thatmanagersus thatmanagto thatmarketreturn thatmaxim thatmeetsor thatmight thatmightdiscouragedirector thatmightresult.in thatminimizesagencycost thatminimizesth thatmorepoweri thatmotivateth thatmustb thatneedansw thatnoneoftheseproposit thatnonmarketfactor thatnotusinganyformoffilterris thatoccur thatof thatold thaton thatonlyoneoutof thatoptionbeforeexpiexercis thatoptiongr thatoptionplanswith thatoptionswiththebasicreload thatotheroffic thatour thatout thatout-of-the-money thatoutsidedirector thatovercompens thatparticular thatperform thatperiod thatperquisit thatpow thatpromptexecut thatprop thatprovideda thatprovidesboundson thatprovidesth thatprovidesuboptimalincent thatr thatreachesth thatrec thatreceivescontribut thatrecognit thatreduc thatreduced-windfal thatreduceoptionwindfal thatreloadprovis thatrepr thatrequiresno thatroa thatsaid thatsal thatscreen thatsector thatsector-shift thatseeksto thatsharehold thatshareholder-approv thatsoci thatsom thatsomeceo thatsubvert thatsuchfullor thatsuchinerfromon thatsuggestthatmanagerialpowerinflu thatth thattheabsenceofsharehold thattheaveragecommitte thatthebenef thattheboardfailedto thattheboardus thattheceo thatthecombin thatthedesireto thatthedirectbenefit thatthedisclosur thattheevopowerapproachpredict thattheexecut thattheexercisepricewillb thattheextensiveempir thatthefirmcouldeithercrepoorlyspent.thisraisesthepossibility thatthefirmsav thatthefirmwa thatthefirmwillneedto thattheiroptionswouldb thatthelevelofcompens thatthemanagerhav thatthemanageri thatthepaygapbetween thatthepayout thatthepersonon thatthepractic thatthepracticeofmak thatthepresenceofa thattheprocessesthatproduc thatther thattherei thattherewillb thatthesemechan thatthesmallad thatthestructur thatthesuitshouldb thatthetourna thattheuseofsuchoptionswouldgiveriseto thattheyar thattheyconstitut thattheydidnotbelieveto thattheywer thatthi thatthisi thatthosewhoiniintroduc thatthreeofforti thatthus thattime.in thattopexecut thattwenti thattwenty-on thattwo thattwo-third thatus thatusetrad thatusingsomeformofwindfal thatusingsomeformofwindfall-reduct thatvestsin thatw thatway thatwehavenotaddress thatwhichtheywould thatwhilebargain thatwilllimitthefirm thatwillreplenish thatwishto thatwouldb thatwouldputtheceo thcceo the-money the1990s the1990sstockmarket theabilityof theabilityoftheceo theabilityto theabsenceof theabsenceofanyoptionplan theabsenceofreducedwindfal theabsolut theabsolutesharepric theabsolutesharepriceincreaseratherthantheamountbywhichthestockpriceexceedssom theaccountingeffectoftheseopt theachiev theacquisiofan theactualcostofconvent theaddit theadoptionofsomearrang theagencyproblembetweensharehold theaggreg thealmostuniform theamerican theamount theamountandtim theamountbywhichexecut theamountof theamountofaddit theamountofunwind theanalysisdo theand theappoint theargument thearm thearrang theassoci theattackon theauthorsshow theaverageofa theaverageperform theaward theawardedoptionsoncetheirvestbecomesentitl theberkeley thebestknownand thebestofourknowledg thebiggestcostarisingfromtheinflu thebigpictureand theboard theboard.and theboard.core theboard.the theboard.theysurmisethat theboard.thus theboardactsund theboardalmostalwaysdedata theboardappearstohaveactedindepend theboardcan theboardcaneasilyfulfil theboardcaneasilymeetitssubstansimilar theboardcanusuallyhavethecasedismiss theboardcould theboardcouldrequirer theboardcouldrequirereal-tim theboarddirect theboardha theboardhavea theboardi theboardmight theboardmightalso theboardmightfind theboardofdirector theboardoffirma theboardoffirmb theboardoverexecut theboardto theboardwerebargain thebotfirmi thebottom thebottomof thebusinesspressand thecas theceo theceo.26 thechairman thechart thechoic thechoiceofindepend thecombinationofeffect thecomingyear thecomment thecommitte thecommittee.45 thecompani thecompanyfortheaveragesharepric thecompanyforthespecifi thecompens thecompensacontract thecompensarecommend thecomplex thecomposit