The False Promise of Risk-Reducing Incentive Pay: Evidence from Executive Pensions and Deferred Compensation

49 Pages Posted: 11 Apr 2012 Last revised: 22 Mar 2013

See all articles by Kelli Alces Williams

Kelli Alces Williams

Florida State University - College of Law

Brian D. Galle

Georgetown University Law Center

Date Written: April 11, 2012

Abstract

The average publicly-traded firm pays its CEO millions of dollars in deferred compensation and defined-benefit pension commitments. Scholars debate whether firms use these payments to efficiently align managerial interests with those of creditors, or whether instead they represent “hidden” forms of rent extraction. Yet others recommend these forms of debt-like incentive compensation, sometimes called “inside debt,” as a way of controlling risk-taking in systemically important financial institutions.

We argue instead that inside debt is unlikely to be efficient in either setting. Inside debt is costlier and more complex than other tools for managing risk, such as covenants or simply cutting back on option pay, and gives managers opportunities to hedge their equity positions without revealing that fact to investors. Drawing on the behavioral literature, we also show that increasing pay complexity is likely to reduce the efficacy of all forms of manager incentives.

To test these hypotheses, we conduct a series of panel regressions utilizing matched CEO and firm data covering over 1300 firms during the period 2007 to 2009. Under most specifications, we find little evidence that current borrowing needs correspond with executive pay structures. We do find, however, significant relations between the use of pensions and markers of managerial power, markers of board risk aversion, and lagged firm debt levels.

Keywords: inside debt, incentive pay, pay for performance, managerial power, bankruptcy, corporate credit, risk regulation

JEL Classification: D23, G21, G33, G34, J33, K22, M52

Suggested Citation

Williams, Kelli Alces and Galle, Brian D., The False Promise of Risk-Reducing Incentive Pay: Evidence from Executive Pensions and Deferred Compensation (April 11, 2012). 38 Journal of Corporation Law 53 (2012), Boston College Law School Legal Studies Research Paper No. 266, FSU College of Law, Public Law Research Paper No. 600, FSU College of Law, Law, Business & Economics Paper No. 12-9, Available at SSRN: https://ssrn.com/abstract=2038528

Kelli Alces Williams

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States
(850) 644-5079 (Phone)

Brian D. Galle (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
374
Abstract Views
3,542
Rank
145,777
PlumX Metrics