Just about every spring, the season of corporate proxy votes, we see the rankings of the highest-paid CEOs, topped by men like David Cote of Honeywell, who in 2013 took home million in salary and bonus, and another million in stock options.Rarely, however, does the press coverage go beyond the moral symbolism of a new Gilded Age.Coverage of CEO pay usually fails to show that the scale of CEO pay packages—and the way CEOs are paid—comes at a cost.
But the greater cost may be the risky behavior that very high pay encourages CEOs to engage in, especially when pay is tied to short-term corporate performance.
CEO pay also plays a major role in the broader trend toward radical inequality—a trend that, evidence has shown, precipitates financial instability in turn.
CEO pay has been controversial in the United States for more than a century—for as long as corporate management has been a profession separate from ownership.
This paper investigates whether weak corporate governance is a contributing factor to the incidence of backdating executive stock option awards.
Based on a sample of S&P 1500 firms that exhibit evidence of backdating, we find that firms with weaker governance structures that allow CEOs to exercise greater power over the board and its compensation committee are more likely to engage in CEO option backdating. Do Corporations Award CEO Stock Options Effectively By David Yermack 5.
Moreover, the tendency to backdate is stronger when stock options are more important in CEO compensation and when directors receive option grants on the same date as the CEO. The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation By Rajesh Aggarwal and Andrew Samwick 6.
We also find interlocking boards among backdating firms are associated with a higher incidence of backdating. Good Timing: CEO Stock Option Awards and Company News Announcements By David Yermack 7.
Finally, we find that CEOs of backdating firms receive a significantly higher level of total compensation than their counterparts in non-backdating firms after controlling for economic determinants of executive pay, and that the predicted excess compensation arising from the board and ownership structure variables has a more negative association with future firm performance for backdating firms relative to non-backdating firms. Good Timing: CEO Stock Option Awards and Company News Announcements By David Yermack 8.
The evidence is consistent with backdating firms having greater agency problems that negatively affect shareholder value. and Gong, Guojin and Li, Haidan, Corporate Governance and Backdating of Executive Stock Options (January 28, 2009). Available at SSRN: or This link gives the references in this paper that have been resolved by our automated systems, with hot links to online versions of each paper where we have been able to locate them.',340,200,2);" onmouseout="tool Tip2();"This link gives the references of papers that cite this paper that have been resolved by SSRNs automated systems, with hot links to online versions of each paper where we have been able to locate them.',340,200,2);" onmouseout="tool Tip2();" 1. The Use of Equity Grants to Manage Optimal Equity Incentive Levels By John Core and Wayne Guay 9.