UC Riverside

This dissertation consists of three essays. In the first essay, I construct a CEO pay complexity index based on grant-level compensation data to test whether compensation complexity is consistent with optimal contracts or agency problems. Complexity may represent board effort to contract optimally or a means by which the CEO camouflage agency issues and rent extraction. I find evidence supporting the agency view by showing how complexity is negatively related to firm value, profitability, and CEO turnover performance sensitivity. I also examine the relationship between complexity and CEO investment behavior and find mixed results. Overall, the findings relate to shareholders' dissatisfaction with the increased complexity of CEO compensation.

The second essay studies how customer concentration affects the use of relative performance evaluation (RPE). Customer concentration increases the potential benefit of RPE in compensation contracts to ease the higher systematic risk CEOs face and provide proper incentives. However, such concentration may make RPE costly and less appealing because of the limited availability of peers or the possible disruption to major customers' relationships. I find that the sensitivity of CEO compensation to systematic performance is higher for firms with significant customers (less RPE). Examining why these firms rely less on RPE, I show that the positive sensitivity of pay to systematic performance disappears once a firm has enough informative peers. Further evidence indicates that the lack of RPE is not related to other explanations such as the possibility of disruption to the relationship with significant customers, CEO power, industry strategic interactions, or less incentive pay for risky firms.

The third essay examines the relationship between CEOs' political leanings and the speed of adjustment to target leverage. While most CEOs' political views do not affect movement towards the target, we find that partisan Democrat CEOs of under-levered firms have significantly slower adjustment speeds. After the exogenous shock of the 2017 Tax Cut and Jobs Act (TCJA), these firms are even slower to make adjustments. We find that the post-TCJA inertia of partisan Democrats reflects a reduction in share repurchases, consistent with the Democratic Party views on the use of windfall corporate profits.