Ironing out the kinks in executive compensation: Linking incentive pay to average stock prices

Traditional stock option grant is the most common form of incentive pay in executive compensation. Applying a principal-agent analysis, we find this common practice suboptimal and firms are better off linking incentive pay to average stock prices. Among other benefits, averaging reduces volatility by about 42%, making the incentive pay more attractive to risk-averse executives. Holding the cost of the option grant to the firm constant, Asian stock options are more cost effective than traditional stock options and provide stronger incentives to increase stock price. More importantly, the improvement is achieved with little impact on the option grant’s risk incentives (after adjusting for option cost). Finally, averaging also improves the value and incentive effects of indexed stock options.     

Auditor independence, executive pay and firm performance

This paper investigates whether compensation committees actively intervene to adjust accounting performance‐based incentive schemes for the real, or perceived, reduced earnings credibility signalled by the purchase of non‐audit services. Using a nonlinear, two‐stage least‐squares method that accounts for the simultaneity of executive pay, firm performance and non‐audit fees, we find a significant negative relationship between non‐audit fees and the sensitivity of chief executive officer (CEO) pay to firm performance. Point estimates suggest that the reduced weight applied to accounting performance lowers the incentive component of executive pay between roughly 5 and 8 per cent for the CEO of the ‘average firm’.     

Troubled by unequal pay rather than low pay:The incentive effects of a top management team pay gap

We examine the relationships with firm performance of the internal pay gap among individual members of the top management team(TMT) and the compensation level o...     

Australian chief executive officer remuneration: pay and performance

International studies document strong evidence that chief executive officer (CEO) remuneration is positively correlated with corporate performance. Prior Australian studies, however, find no positive link between CEO pay and market performance. In the present paper we re‐examine the association between Australian CEO remuneration and firm performance using standard empirical models from the international literature. We find that in every respect the Australian evidence is consistent with international findings for firms of the USA, UK and Canada. In particular, we document CEO pay–performance association as positive and statistically significant.     

Valuation and incentive effects of hurdle rate executive stock options

Traditional executive stock options are often criticized for inherently weak links between pay and performance. Hurdle rate executive stock options represent a viable improvement. However, valuing these options presents extraordinary analytic difficulties. With a constant dividend yield the strike price becomes a path-dependent function of the stock price and exact analytic valuation is intractable. To solve this problem, we apply the Monte Carlo valuation approach developed by Longstaff and Schwartz (Rev Financ Stud 4:113–147, 2001) to estimate the value of path-dependent American options. We also extend the methodology to incorporate the theoretical framework by Ingersoll (J Bus 79:453–487, 2006) to permit subjective valuation influenced by an executive’s risk aversion.

Tax incentives for inefficient executive pay and reward for luck

I study the economic consequences of tax deductibility limits on salaries for the design of incentive contracts. The analysis is based on an agency model in which the firm’s cash flow is a function of the agent’s effort and an observable random factor beyond the agent’s control. According to my analysis, limiting the tax deductibility of fixed wages has two consequences. The principal rewards the agent on the basis of the observable random factor and adjusts the amount of performance-based pay in the optimal incentive contract. The new contract can have weaker or stronger work incentives than without the tax. The theoretical findings have implications for empirical compensation research. First, the analysis shows that reward for luck can be the optimal response to recent tax law changes, whereas earlier empirical literature has attributed this phenomenon to managerial entrenchment. Second, I demonstrate that a simple regression analysis that fails to control for separable measures of luck is likely to find an increased pay for performance sensitivity as a response to the introduction of tax deductibility limits on salaries even if the pay for performance sensitivity has actually declined.     

Sensitivity of executive pay to accounting performance measures in all-equity firms

We investigate the relation between chief executive officer compensation and accounting performance measures as a function of the firm's capital structure. We specifically analyse pay–performance relationships for all‐equity firms relative to high‐levered firms. We find a significant positive association between return on equity and the level of compensation for all‐equity firms. Consistent with optimal contracting theory, we cannot discern any such relationship for high‐levered firms. