Accounting

Speaker: Aiyong Zhu: Dartmouth College - Visitor

Time: 12:00 PM - 1:15 PM

Location: Volanakis

Speaker: Ivan Marinovic: Stanford University

Time: 12:30 PM - 2:00 PM

Location: Volanakis

While agency theory has greatly influenced the narrative around real-world compensation plans, boards rarely make the quantitative assumptions underlying executive contracts fully explicit. We develop a tractable methodology to invert the primitives of the agency problem from observed contract shapes, and obtain in closed-form the implied incentive misalignment, the contribution of managerial actions to firm value, and the agent’s outside option - allowing monitors and outsiders to understand what they are voting on. Under a plausible restriction on likelihood ratios, a simple test identifies settings in which only preferences near risk-neutrality can be rationalized and, in this case, the primitives can be recovered from a linear regression of realized performance on pay. Applying the method to Tesla’s controversial 2018 package for Elon Musk, we find that (i) Musk enjoyed little bargaining power, (ii) the contract embedded extreme incentive misalignment, (iii) the board expected him to generate far less value than the firm ultimately produced, and (iv) without performance-vesting options, eliciting effort would have been prohibitively costly. The framework therefore provides a transparent lens on the economics of “superstar” CEOs and answers calls for clearer explanations of high-powered incentive plans.

Speaker: Miao Liu: Boston College,
Rachel Geoffroy: Ohio State,
Stefan Huber: University of Pennsylvania,
Joaquin Peris: Purdue University,
Reining Pettachi: Georgetown University

Time: 8:00 AM - 5:00 PM

Location: Uhrig