thecomstrateg thecomtermin theconclusionthattheresearch theconsult thecontextofcorporatelaw thecontractu thecontribut thecontrol thecorpor thecorporatestatutesof thecostof thecostofthes thecostto thecourtwillrespectth thecreationoflong thecreationoflong-term thecrit thecross thecross-sect thecurr thedateofgr thedateofthegrant.1 thedateofthegrant.145 thedealunlesstheyreceivemor thedearthofindex thedecoupl thedeferr thedemandforexecut thedemandfutil thedepartureof thedesign thedesignof thedesignofa thedesignofcompens thedesignofoptimalcompens thedesignofoptionplansin thedesignofstockoptionplan thedesirablelimitson thedesiredpayplan.forexample thedesireto thedesiretocamouflag thedesirfreedomin thedetail thedevili thediffer thedirector thedisciplineof thediscipliningforceof thediscuss thedownsid thedownsidebutalso theeconom theeconomiccostof theeconomyboom theeconomythatbenefitthefirm theeffect theeffici theeffort theempir theenact theequity.not theequivalentofmakinga theestablish theeventof theeventofa theeventthatthefirm theex theexact theexcusesfornotusingreduc theexcusesfornotusingreduced-windfal theexdistinct theexecut theexecuthedirectbenefit theexecutiveand theexecutivecompens theexecutivecouldb theexecutivei theexecutiveincent theexecutiveoncetheyhavevesteddo theexecutivesreceivemoreindexedoptionsto theexecutiveto theexercis theexerciseof theexercisepric theexercisepriceof theexercisepriceofopt theexercisepriceofoptionscouldreducetheexecut theexercisepricewouldb theexistenceand theexpect theexpectedrateofincompani theexpectedsavthemanag theexpectedvalueofa theexpenseofinterest theexpenseofpublicsharehold theexpenseofpublicshareholdmanag theextens theextent theextentindusreduct theextentthatfirm theextentthatrentextract theextentthattheincreaseof theextenttheindexedoptioncouldnotb theextentto theextenttowhichrentexnotjust theextract theextravaluegener thefac thefactthat thefactthatenronexecut thefactthatthemanagercan thefactthattherandomnoiseassociatedwithconvent thefailur thefailureof thefailureofsharehold thefasb thefearofb thefearofembarrass thefield thefiftieth thefirm thefirmcannotrenegoti thefirmcouldmakeavailableto thefirmgivesth thefirmmeetingcertainperform thefirmmovesforward thefirmproat thefirmsticksbi thefirmvalueh thefirmwhendisposali thefirmwillnothireprofession thefirst thefirstgener thefirstplac thefirstplace-a thefirstplace.ex thefiscalyear thefocusof thefollowconsult thefootnot theforcesthatlimitrentextract theforego theformul thefourmosthighlycompensatedoffic thefreedomof thefrontof theful thefullextentofthestockpric thefutur thegain thegain.manyfirms thegoal thegoldenparachut thegrant thegrant-d thegrantd thegrantdateandtherebi thegrante thegrantofin thegrantofin-theand thegreaterof thegreatertheceo thegroundthatthecompens thehandsof thehandsofinstitut thehandsoftheceo theharvardbusinessreview theheartof thehedgingofunvestedoptionsand thehigh thehigherthepayout thehir thehold theimpacti theimpactofthisreductionin theimplicit theimport thein theincent theincomestat theincomestatementor theincreas theincreasein theincrement theindedirector theindepend theindex theindex-adjust theindexdeclinesfromtheissuedatetotheexercised theindustri theinfluenc theinform theinoflow theinoflower-valu theinterest theintern theinternalrevenuecod theirabilityto theirabl theirabsolutetal theirad theiralmostcompleteabs theiranalysi theircash theircloserelationship theircompens theircompensation.43 theircontrol theircoststo theirdecisionmanageeffect theirdispos theireffect theireffort theirequityhold theirequityportfolio theirequityposit theirexecut theirexecutivesmulti theirexecutivesmulti-million-dollar theirexist theirextracscureandlegitim theirfirm theirfirmperform theirfirmsar theirfirst theirforeigncounterpart theirfullforceha theirhumancapitaldependson theiridea theirincent theirinsideinform theirinstructur theirintendedtrad theirleisuretim theirmanageri theirmonitoringof theirobject theiropt theiroptions.the theiroptionswel