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Difference between revisions of "CEO Utility Pay Literature Review"

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(Executive Compensation and Corporate Performance in Electric and Gas Utilities)
(Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry)
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===Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry===
 
===Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry===
 
[http://www.jstor.org/stable/2555797?seq=1#page_scan_tab_contents P. L. Joskow, N. L. Rose, and C. D. Wolfram, “Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry,” The RAND Journal of Economics, vol. 27, no. 1, pp. 165–182, 1996.]  
 
[http://www.jstor.org/stable/2555797?seq=1#page_scan_tab_contents P. L. Joskow, N. L. Rose, and C. D. Wolfram, “Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry,” The RAND Journal of Economics, vol. 27, no. 1, pp. 165–182, 1996.]  
*
+
*covers 1978-1990
*
+
*2 extreme views help highlight the array of views on the topic:
 +
:#CEO compensation is not sensitive enough to firm financial performance
 +
:#executive compensation is generally controlled by the CEO rather than the board of directors, giving CEOs a higher salary
 +
*2 ways political constraints can affect pay:
 +
:#It can make a CEO's job easier, making it more profitable to reduce the CEOs pa, tie pay less to firm performance, etc.
 +
:#The board may react to the high CEO pay currently observed and try to reduce the costs.
 +
*Salomon Brothers regulatory environment rankings were used.
 +
Variables
 +
*CEO Compensation:
 +
:*annual salary and bonus (Forbes' annual survey of CEO compensation and proxy statements)
 +
:*salary and bonus captures almost all of a CEOs pay in the industry (95%)
 +
*CEO characteristics(Forbes' survey or proxy statements):
 +
:#age
 +
:#tenure in office
 +
:#if the CEO was hired from outside the company or promoted
 +
*Firms Characteristics:
 +
:#Firm size(revenue, assets, employees used to measure from COMPUSTAT Utility Tapes)
 +
:#Financial performance(COMPUSTAT Tapes, stock market rates of return)
 +
:#measures of organizational structure(utility annual reports, 10k filings, financial analysts' reports. if it is organized as an exempt holding company and if it has diversification into non regulated industries.)
 +
*Regulatory and Political Environment:
 +
:#Salomon Brothers' Rankings
 +
:#residential and industrial rate change
 +
:#characteristics of each states regulatory agency(annual issues of the National Association of Regulatory Utility Commissioners' annual report on utility and carrier regulation, 1978-1990.
 +
*CEO compensation results:
 +
:*paid less when their firms regulatory environment favors consumers
 +
:*Paid less when rates are high or rising rapidly (mostly residential)
 +
:*paid less when their state has an elected commissioner
  
 
===Linking CEO pay to firm performance: empirical evidence from the electric utility industry===
 
===Linking CEO pay to firm performance: empirical evidence from the electric utility industry===

Revision as of 16:05, 24 January 2016

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Background

Searches

  • Google Scholar
  • CEO Utility Pay
  • CEO Compensation Electric Utility

Journals

  • Academic OneFile
  • CEO Utility Pay

Utility CEO Pay

From Wikipedia: Electric Utility "The compensation received by the executive in utility companies often receives the most scrutiny in the review of operating expenses. Just as regulated utilities and their governing bodies struggle to maintain a balance between keeping consumer costs reasonable and being profitable enough to attract investors, they must also compete with private companies for talented executives and then be able to retain those executives."

see Executive Compensation in the U.S. for a summary on why private companies seem to have an advantage in terms of CEO pay.

Why CEO Utility Pay?

CEO, or Chief Executive Officer, salary has risen dramatically over the past two decades. Utility companies are found to pay their CEO's significantly less than their private counterparts. This is being investigated to determine the chief reasons CEO's in the electrical utility industry seem to be paid less, and discover if their pay is justified.

How many methods for Calculation?

