1 / 14

Political contributions and CEO pay

This paper delves into the interplay between CEO political donations and compensation levels. Results show that higher political connectness leads to increased CEO pay and reduced pay-performance sensitivity. The study examines the implications of CEO connectedness for the firm, exploring how specific CEO characteristics and political history impact compensation. The link between donations and power, potential substitutes between CEO and firm donations, and the influence on politicians are also discussed. The study uncovers insights on why pay-performance sensitivity correlates negatively with political contributions, offering new perspectives on CEO compensation dynamics.

minniek
Download Presentation

Political contributions and CEO pay

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Discussion of Aslan-Grinstein:Political Contributions and CEO PayRotterdam, May 2012Moqi Xu, LSE

  2. Political contributions and CEO pay • Two controversial topics combined! • Welfare implications?....

  3. Main results • This paper uses CEO donations as measure of political connectness • Result: more CEO donations (connectedness)  higher compensation and lower pay-performance sensitivity • Robust result with many interesting robustness checks • Is this good or bad (for the firm)? • Paper concludes „good“: „excess compensation predicted by donation“  better performance

  4. How does CEO connectedness create firm value? • Some initial evidence in the paper: • Supporting a winning candidate is better (for pay) • Longer connections are better (for pay) • Own political history is better (for pay) • First stage regressions could be interesting, but not shown • Certain CEO characteristics that make them more powerful? Religion? Conservatism? Risk-loving or risk-averse? What is the link between donations and power? • How does the network support work? Certain committees? Mergers? Market power? Bailouts? • Which politicians are supported? On average 25 candidates. Bipartisan? Which party?

  5. Donations by Dimon: 2,000 Donations by JPMorgan: 37,950 Donations by Dimon: 2,000 Donations by JPMorgan, 28,500

  6. Are CEO donations and firm donations substitutes? • This is the first paper on CEO donations • Most literature on corporate donations or connections • Direct comparison: which one more useful, and how do they affect politicians? • What about other executives (Farrell et al.)? Donation “expected” in an industry (Ovtchinnikov and Pantaleoni)? Can the firm “force” CEOs to donate? • Robustness checks present alternative measures (networks, previous political experience) – what is the difference?

  7. 1991-2012 total contribution James Dimon JP Morgan

  8. Why is pay-performance-sensitivity negatively related to political contributions? • CEO perspective: his connections will create value. Why not demand more performance-related pay? • Firm perspective: CEO has bargaining power because of his connections, potentially hard to punish. Why not make him work harder with incentives? • Alternative explanation: election risk

  9. Is election risk connected to employment risk? Some very superficial evidence Above/below median 2-digit SIC corporate contributions in election PACs • In industries with high political contributions, CEOs get shorter contracts • Their contracts end more often in presidential election years • Yet, their stock and options have more time until vesting (forfeited upon termination) • Perhaps they want to get compensated for this risk?

  10. James Dimon‘s contract? From the 2008 proxy statement: The employment agreement between Mr. Dimon and the Firm, which was entered in connection with the 2004 merger of JPMorgan Chase and Bank One Corporation, expired on May 15, 2007. In addition, the Firm’s executive severance policy was terminated effective June 30, 2007. All of the Named Executive Officers are “at will” employees of the Firm. They do not have employment contractsor change of control agreements and do not have benefits or equity awards that are triggered or accelerated upon a change of control.

  11. Technical remarks • Instrumental variable for connectedness: geographical distance • Only donations to candidates for president, senate, house of representatives • Are they not all in Washington? If not, measurement of power? • Alternative: state of origin • Performance test • Predicted excess compensation = donation scaled by coefficient donation/compensation • What does it mean? • More meaningful to document the direct effect of CEO donation (connectedness)? • Perhaps cleaner to use event studies of winning / death of candidate?

  12. Miscelleanous • Firms are very young: mean age = 22, mean tenure = 11 • Why are relative donations >1?

  13. Conclusion • Interesting paper in a new literature • Shows that CEOs who donate more to politicians get paid more, with lower pay-for-performance sensitivities • Very robust results on the relation between pay and individual political contributions • Much potential for more research on the performance effects

More Related