theirown theirown.butas theirowneffort theirownpay theirownutil theirparamet theirpay theirpaydo theirpeers.sectorindexing theirperform theirposit theirpoweralwithnot theirpowerto theirpresentjob theirprimari theirprofit theirproposedpaypackagewouldcr theirproxyreportsto theirrc theirrecipi theirresultsa theirrightsund theirs.narrowingthe theirsal theirsalari theirsecretari theirsector.thesemanagers theirsectordo theirsectorwil theirseminal1990study theirsharehold theirtheori theirus theiruse-suggest theissueofexto theissueofhiscompens thekeydecisionsin thelack thelackof thelackofan thelackofrestrict thelargestand thelargestsharehold thelargestsinoftheaverageexecut thelate1980sandearly1990s thelatterapproachregard theleadingviewamongfinanci thelearningcurvehypothesi theless thelesswillb theleveland thelevelof thelevelthatwould thelikelihood thelikelihoodofsuchan thelimit thelimitedevid theliteratur thelitig thelongrun thelongstand thelowerexecut thelowerranksofemploye thelowestpossibleexercisepricei themagnitud themajorfactorin themanag themanageri themanagerialpowerapproach themanagerialpowerapproachwouldpredict themanagerialrank themanagersar themanagerswillnotearnless themanagerto themanaindepend themanainvestor themannersuggest themargin themarket themarketaverageorto themarketboomtheori themarketboomtheoryappearsto themarketfor themarketforcesdiscussedearlierthatcould themarketforcorpor themarketi themarketpric themarketwouldignorethechangein thembecaus thembi themdifficult theme.for themeantim themedia themediahaverec themedianceo themerg themeritsat themforwhatev themiddleofthevestingperiod themin themoment themoneyhasa themoneyi themoneyoptionsareoptim themonthfollow themor themorehesit themorelikely themorereluct themorevulner themselves.116 themto themwithth thenatureof thenear theneedforboardapprovaland theneedto thenetawardwa thenewjob thenewreloadopinexercis thenexamconsiderindex thenexttim thenexttime-shouldtheconsult thenomin thenorm thenprovidesa thenretaintheceo thensellingth thentherei thenumb thenumberof thenumberofindepend thenumberofopwheth thenwouldb theo theobstaclesto theoil theold theon theonesmost theonlyothertheori theonlyreasonwhysomemanagersarepaidmor theonlyrecentstudythatconsid theoperationaleffici theoppositeeffect theoptim theoptimal-contract theoptimalarrang theoptimalcompens theoptimalconhold theoptimalcontract theoptimaldesignofreduc theoptimaldesignofreduced-windfal theoptimalexercisepric theoption theoption-for theoption.as theoptionfora theoptionplanforsharehold theoptionsagainstmarket theoptionsarein theoptionsarein-the-money theoptionsdo theoptionson theoptionsto theoptionswereexercisedafteran theoptionto theoret theoreticaland theoreticalframework theorgan theorganization.5moreover theori theoriginalopt theoriginand theorist theorists-thepracticeof theoryand theorycombiningnormswithth theoryof theotherhand theothersidewillin theothersin theothersourcesthatar theoutragethata theoutsideceo theoutsidehiresar theoverallamountofrentsthat theoverwhelm theownerof thepackageto theparticular thepassageoftim thepastfifteen thepaup thepay thepayleveldesiredbyceo thepayoff thepayoutatthetimeitapprov thepercentag theperform thepervasiveinflu thepictureemerg thepil theplan thepositionof theposs thepossiblealtern thepotenti thepowercertainagentsobtaininorganizaliteratur thepowerof thepowerofmarket thepowerofsharehold thepowerto thepractic thepracticeof thepracticeofex thepracticeofgivingtheceo thepreced thepredomin thepresenceandextentofrentextract thepresenceof thepresentvalueofthefirm thepresidistribut thepressureto theprevi thepricedown.themarket thepricefrommovingto theprincip theprincipal-ag theprivatebenefit theprob theproblemand theproblemitself theprocess theproductof theprofit theprojectchoicesavailableto theproposit theprospect theprospectof theprospectofb theproxymachineri thepubliccritic thepublicmight thepurposeofa thepuzzl thepuzzlefortheoptimalcontract thepuzzleofon