Two Essays on the Effects of External Pressure on Executive Compensation: Evidenced Through Political Sensitivity and Pay for Performance Disclosure

This dissertation analyzes the impact of two external forces on executive compensation behavior. In the first chapter, the impact of political sensitivity is investigated as an external force on government contractor executive compensation. Compensation for top executives has come into the political spotlight, especially over the last decade, with many politicians publicly supporting limits on compensation. However, the impact of political scrutiny to limit compensation is debatable. This study analyzes the effect of political scrutiny on CEO compensation using a sample of Federal contractors, which represents a group of firms where politicians yield the most power. Results suggest that Federal contractors with the most visible government contracts that make up significant portions of their revenue have lower CEO compensation, but the efficiency of this compensation structure is debatable as it leaves CEOs with weaker incentives. However, the impact of political sensitivity is muted when the firm has more bargaining power with the government.

In the second chapter, the effects of external forces of mandated compensation disclosure and shareholding voting requirements on compensation behavior are examined. Given the lack of guidelines provided for Dodd-Frank mandated Pay for Performance disclosure and the increase in alternative pay definitions used in Pay for Performance discussions, this chapter analyzes the determinants of and the effects on Say on Pay support of disclosing alternative pay measures. Results suggest that firms that disclose alternative pay measures in their Pay for Performance discussions do so for different reasons. Although certain measures are characteristic of opportunistic disclosure and others are indicative of informative disclosure, effects on Say on Pay are similar yet distinct. There is often a significant positive impact of disclosing additional information related to compensation on Say on Pay approval, particularly when combating prior poor Say on Pay support. However, the positive impact on Say on Pay support is most robust when peer comparisons are shared, providing evidence of the value of reporting comparative pay.