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

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

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 3

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? 4

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

total contribution JP MorganJames Dimon 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? 11 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, In addition, the Firm’s executive severance policy was terminated effective June 30, All of the Named Executive Officers are “at will” employees of the Firm. They do not have employment contracts or change of control agreements and do not have benefits or equity awards that are triggered or accelerated upon a change of control.

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 14