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CEO Utility Pay Literature Review
- 1 Note to Readers
- 2 Background
- 3 Literature Review of CEO Utility Pay
- 3.1 Electric Utility Compensation
- 3.1.1 Executive Compensation and Corporate Performance in Electric and Gas Utilities
- 3.1.2 Political Constraints on Executive Compensation: Evidence from the Electric Utility Industry
- 3.1.3 Linking CEO pay to firm performance: empirical evidence from the electric utility industry
- 3.1.4 The impact of regulation on CEO labor markets
- 3.1.5 CEO Compensation after Deregulation: The Case of Electric Utilities
- 3.2 General Executive Compensation
- 3.2.1 How Much Does Performance Matter? A Meta-Analysis of CEO Pay Studies
- 3.2.2 Pay for performance? Government regulation and the structure of compensation contracts
- 3.2.3 CEO compensation, diversification, and incentives
- 3.2.4 A comparison of CEO pay-performance sensitivity in privately-held and public firms
- 3.1 Electric Utility Compensation
Note to Readers
Please leave any comments on the Discussion page (see tab above) including additional resources/papers/links etc. Papers can be added to relevant sections if done in chronological order with all citation information and short synopsis or abstract. Thank You.
- Google Scholar
- CEO Utility Pay
- CEO Compensation Electric Utility
- 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
- Measurement of profitability:
- accounting data
- 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:
- maximize sales in order to grow their own job security, perks, prestige, and control
- market forces and compensation contract align the CEO with stockholder interests. i.e., maximize stockholder 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.
Linking CEO pay to firm performance: empirical evidence from the electric utility industry
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
- 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:
- Investment opportunity set (IOS)
- Agency cost of debt
- Liquidity Constraints
- Firm Size
- SIC codes 4911 and 4931 has firms with data used in samples
- Components of compensation
- Annual cash bonus
- value of stock options
- value of restricted stock grants
- 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:
- firm specefic regressions
- Regression for pooled data set
- Variables used in calculations:
- sample period
- Free cash flow
- long term debt
- investment opportunity set
- total assets (natural log)
- CEO stock ownership
- regulatory environment indicator
- earnings based measures of performance (2 total)
- variance of annual earnings
- variance of monthly stock returns
- Variables used in calculations of CEO pay:
- stock option (black-scholes pricing)
- restricted stock compensation
- long term incentive plan layout
- 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
CEO compensation, diversification, and incentives
A comparison of CEO pay-performance sensitivity in privately-held and public firms
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