Evaluating Executive Compensation Packages

from the Richmond Fed

The first step in understanding the incentives provided to chief executive officers (CEOs) of large public firms is to measure their compensation accurately. This is not a straightforward task, as only partial information on compensation contracts is collected systematically (Execucomp, since 1992, for top executives of public U.S. firms). The source for the information is the compensation summary tables that the Securities and Exchange Commission mandates to be included in annual proxy statements.

We show how to use this available data, together with stock price data in the Center for Research in Security Prices, to construct a measure of annual income that is based on realized compensation, rather than on the expected value of stock and option grants. We discuss the limitations of the available data to construct this measure and compare it to other measures recently used in the literature. We also propose a counterfactual exercise to project what annual income for CEOs in our sample would have been in different performance scenarios for their firm. We present our estimates of annual income and its sensitivity to performance for the period from 1993 to 2012, with a particular focus on the financial industry since the 2008 financial crisis.

[click on image below the read the entire study]

source: http://www.richmondfed.org/publications/research/economic_quarterly/2013/q4/pdf/jarque.pdf