Texas Law Review, Volume 96, Number 2, December 2017 Page: 273
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CEO Pay Redux
rents disincentivizes managers to undertake strategies that boost short-term
performance at the expense of future losses.
Within this analytical framework, we show that board protection from
market discipline, whether in the form of intense product-market competition
or greater shareholder power, is likely to increase, rather than decrease, the
efficiency of executive-compensation plans. Board protection does so by
reducing the risk that market discipline will interfere with a manager's
continuation value, thereby making shareholders' own commitment to long-
term value creation credible and avoiding value-decreasing, short-termist
distortions in executive-pay schemes. The evidence we provide on the
overuse of option grants in the past decade offers a vivid illustration of such
distortions, as this evidence suggests that boards that are more exposed to
market forces are more likely to use option-based compensation that
emphasizes short-term performance at the expense of long-term firm value.
Going forward, policymakers would do well to reconsider the case for
enhanced shareholder power in corporate governance, which has driven
recent executive-compensation reforms and which has boosted the influence
of proxy advisory firms on the executive-pay process. As this Article has
shown, this case is theoretically lacking, unsupported by the data, and seems
detrimental to both the interests of shareholders and society as a whole.
Future research would also do well to reexamine proposals to reform
executive pay in the attempt to address the rising income inequality in the
United States.223 Our analysis suggests that blaming boards of directors and
managers for this rising inequality224 reflects a fundamentally reductionist
understanding of the dynamics that have led to the rise in CEO pay.
Accordingly, proposals that penalize firms for high executive pay will
223. The clearest evidence is provided by the 2010 Dodd-Frank Act's provision directing the
SEC to introduce a CEO-pay-ratio disclosure requirement. Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, Pub. L. No. 111-203, 953(b), 124 Stat. 1376, 1899 (2010)
(codified as amended at 15 U.S.C. 78n-1). Under this requirement, all U.S. public companies will
have to disclose the ratio of CEO pay to median employee pay starting in 2018 proxy statements
(reporting on fiscal year 2017). See 17 C.F.R. 229.402 (Executive Compensation). The theory
behind this impeding mandate is that making the CEO pay ratio publicly available will make board
capture by executives more difficult-or, at least, more evident to firm outsiders, including
shareholders-ultimately leading to a reduction of both CEO pay and income inequality. See Ira
Kay & Blaine Martin, CEO Pay Ratio and Income Inequality: Perspectives for Compensation
Committees, HARV. L. SCH. F. ON CORP. GOVERNANCE & FIN. REG. (Oct. 25, 2016),
https://corpgov.law.harvard.edu/2016/10/25/ceo-pay-ratio-and-income-inequality-perspectives-for
compensation-committees/ [https://perma.cc/9LR7-46CU].
224. One of the most prominent advocates of this view has been French economist Thomas
Piketty. In his book du jour, Capital in the Twenty-First Century, Piketty argues that
"supermanagers, that is, top executives of large firms who have managed to obtain extremely high,
historically unprecedented compensation packages for their labor," have come nowadays to make
up most of the income hierarchy's top 0.1%. THOMAS PIKETTY, CAPITAL IN THE TWENTY-FIRST
CENTURY 302 (2014). In searching for a rational basis for the explosion in managerial pay, Piketty
suggests that one plausible explanation is that "social norms" have allowed senior managers to
substantially set their own pay. See id. at 332.2017]
273
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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/m1/81/: accessed July 18, 2024), University of North Texas Libraries, The Portal to Texas History, https://texashistory.unt.edu; crediting UNT Libraries Government Documents Department.