There are several generally agreed upon components to a CEO's salary:

  • Base Salary
  • Incentive Pay, Short Term (i.e., bonus)
  • Incentive Pay, Long Term (i.e., stocks)
  • Benefits (i.e., Cars, Health Care, Retirement)

Running Notes and Ideas

  • Gather data on many firms from both electric utilities and non-regulated industries.
  • Use this data (firm size, stock price, etc.) in minitab to discover what variable are more significant in calculating the pay of a CEO for both industries.
  • use minitab to see if utility idustries pay more with salary/bonus or stock options than non-regulated firms.

Literature Review of CEO Utility Pay

Electric Utility Compensation

Executive Compensation and Corporate Performance in Electric and Gas Utilities

A. Agrawal, A. K. Makhija, and G. N. Mandelker, “Executive Compensation and Corporate Performance in Electric and Gas Utilities,” Financial Management, vol. 20, no. 4, p. 113, Winter 1991.

  • Measurement of profitability:
  1. accounting data
  2. stock market returns
  • Managers should be rewarded for ability, responsibility, firm size, past performace, current performance
  • Need to focus on whole compensation package (bonus, stocks, salary, etc.)
  • Most studies look at historical data. How do I predict future data?
  • 2 views on what CEOs strive for:
  1. maximize sales in order to grow their own job security, perks, prestige, and control
  2. market forces and compensation contract align the CEO with stockholder interests. i.e., maximize stockholder wealth
  • Used all utility firms with the SIC codes 4911 and 4931 on the COMPUSTAT tapes which were listed on the New York Stock Exchange or the American Stock Exchange in 1985
  • Proxy statements were requested directly from these firms for the period of 1975-1984.
  • size was measured by: sales, number of employees, shares outstanding, market value of equity, or total book value of assets
  • Consumer Price Index was used to convert dollar values across time
  • Stock options were ignored because they were so rarely used in compensation
  • pension benefits were ignored because of the difficulty of estimating their value and contribution
  • Demand for the public utility's product is mostly determined by economic and weather conditions in the area.
  • public utility's price is set by the public utility commission
  • Concluded that compensation for managers shifted their goals to line up with the stockholders'
  • This contradicts the most common view, that utility managers do not have incentive to increase stockholders wealth

Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry

P. L. Joskow, N. L. Rose, and C. D. Wolfram, “Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry,” The RAND Journal of Economics, vol. 27, no. 1, pp. 165–182, 1996.

  • covers 1978-1990
  • 2 extreme views help highlight the array of views on the topic:
  1. CEO compensation is not sensitive enough to firm financial performance
  2. executive compensation is generally controlled by the CEO rather than the board of directors, giving CEOs a higher salary
  • 2 ways political constraints can affect pay:
  1. It can make a CEO's job easier, making it more profitable to reduce the CEOs pa, tie pay less to firm performance, etc.
  2. The board may react to the high CEO pay currently observed and try to reduce the costs.
  • Salomon Brothers regulatory environment rankings were used.

Variables

  • CEO Compensation:
  • annual salary and bonus (Forbes' annual survey of CEO compensation and proxy statements)
  • salary and bonus captures almost all of a CEOs pay in the industry (95%)
  • CEO characteristics(Forbes' survey or proxy statements):
  1. age
  2. tenure in office
  3. if the CEO was hired from outside the company or promoted
  • Firms Characteristics:
  1. Firm size(revenue, assets, employees used to measure from COMPUSTAT Utility Tapes)
  2. Financial performance(COMPUSTAT Tapes, stock market rates of return)
  3. measures of organizational structure(utility annual reports, 10k filings, financial analysts' reports. if it is organized as an exempt holding company and if it has diversification into non regulated industries.)
  • Regulatory and Political Environment:
  1. Salomon Brothers' Rankings
  2. residential and industrial rate change
  3. characteristics of each states regulatory agency(annual issues of the National Association of Regulatory Utility Commissioners' annual report on utility and carrier regulation, 1978-1990.
  • CEO compensation results:
  • paid less when their firms regulatory environment favors consumers
  • Paid less when rates are high or rising rapidly (mostly residential)
  • paid less when their state has an elected commissioner

Linking CEO pay to firm performance: empirical evidence from the electric utility industry

Augustine I. Duru and Raghavan J. Iyengar, “Linking CEO pay to firm performance: empirical evidence from the electric utility industry,” Managerial Finance, vol. 25, no. 9, pp. 21–33, Sep. 1999.