thepuzzleofone-size-fits-al thequalityofprojectschosen thequestioni thequestionofratifi theradarscreen therangeof therangeofflex therateofinfl therean thereappearsto therear therearelik thereareoth therebi therebound.thus therebyallowingshareholdersto therebyfacilitatea therebyincreasetheir therebyindirect therebyreduc therecipi therecomparison therecouldb theredistribut therefor therehavebeen therei therel therelativeperformanceevaluationhypothesi thereloadfeaturemight thereloadoptionsthey thereloadpromoresharesunlesstherear thereloadsdo theremaywellb therentsandprivatebenefit therentscapturedbythepow therentsthatexecut therentsthatmanagerscan therentswilltendto therepricedoptions.182 thereschemea thereset therestrict therestricted-unwind theretent thereturn therewa therewillb therewould therightinfer theris theriskthattheagentwil therol theroleofcamouflag theroleofmanagepowerapproach theroleofmanageri thes thesal thesalaryand thesales.afterall thesam thesame.yet thesamea thesameamountofmoneyit thesameclaimcouldb thesamecostgivethemanagera thesameexercisepricea thesameexercisepriceforoptionsregardless thesamefora thesameformula thesameindustri thesameprob thesameunfavor thesampl thescientif theseadditionalr thesear thesearrang thesec thesecas thesecategoriesof thesecompon theseconcommon thesecondpattern.but thesecondregim thesecostsmustb thesector thesectoror thesecur thesedata thesedirector theseequ theseequity-bas theseexecut thesefactor thesefigur thesefind thesefirm thesefirmsar thesefirmsdo theseforc theseforces.the theseforcesar thesegratuit theseimpl theseincent theseindilutesthestrength theseindustri theseleg theselimit theseliquid thesemarketmechan thesemechan thesemi thesemi-index theseneedscan thesensit theseopmeetcertainperform theseoptionswouldb thesepay theseperform thesepractic thesepracticesand theseproblem theseprocess theseprofit theseproposit theseresolut theserestrict thesestudiesdid thesetrad thesetrades.currently thesetransact thesevariableswilldiff theseventi theseventy-fifth theshadow theshapeofth thesharehold theshareholdersmustactuallywinon thesharepric thesharepriceexceedinga thesharepricei thesharepriceincrease.in thesharepriceof thesharesdirect thesharesof theshort theshort-term theshortcom thesignalproi thesitu thesoci thespiritoftheeconom thestageof thestatein thesticki thestock thestockexchang thestockmarketi thestockmarketris thestockoptionplanson thestockpric thestockprice.third thestockpricedu thestockpriceincreasethat thestockpriceperform thestockpricethatar thestockpricethatdo thestockreceivedthrough thestocksurrend thestructur thestudi thestudieslistedin thestudyexboardsdo thestudyfindsthatceo thestudyfoundthat16 thestudyof thesubject thesubject.2 thesubjectof thesuboptim thesubstanti thesuccessof thesuccessofsucha thesuccessofthebusi thesuitshouldb thesupplylesselasticin thesupplyofindividu thetable.29 thetarget thetargetboardgivestheceo thetax thetaxesdu thetenthday theterm thetermin thetermsof thetermsoftheexecut thetheorydo thetheoryof thethreatofhisinvolv thetim thetimeoftheirhir thetimeofunwind thetimesdur thetimevalueofmoneyand theto thetop thetopthreeexecut thetrade.undertheoptimal thetrendamongfirm thetypeof thetypicalceo theu.s theu.s.243 theunder theunfavor theunitedkingdom theunitedstates.at theunivers theunvestedoptionsand theunwind theupsid theupside.this theupsideand theus theusa thevalu thevaluationof thevalueof thevalueofanyofthevestedopt thevari thevariousmarket theveryuseofstockoptionplan thevest thevestedopt thevestedoptions-thati thevestingof thevestingperiodof thevestthanon theview thevieww thevolatil thevoteto thewakeof thewallstreet thewayit thewaypredict theweakbutperhapsvaguelyplausiblejustif thewid thewilling theyalso theyar theyarguethatthisevidencecanb theycalculatedan theycan theycanarelikelytoplaya theycandesignsurvey theychoose.havingdecidedto theyconductcomandprovideaccessto theycontribut theycould theydeand theydo theyearofrepr theyears1992 theyears1992-1994experifortune