Corporate Finance: Compensation and Agency
Paper Session
Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)
- Chair: Gustavo Manso, University of California-Berkeley
Competition and Executive Compensation: Evidence from Pharmaceutical Breakthrough Designations
Abstract
We examine the effect of competitive shocks on executive compensation and innovation in the pharmaceutical sector. The pharmaceutical sector is ideal for testing the joint theories of Arrow (1962) and Manso (2011) because innovation is paramount and periodic shocks to the competition space are common. Breakthrough therapy designations (BTDs), which expedite the approval of promising therapies, represent significant competitive shocks that are exogenous to rival firms' compensation structures. We find that when a pharmaceutical firm receives a BTD, rival firms respond by increasing risk-incentive pay via option grants in the subsequent year. This effect is robust to various econometric specifications and various ways of identifying rival firms. Furthermore, the observed effect is most pronounced for the most afflicted rivals (i.e., the rivals that exhibit the worst stock price reaction to the BTD) and for CEOs relative to other executives. We also examine if rival firms respond to the increase in executive stock options by shifting resources to riskier innovation. The evidence suggests that afflicted rivals escalate the developments of new drugs, initiate more drug projects using new technologies, and are more inclined to take on projects with lengthy development times. Overall, our results corroborate theoretical models wherein (i) firms facing competitive pressures optimally intensify innovation, and (ii) stock options encourage executives to undertake such innovation.Firms with Benefits? Nonwage Compensation and Implications for Firms and Labor Markets
Abstract
Nonwage benefits have become increasingly important and now represent 30% of total compensation (Bureau of Labor Statistics, 2021). Using administrative data on health insurance, retirement, and leave benefits, we find within-firm variation accounts for a dramatically lower percentage of total variation in benefits than in wages. We also document sharply higher between-firm variation in nonwage benefits than in wages. We argue that this pattern can be a consequence of nondiscrimination regulations, fairness concerns and the high administrative burden of managing too many or complex plans. Consistent with this mechanism, we show that the presence of high-wage workers in unrelated divisions of a firm as well as workers hired in high-benefit local labor markets positively predicts their colleagues’ benefits, controlling for occupation, wages, state, and industry. This dynamic has implications for employee turnover. We find that the resulting high benefits reduce employee departures, particularly among low-wage workers, for whom the benefits comprise a larger percentage of total compensation. We also find evidence that firms with more generous nonwage benefits reduce their reliance on low-wage workers more than low-benefit peers, suggesting that constraints on the provision of benefits affect the distribution of human capital across firms. Moreover, firms with relatively more generous benefits tend to have lower market valuation ratios, consistent with the existence of costs associated with providing more equal non-wage benefits within a firm.ESG-linked Pay Around the World —Trends, Determinants, and Outcomes
Abstract
We conduct a large-scale global study of ESG-linked pay for major firms that constitute 85% of themarket capitalization across 59 countries. We find that the ESG-linked pay adoption is strongly associated with a country’s culture and legal and institutional environment and the firm’s industry affiliation, and is higher for large firms or firms with high return on assets. The adopters also
experience better future social and financial performance. Exploiting a regulatory shock that
mandates corporate ESG disclosure, we establish that the adoption of ESG-linked pay is followed by enhancements in firms’ social performance and profitability and that employee satisfaction is a
plausible channel. Our findings suggest that pay contracts that direct managerial attention toward
often overlooked, yet long-term valuable dimensions can lead to mutually beneficial outcomes for
both shareholders and stakeholders. A regulatory framework advocating greater transparency in ESG disclosure holds the potential to enhance the effectiveness and advantages of ESG-linked pay. Such
measures can have spillover effects beyond national borders.
Discussant(s)
Nicolas Crouzet
,
Northwestern University
Moqi Groen-xu
,
London School of Economics
Jessica Jeffers
,
HEC Paris
Alex Edmans
,
London Business School
JEL Classifications
- G3 - Corporate Finance and Governance