The impact of regulation on CEO labor markets

D. Palia, “The impact of regulation on CEO labor markets,” RAND Journal of Economics, vol. 31, no. 1, p. 165, 2000.

CEO Compensation after Deregulation: The Case of Electric Utilities

S. Bryan, L. Hwang, and S. Lilien, “CEO Compensation after Deregulation: The Case of Electric Utilities,” The Journal of Business, vol. 78, no. 5, pp. 1709–1752, 2005.

  • In 1992 NEPA decreased regulation. This affected the CEO compensation by increasing firm competition
  • Assumes that managers behave in a way consistent with their compensation
  • FERC's Form 1 gives information on firms performance, and could be useful
  • A control sample of other non-regulated firms was used
  • CEO compensation becomes more performance based after regulation ended.
  • Firms have annual SEC proxy statements that summarize their CEO-compensation policies
  • deregulation requires more time from the CEO, which increases CEO compensation
  • Stock option compensation Variables include:
  1. Investment opportunity set (IOS)
  2. Agency cost of debt
  3. Liquidity Constraints
  4. Firm Size
  • SIC codes 4911 and 4931 has firms with data used in samples
  • Components of compensation
  1. Salary
  2. Annual cash bonus
  3. value of stock options
  4. value of restricted stock grants
  5. long-term incentive plan payments
  • Value of stocks was measured using Black-Scholes (1973) model.
  • data was received from the Compustat and the Center for Research in Security Prices (CRSP) databases.
  • Ways to estimate the relation between CEO compensation and earnings performance:
  1. firm specefic regressions
  2. Regression for pooled data set
  • Variables used in calculations:
  1. sample period
  2. Free cash flow
  3. long term debt
  4. investment opportunity set
  5. total assets (natural log)
  6. CEO stock ownership
  7. regulatory environment indicator
  8. earnings based measures of performance (2 total)
  9. variance of annual earnings
  10. variance of monthly stock returns
  • Variables used in calculations of CEO pay:
  1. salary
  2. Bonus
  3. stock option (black-scholes pricing)
  4. restricted stock compensation
  5. long term incentive plan layout
  6. ratio of CEO stock option compensation to cash compensation(salary+bonus)
  • benefits was purposefully left out.
  • This paper did not specify if firms were coal, solar, hydro, etc. This would help.
  • The paper gives a future research topic into the reasoning of why there is a reweighting of the parameters of bonus formulas that certain utilities undertook during worse performance.

General Executive Compensation

How Much Does Performance Matter? A Meta-Analysis of CEO Pay Studies

[1H. Tosi, S. Werner, J. Katz, and L. Gomez-Mejia, “How Much Does Performance Matter? A Meta-Analysis of CEO Pay Studies,” Journal of Management, vol. 26, no. 2, pp. 301–339, Apr. 2000.]

Pay for performance? Government regulation and the structure of compensation contracts

T. Perry and M. Zenner, “Pay for performance? Government regulation and the structure of compensation contracts,” Journal of Financial Economics, vol. 62, no. 3, pp. 453–488, Dec. 2001.

CEO compensation, diversification, and incentives

L. Jin, “CEO compensation, diversification, and incentives,” Journal of Financial Economics, vol. 66, no. 1, pp. 29–63, Oct. 2002.

A comparison of CEO pay-performance sensitivity in privately-held and public firms

H. Gao and K. Li, “A comparison of CEO pay-performance sensitivity in privately-held and public firms,” Journal of Corporate Finance, vol. 35, p. 370+, Dec. 2015.

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