theyearthata theyfindevidencethatceo theyfindthatcompaniesthatpay theyfindthatcompens theyfoundthatthestrikepricewa theygener theyhavean theymightb theymightimposesomeconstraint theyneingevidencethatintransact theyreceivedin theyreport theyshould theyshowthattheexercisepricethat theysimplyreceiv theysuggest theytak theytend theyus theyvest.nevertheless theywereacadem theywilldo theywillhavean theywillreceivea theywillusuallylacktheinform theywouldlikelyhaveneith theywouldnotdo theywouldplacemorevalueon theywouldpreferto think thinki thinkiti thinkthatceo thinkthatfirmsmightb thinkthatin thinkthatsuchan thinkthattheoptimalexercisepricewouldnoton thinkthatthepracticeofusingconvent third thirdof thirdpossiblereasonwhymanagersmightopposereduc thirdpossiblereasonwhymanagersmightopposereduced-windfal thisagencyproblem thisamount thisapproach thisapproachcan thisapproachcanexplaintheconvent thisapproachcomparedto thisapproachi thisarea thisargu thisarticl thisarticledevelopsan thisarticlequestionsth thisaspectof thisaspectofindex thisbringsus thiscas thisconnect thisdevic thisdifferenti thisdisincent thiseffect thiseffectleadsto thisexcesspay thisexercisepricecan thisfailurecan thisfashion thisfearofexposuremayexplainmanag thisi thisin thisindicatesthatrentextract thisinform thislevel thisliteratur thismight thisneed.ceo thison thisone-sid thisopportun thispartdiscussesimport thispartexplain thispartputsforward thisphenomenon thispoint thispowerto thispressurei thisprocessand thisrang thisreluct thisrequir thisriskyformofpaybylessthanthefirm thisroleha thissectionexamin thissector thissector-shift thissimplifi thissitu thisstudyfindsthatceo thissubjectand thistaxadthus thistestablepredict thistheoryof thistrendwa thiswork.see thiswouldsuggestthatat thlli thoma thomasandkenneth thomasc thor thoriti thoroughreviewof thosecaseswheresuchrestrict thosecontrol thosefirm thoseincent thoseofactualmanag thoseoptionsto thoseoutsidersmightbecomeangryand thoseposit thosethatar though thoughboardsarewil thoughcorporateboard thought thoughth thoughtheoptionsweregrantedon thousand thousandconvent thousandoptionsto threaten threatof threatto three three-week three-year threeor threeprimari threeyearsfollow throughobvi throughout throughtheirequityinterestsin throughtheirexecutivecompens throughwhati throw throwout thus thusar thusb thuscan thuscompl thusfar thusless thuslikelyto thuslittlereasonfordesign thusmight thusmightb thusmightsparksomeoutrage.in thusmorelik thusmorewillingto thusnaturalto thusne thusratherdifficult thusthatmanagerialpow thustherear thusunlik thwartor tiaa/cref tiacanexplainthealmostunivers tiallyadvocatedth tiallyin tian tice ticeofreward ticipatethattheexercisepric ticular tie tiedto tiesto tifano tight timalexercisepricesundervariousassumpt timalincentiveschemeswithmanyag time time.suchfactors timeduring1980may timemoveto times-forthefirm timesmight timestherewillb timeth timetheirsalesmightenablemanagersto timingof timothi tingrichwithat tingrichwithat-the-money tion tion-a tion-indexedopt tion-rel tionagainstmarket tionaloptionsand tionaloptionwithsom tionalpuzzlefortheoptimalcontract tionandanalysi tionandincent tionandslowmov tionarrang tionat tioncommitte tionfordevi tionforwhichmarketforceswillprovideinsuffici tionfromacadem tionhasbeenhurtbytheboard tionin tionindexedto tionnortheincent tionof tionofthecorpor tionoverallbyreduc tionpackagestheyse tionpaid tionprocessand tions-lik tions-opt tions.furthermore tionsaftera tionsandthoseag tionsar tionsawardceo tionscamenotfroma tionscarrythesameexpir tionsdo tionsgrantedto tionship tionsi tionsin tionsmanagersar tionson tionsor tionswhentheirstockpricesfellbelowtheoriginalexercisepric tionswiththeiradverseaccount tionto tive tivecompat tivei tiveoutsideownership tivepay tivepay-even tives.thepuzzling tives.thus tivesand tivesprovidedto tivesto tivestoprovidemuchearlierdisclosur tivestructur tiveswillb tiveto tjoday tlili tlose to4.2directors tobe tobecomeceo