Stakeholder Pressure and the Structure of Executive Compensation

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Abstract
We examine whether the recent public outcry over executive compensation has had an impact on the level of executive compensation and/or the sensitivity of cash compensation to firm performance. Cross-sectional analyses for a sample of 186 firms show that post-1993 compensation levels have risen despite increasing stakeholder pressure. Tests based on firm- specific, time series analyses indicate a post-1993 increase in the sensitivity of cash compensation to firm performance that cannot be completely explained by a rising stock market. In addition to examining overall changes in the structure of executive compensation, we also examine the impact of four specific sources of stakeholder pressure. We find no evidence that the receipt of a shareholder proposal on executive compensation or the redesign of short- term and long-term incentive plans in response to the $1 million pay cap is followed by significant changes in compensation levels or cash compensation performance sensitivities. However, our evidence does indicate that following negative financial press coverage of a firm?s executive compensation policies, there is both a smaller subsequent increase in total compensation and a larger subsequent increase in the sensitivity of cash compensation to firm performance than is experienced by firms that were not singled out by the media. Finally, we find that the targeting of a firm by institutional investors with concerns about the firm?s performance is associated with subsequent declines in both total compensation and cash compensation performance sensitivities.