Texas Law Review, Volume 96, Number 2, December 2017 Page: 212
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Texas Law Review
product competition.20 When managers are subject to such market forces,
they will rationally anticipate a greater risk of being removed in the near
future and, therefore, substantially discount their expected continuation
value. By preventing market forces from interfering with a manager's
continuation value, board protection might accordingly facilitate the design
of pay schemes that promote long-term shareholder wealth.
Against this analytical background, Part III moves to the empirical
investigation of the relationship existing between corporate governance and
market forces, on the one hand, and CEO pay levels and structure, on the
other. We begin by examining the relationship between the use of defensive
measures and CEO pay. If the predictions of managerial power theory were
accurate, we would expect to find that the adoption of such measures
increases the likelihood that managers obtain higher pay or pay that is not
sufficiently tied to performance. For example, pursuant to the claims made
by managerial power scholars, we should find that CEO pay arrangements
include larger portions of non-equity pay (e.g., cash, salary, and the like),
which fail to directly align manager and shareholder interests.21 Similarly, we
would expect to find a greater use of restricted stock grants, which according
to managerial power theory inefficiently provides managers with lower-
powered incentives than the use of option grants.22 In contrast with these
predictions, we find no evidence that the adoption of defensive measures
results in higher levels of executive compensation or changes in pay structure
(neither before nor after the Dodd-Frank Act's introduction of new
compensation rules).
Next, we examine the effect on CEO pay of various forms of
competition. These forms include labor-market competition for managerial
talent, product-market competition, and competition through merger and
acquisition (M&A) activity, which we interpret as a proxy for an industry's
shareholder pressure (as operating through the takeover channel). 23
Consistent with managerial talent theory, we document that competition for
managerial talent has a substantial effect on both CEO pay levels and
structure, as greater talent competition is positively associated with higher
CEO pay levels and a larger proportion of restricted stock grants. This
evidence suggests that the increase in CEO pay due to managerial talent
competition largely comes from a greater use of restricted stock. On the
contrary, greater product-market competition and M&A competition are
associated with an increase in the option component of CEO pay and a
20. Similar to when they are exposed to enhanced shareholder power, managers are subject to
intense market-driven discipline in environments with intense product competition due to relative
performance evaluations under which the imperative for managers is beating competitors. See JEAN
TIROLE, THE THEORY OF CORPORATE FINANCE 20, 28-29 (2006).
21. See infra text accompanying notes 63-64.
22. See infra text accompanying notes 65-69.
23. See infra subpart III(A).212
[Vol. 96:205
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Texas Law Review Association. Texas Law Review, Volume 96, Number 2, December 2017, periodical, December 2017; Austin, Texas. (https://texashistory.unt.edu/ark:/67531/metapth1115391/m1/20/: accessed July 18, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu; crediting UNT Libraries Government Documents Department.