Executive compensation and corporate governance

Otto, Clemens (2012) Executive compensation and corporate governance. Doctoral thesis, University of London: London Business School.

Abstract

This thesis contains five chapters. The first chapter provides an introduction and the fifth chapter a brief conclusion. In the second chapter, I study the relationship between CEO optimism and optimal compensation contracts both theoretically in a two period principal-agent model and empirically in a sample of US firms. The model predicts that optimists receive lower incentive and total pay than unbiased agents. Using data on compensation in US firms, I provide evidence that CEOs whose option exercise behavior and earnings forecasts are indicative of optimistic beliefs indeed receive smaller stock option grants, fewer bonus payments, and less total compensation than their peers. The third chapter documents an unintended effect of the Sarbanes-Oxley Act (SOX). The objective behind SOX was to improve corporate governance by improving account- ing disclosures. Compliance with Section 404 is considered by many to be the most costly requirement of SOX and has been argued to be a disproportionate burden for small firms. Consequently, firms with a public float below USD 75 million were granted several exemptions from compliance. These exemptions entailed a weakening of corporate governance through a weakening of the market for corporate control. In the fourth chapter, I examine the role of private benefits in optimal compensation and monitoring arrangements in a simple principal-agent framework. If the cost of monitoring is not too high, the optimal incentive scheme, level of monitoring, and the agent's expected total monetary compensation are not monotone in the level of potentially avail- able private benefits. It can be optimal to allow the extraction of benefits - even if they are not productivity enhancing and if their direct costs exceed their direct value.