Law Commons^™

The Way We Pay Now: Understanding And Evaluating Performance-Based Executive Pay, David I. Walker

Faculty Scholarship

Over the last ten years, performance-based equity pay, and particularly performance shares, have displaced stock options as the primary instrument for compensating executives of large, public companies in the U.S. This article examines that transformation, analyzing the structure and incentive properties of these newly important instruments and evaluating the benefits and risks from an investor’s perspective. Notable observations include the following: Although technically “stock” instruments, performance shares mimic the incentive characteristics of options. But performance shares avoid the tax, accounting, and other constraints that have led to uniform grants of non-indexed, at the money options. Performance share plans can be …

Employee Say-On-Pay: Monitoring And Legitimizing Executive Compensation, Robert J. Rhee

Robert Rhee

This Article proposes the adoption of employee say-on-pay in corporate governance. The board would benefit from an advisory vote of employees on executive compensation. This proposal is based on two considerations: firstly, the benefits of better monitoring and reduced agency cost in corporate governance; secondly, the link between executive compensation and income inequity and wealth disparity in the broader economy. If adopted, shareholders and employees would monitor executive performance and pay at different levels. Shareholders through the market mechanism can only monitor at the level of public disclosures and share price. Employees can leverage private information. Non-executive managers in particular …

Stock Appreciation Rights And The Sec: A Case Of Questionable Rulemaking, Stuart R. Cohn

Stuart R. Cohn

A stock appreciation rights (SARs) program is a form of deferred incentive compensation. Grantees are awarded SAR-units representing an equal number of the grantor’s equity shares currently being traded in public markets. SARs provide grantees the benefit of stock ownership without equity interest, investment, or risk of loss. Stock appreciation rights programs offer various advantages over other forms of executive compensation and have grown rapidly in number. These advantages include the availability of benefits without the requirement of monetary payments, the utilization of SARs as an interest-free form of financing the purchase of stock under tandem stock option programs, the …

Executive Compensation In Controlled Companies, Kobi Kastiel

Indiana Law Journal

Conventional wisdom among corporate law theorists holds that the presence of a controlling shareholder should alleviate the problem of managerial opportunism because such a controller has both the power and incentives to curb excessive executive pay. This Article challenges that common understanding by proposing a different view based on an agency problem paradigm. Controlling shareholders, this Article suggests, may in fact overpay managers in order to maximize controllers’ consumption of private benefits, due to their close social and business ties with professional managers or for other reasons, such as being captured by professional managers. This tendency to overpay managers is …

Killing Conscience: The Unintended Behavioral Consequences Of "Pay For Performance", Lynn A. Stout

Lynn A. Stout

Contemporary lawmakers and reformers often argue that ex ante incentive contracts providing for large material rewards are the best and possibly only way to motivate corporate executives and other employees to serve their firms' interests. This Article offers a critique of the "pay for performance" approach. In particular, it explores why, for a variety of mutually reinforcing reasons, workplaces that rely on ex ante incentive contracts suppress unselfish prosocial behavior (conscience) and promote selfishness and opportunism. The end result may not be more efficient, but more uncooperative, unethical, and illegal employee behavior.

Employee Say-On-Pay: Monitoring And Legitimizing Executive Compensation, Robert J. Rhee

Robert Rhee

This Article proposes the adoption of employee say-on-pay in corporate governance. The board would benefit from an advisory vote of employees on executive compensation. This proposal is based on two considerations: firstly, the benefits of better monitoring and reduced agency cost in corporate governance; secondly, the link between executive compensation and income inequity and wealth disparity in the broader economy. If adopted, shareholders and employees would monitor executive performance and pay at different levels. Shareholders through the market mechanism can only monitor at the level of public disclosures and share price. Employees can leverage private information. Non-executive managers in particular …

The Political Economic Dimensions Of Executive Compensation Reform: Can The Foundations Of Shareholder Primacy Be Sustained In The Post - Crisis Regulatory Environment?, Dezso Peter Arpad Farkas

LLM Theses

What is absent in much of the literature on executive compensation reform is a deeper appreciation of the shift that has occurred since the latest financial crisis away from performance-based corporate governance arrangements to an approach that seeks to put the brakes on a runaway train, the shareholder value model and its relentless pursuit of shareholder wealth at all costs. By situating this debate into a broader discussion of corporate purpose, corporate governance and the law’s role in how business corporations are run in their social, economic and political environment this project seeks to shed some light onto what really …

The Mess At Morgan: Risk, Incentives And Shareholder Empowerment, Jill E. Fisch

All Faculty Scholarship

The financial crisis of 2008 focused increasing attention on corporate America and, in particular, the risk-taking behavior of large financial institutions. A growing appreciation of the “public” nature of the corporation resulted in a substantial number of high profile enforcement actions. In addition, demands for greater accountability led policymakers to attempt to harness the corporation’s internal decision-making structure, in the name of improved corporate governance, to further the interest of non-shareholder stakeholders. Dodd-Frank’s advisory vote on executive compensation is an example.

This essay argues that the effort to employ shareholders as agents of public values and, thereby, to inculcate corporate …