Have managerial objectives changed after crisis? Executive compensation and M&A perspective

Martina Vitezova

Student thesis: Master thesis


Inadequate executive compensation practices of bank CEOs are considered to be one of the causes that brought about recent global economic crisis. To ameliorate this issue, the US government enacted the Dodd-Frank Act in 2010 that gave shareholders of all public companies unprecedented level of direct control over executive pay. It is the objective of this thesis to assess whether the Act has improved corporate governance of the US firms in the crisis aftermath. Compensation granted to executives has been on the rise during past several decades driven by increasing stock and stock option grants. Two opposing, yet complementary views can explain this trend. On one hand, board of directors optimally decided on such managerial pay when acting on behalf of shareholders. On the other one, influence of managers into the decision-making of board directors occurred, signaling agency problem. Equity based executive compensation is used to align executive interests with the ones of shareholders to maximize the value of a firm. However, stock-based salary can incentivize managers to take up risky projects and focus on short-term results to increase their personal gains at the detriment to the shareholders. To detect if the salary decisions and therefore managerial incentives were optimally determined, and consequently if Dodd-Frank Act brought managers‟ objectives closer to shareholders‟ we will look into managers‟ performance when undertaking mergers and acquisitions, as some of the most visible investment decisions managers get to decide on during their careers. Analyzing the deals taking place from 2002 to 2012, we confirm that stock-based compensation affects the merger and acquisition performance of managers negatively and this was especially the case shortly before crisis. Based on this result we conclude the salary levels and structures were not optimal for the shareholders and agency problem existed between them, CEOs and board directors. After Dodd-Frank Act was enacted, level of stock-based compensation has dropped, less risky, more valuable deals were taking place, and acquirers had boards with better quality. Therefore, the Act has contributed significantly to the agency problem resolution. This thesis contributes to existing research by making a negative association between wealth of shareholders and risk-taking incentives of equity based salary and generalizing it for most industries of the US economy. In this way it adds to existing knowledge on the causes and consequences of the global economic crisis.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2015
Number of pages98