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«Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. Executive ...»

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Yermack, David. 2006. “Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns,” Journal of Financial Economics 80: 211-242

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Note. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. The change in executive wealth is defined as the sum of total compensation and the revaluation of stock and stock option holdings. Results are based on median regressions estimated separately for each decade. Standard errors are given in parentheses and are clustered by firm. The year 1946 is excluded from all calculations;

see footnote 42 for details.

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4.8 120.0 4.2 3.6 100.0 3.0

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2.4 80.0 1.8 60.0 1.2 40.0

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Note: Total compensation is composed of salary, bonuses, long-term bonus payments, and stock option grants.

Relative compensation is defined as total compensation divided by total wage and salary accruals per full-time equivalent employee from table 6.6 of the National Income and Product Accounts. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990.

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Note: Each line shows the median value of compensation defined as an increasing number of types. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990.

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.6.4.2

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Note: Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990. Fraction of executives granted options includes imputations for cases when only the cumulative number options awarded over a multi-year period is reported. See Appendix Section 2.3 for details.

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11.0 8.0

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2.0 1.0 0.5

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Note: Total compensation is composed of salary, bonuses, long-term bonus payments, and stock option grants. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and 1990. Rankings by market value are based on all firms appearing in the CRSP database, which includes all publicly-traded firms in the NYSE, AMEX and NASDAQ stock markets.

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5 1.2.8

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.4.2.1

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Note: Total compensation is composed of salary, bonuses, long-term bonus payments, and stock option grants. Based on the three highest-paid officers in the largest 50 firms in 1940, 1960 and

1990. The S&P index is expressed relative to the CPI and equals 1 in 2000.

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Note. Based on the three-highest paid executives in the 50 largest firms in 1940, 1960, and 1990. All measures are indexed to 1 for the 1936-40 period. Results are based on median regressions estimated separately for each decade. The unadjusted ES is the value of equity at stake and the unadjusted JM is the Jensen-Murphy statistic estimated from equations 2 and 3 in the text. Size adjustments are described in Section 5.4 and Appendix Section 4. The year 1946 is excluded from all regressions; see footnote 42 for details.

Data Appendix to Executive Compensation: A New View from a Long-Run Perspective 1936-2005

1. Sample Selection

1.1 Selecting Firms Our sample includes data on executives working in the largest 50 firms in 1940, 1960 and 1990.

For 1960 and 1990, we measure firm size by the total value of sales and obtain company rankings from Compustat.56 Because Compustat’s coverage is incomplete prior to 1978, we crosscheck the 1960 ranking with a list of the largest manufacturing firms published by Fortune magazine and add firms that are missing from Compustat.57 For 1940, a rank ordering of firms by the value of total sales was not available from either Compustat or any other published surveys. Therefore, we rank firms by their total market value using the Center for Research in Security Prices (CRSP) database.58 Our information on executive compensation comes from historical proxy statements and 10-K reports, which were mainly obtained from the collection at Harvard Business School’s Baker Library. To facilitate the data collection process we limit our sample to firms for which the Baker Library has proxy statements for a large number of years. To be specific, we only use firms for which we can find information for at least 20 years in a 30-year window. These 30year windows are 1936-1966 for the 1940 sample, 1943-1973 for the 1960 sample, and 1970for the 1990 sample. In addition, we also require that annual data must be available for at least three blocks of five consecutive years within this 30-year period. This requirement is necessary because only consecutive data on stock option grants and exercises can allow us to reliably estimate an individual’s holdings of unexercised stock options. If a firm does not meet these criteria, we replace it with the next largest firm on the list. In this manner, we move down the rankings until we have a total of 50 firms for each list of rankings. Because the ranking of firms is fairly consistent over time, our final sample includes a total of 101 firms. For each firm that meets our selection criteria, we collect annual data for all of the years for which proxy statements or 10-Ks are available. Appendix Table A1 lists the firms in our sample, the years they appear and their industrial classification.





An important issue related to the selection of the firms in our sample is how to treat mergers. Our intent is to keep a post-merger company in the sample if the new firm is similar to the original company. Therefore, we continue to follow a company for as long as the firm maintains the same permanent company identification number (PERMNO) in the CRSP database. We also include a post-merger firm with a different permanent number if either (1) all or part of the name of the old company is retained in the new company’s name, or (2) the 2-digit SIC code of the new and the old company are the same. Out of the 101 firms in our sample, there are seven cases where a firm’s identification number changes but it retains the name of the original firm, and 25 cases where the identification number and name changes but the industrial classification remains the same. There are 11 cases where we stop following a firm after a Although we select firms based on rankings in three particular years, we intend to select companies that were large for a reasonable period of time. Therefore, we use the value sales to measure firm size whenever possible, since it is less susceptible to transitory shocks than market value.

We find three firms that are listed in Fortune’s ranking but do not appear in Compustat. See Kothari, Shanken and Sloan (1995) for a more detailed description of survivorship bias in Compustat.

In 1951 (the first year with a reliably large number of firms reporting sales in Compustat), the correlation between a firm’s rank by sales and its rank by market value is 0.76 (based on 423 firms). Thus, it is unlikely that the change in our selection criteria introduces a large bias in our sample.

merger because the new firm takes on an entirely new name and operates in a different industry.

There are also another 14 cases where we cease to follow a firm because it becomes foreignowned (and therefore not subject to the Securities and Exchange Commission (SEC) reporting requirements) or because the firm has gone out of business.