tobestowa tobettercamouflag toboardsbecom tobribethemnotto tobuythestock tochalleng tod todayof todd todef todelaya toensurethatcompens toestablish toexplain tofacilit tofocuson togeth togivea togrant tohir toindepend toindex toinfluenc toinvestin toinvestinfirm tojustifi tolosetheir tom tom20 tomakeprofit tomanag tomarket tomarketand tomaxim tomnohel tomnohelandsteventodd tonegoti tonorm tooffset tool toomuchortoolittlerisk.whileitis top topleaseth topoffic topperform toprev toprofit toproposeitinthefirst toproveanyoftheseviol toprovideforan tor toreflect tores torif torsand torsarewil torsthatarelikelyto torswantestablishedfirmsto torswereotherwis torunlargefirm tosi tosijr.andluisr tostatea tostickto tosuchrecognit totakeandretaintheposit total totalannualcompens totalceo totalcompens totalcompensaof totalnon totalnon-performance-bas totalnumberof toterminatethelitig tothatincludeda totheceo tothefirm 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unexpect unexplanationsforreset unfavor unfavorableaccountingconsequencesifth unfavorableaccountingrequir unfavorableaccountingtreat unforese unforeventhemostpat unfortun unib unidentifi uniform uniformpracticeof unit unitedkingdom unitedsharehold unitedstatesand univers universityof unless unlessanduntilh unlesscertainperform unlessth unlesstheceo unlesstherisk unlesstherisk-adjust unlik unlikean unlikelyto unlikemostacademicswork unlimit unnot unobservableand unpleas unproduct unrel unrelatedto unrestrict unsupport untilafterthatd untiltheincrement unto unusu unvestedoptionsto unvestedsharesand unwind unwindincent unwindincentives-it unwindthem.but unwindvestedincent unwindvestedoptionsand upon uponhowmuchrentsareextract upontheopt upset.if upsw url us usc use used.therefore usedforcomparison usedthisprocedur usedtoimprov usefulformof usefulforretain usefulframework usefulonlya usefulrol usefultaxand usefulto usefultool uselessin useof usingaccount usingaverageperform usinghispowerto 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verrecchia vers versionofthisarticlewascircul versionsofsuchvest versusth verticalpay verycommon veryimport verylarge.the verylikelyto veryreasonsforquest veryslow.it verysmallfract verysuccess verytopofthecorpor vest vesta vested.in vestedopt vestedoptionsthathav vestig vesting.most vestingconditionalon vestingcould vestingcouldb vestingd vestingha vestingof vestingperiod vestonlyaftera vestsin vestunlessh veyedaimedto veysandconsult victorbrudney vide videdbyindepend videssomevalu videtimelydisclosureofsales.indeed view vieweda viewedbythemediaor viewi viewsymposiumon viewthatcompens viewthatsomeappropri violat viouslylimitsto viralv virginia virtual vis vis-a-vi visit visitedapr visitedapr27 visitedmay visitedmay3 visitedmay4 visitedmay5 visothersharehold visth voicedexplan vol volatil volatile.105 voluntarili vote vote.section162 voteagainstemployeestockoptionplans.as voteon voteonlyiftherei votingon vs w wade wage wagea wake wakeforest wakeforestl walk walker walkerttt 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wouldnotexpectanyfirm wouldoverallworsenmanag wouldoverthatindex wouldpref wouldprefermarketriskto wouldprefersucha wouldpreventadjustmentfromb wouldprovidedesirableincent wouldprovidestrong wouldreceivethetensharesoptionedplusfivenewr wouldreduceexecut wouldrepl wouldrequirepermit wouldsavemoneythat wouldshinea wouldstillb wouldundesir write wrongfulrefusalof www.jstor.org www.jstor.org/page/info/about/policies/terms.jsp www.jstor.org/stable/1600632 x yablon year yearalmosttwicethetot yeardo yearha yearon yearopt yearperiod years1993 yearsbutcannotb yearsceo yearsfromnow.thismightdependon yearsin yearsmanyfirm yearsthereha yermack yermack.no yermackfindsthat yes yet yetanotherbuildingblockof yetanotherfeatureof yetanothertwistto yieldsreput yisong yisongs.tian york york-sharehold young zenner zennerreport zero zero-costcollar zimmerman zingal zom zone.comercisepriceand zorn zurichinstituteforempiricalresearchin