The fourth in a series of posts that looks at some of the new research that was presented at the FMA conference last week in NYC.
Two of my favorite papers happened to be in the same session (a fact that I doubt was independent, watching a good (or bad) presentation no doubt has carryover effects to the next paper).
Jayaraman and Millburn examine two simultaneous long term trends of increased market liquidity (which is presumed to make stock prices more informative) and paying executives with more market based pay and find that the latter is dependent on the former. That is, as liquidity increases, so too does pay sensitivity that is tied to stock performance. (Notably, they find no such increase for pay to earnings sensitivity which presumably is seen as a second best solution to paying managers for performance.) Using the change to decimalization and inclusion into S&P 500 as robustness checks gives further support to this idea. (it should be noted that SP inclusion was used because it leads to LESS informative prices and consequently lower equity pay sensitivity.
Then in a paper so good that I really enjoyed it even though the presenter was not an author. Intuitively I just love the idea and can not figure out why firms are not doing it! The author York's Yisone Sam Tian shows that using Asian options (which uses the average stock price instead of closing stock price) helps alleviate some of the incentive problems that arise when using traditional executive stock options. For instance the risk manager would be not need as large of premium for accepting the pay, there would be less incentive to withhold bad news, etc. That said, there might be increased incentive for earnings smoothing as the discussant pointed out. Genius!
Durham, Perry, and Carpenter examine pay equity in NFL football and find that it a team has a wide dispersion of pay (paying some a great deal and many others near the league minimum for example), turnover increases and winning percentages drop. This is not the first time for similar findings. Past researchers have examined pay equity issues in many settings, including professional sports. The past results have been quite mixed, but in a nutshell have suggested that for "large team games" such as US football, baseball, soccer some measure of fairness matters, where in smaller team games (basketball) it matters less (presumably where a few superstars can carry the team). And I really wish they had looked at whether turnover led to turnovers. LOL..
previous posts from the FMAs