1.2 Selecting Executives in Each Firm During the 1930s, the SEC required firms to report remuneration for each of their three highest paid officers. This requirement was extended in 1943 to include any additional officers who earned above a nominal cutoff, which was subsequently raised over time. From 1978 to the present, the disclosure requirements were extended to the five most highly compensated officers.

We collected information on the 5-highest paid officers in each firm whenever possible, but our main sample excludes the 4th and 5th highest-paid executives because only high-paying firms reported the remuneration of these officers prior to 1978.59 We also exclude executives who did not work for the entire fiscal year.

1.3 Collecting Firm-Level Data We measure the market value of each firm in our sample as the number of shares outstanding multiplied by the end-of-fiscal year market price, both of which are reported in CRSP. The total value of sales in each firm is from Compustat (data12), which is available for most companies from 1950 to the present. For years prior to 1950, we collected data on total sales from various editions of Moody’s Industrial Manual, Moody’s Transportation Manual, and Moody’s Public Utility Manual.

2. Measuring Executive Compensation

2.1 Collecting Information from Proxy Statements Our compensation data were hand-collected from corporate reports that were filed with the SEC, which has required firms to disclose this information since 1934. Prior to 1942, the information was disclosed in 10-K reports, which included the name, job title, and aggregate remuneration (normally defined as cash salary and bonuses) paid to each of the three highest-paid officers. In 1942, the SEC introduced executive compensation as an item in proxy statements and began to require detailed quantitative and qualitative information on the major forms of remuneration.

Therefore, we collect data from proxy statements between 1943 and 1992 (thus for data pertaining to 1942 to 1991), and extend our sample back to 1936 using 10-K reports.60 From 1992 to 2005, we use information on executive pay from Computstat’s Executive Compensation (ExecuComp) database. These data are also obtained from proxy statements, and so are comparable to our hand-collected data.

We obtain information on executive pay from several parts of the proxy statement. As required by the SEC, each proxy statement contains a table listing the remuneration of the highest paid officers in the firm. This table provides data on cash remuneration, long-term bonuses and, frequently, job titles. Information on stock option grants and exercises generally In accordance with SEC guidelines, the highest-paid officers are identified according to total cash remuneration (i.e. total cash and bonus payments, but not the value stock or stock option grants).

We begin our sample in 1936 because this is the first year that provides us with a large enough sample size, as many firms refused to disclose information on pay in 1934 and 1935. Moreover, the collection of 10-Ks at Baker Library includes fewer companies in the earliest years of the SEC’s operations. Due to the limitations of Baker Library’s collection, we were able to find information pertaining to the 1936-42 period for 63 out of the 85 firms in our sample that were operating during those years.

follows this table. Many proxy statements also include a description of incentive pay or stock option plans that were in effect at the time. These descriptions include details on the characteristics of stock option and bonus awards (for example, the vesting structure of options and deferred bonuses, the tax status of stock options, and the method used to calculate incentive compensation). Proxy statements also contain a table listing the holdings of company stock for nominees for director. This table allows us to record the equity holdings of officers who were also directors, which comprises more than 80 percent of the executives in our sample.

2.2 Measurement of salary and bonus payments Salary and current bonus payments: Salary plus any bonus both awarded and paid out in the same year. These bonuses were generally in the form of cash, although some were given in stock. Stock bonuses are valued using the stock price on the day the stock was given to the executive. When the stock price on the grant date is missing, we use the stock price at the end of the fiscal year. In many cases cash remuneration is reported as one lump-sum, so we are unable to separate straight salary from bonus payments. In about five percent of the sample, cash remuneration also includes payments from long-term incentive awards as well as current-year bonuses.

Long-term incentive payments: Payments made to the executive as compensation for bonuses awarded in prior years. Many long-term incentive plans were structured to pay bonuses in equal installments during the four to five years after they are awarded. Although we would prefer to attribute all bonus awards to the year in which they are granted, the majority of firms only report the cash amounts paid to the executive in each year. In cases where the firm reports the amount awarded, we convert the award into future payments using the structure of the bonus plan to estimate the amount paid out each year. In earlier decades, the majority of these bonuses were paid in cash, but a few are awarded in stock. Bonuses awarded in stock became more common over time as restricted stock grants became more prevalent. Stock bonuses are valued using the stock price at the end of the fiscal year in which the stock is received. Since the realization of performance measures for contingent awards are usually not observable, contingent bonuses are only included when the amounts paid out are reported.

2.3 Measurement of stock options

Options granted: We value options on the day they were granted using the following BlackScholes formula:

Award value = N [ Pe dT Φ ( Z ) − Ee rT Φ ( Z − σ T )] ⎛P⎞ 1 ln ⎜ ⎟ + T ( r − d − σ 2 ) Z= ⎝ ⎠ E σT N = number of shares awarded P = stock price on the date of the award. In most cases we assume this price is equal to the exercise price of the stock (see below for details).

E = exercise price of the stock option.

d = monthly dividend rate = 1/12*ln(1+D/S) where D is the total value of dividends paid in the previous year and S is the average stock price in the previous year.

T = time to expiration of the option, measured in months.

r = monthly yield on US treasury securities. We use the 3-year constant maturity interest rate from Global Insight’s DRI-WEFA Basic Economic Database.

Σ = standard deviation of monthly stock returns. Monthly stock returns are obtained from the CRSP database and are corrected for stock splits and dividend payments. We calculate the standard deviation using the three prior years of monthly data.



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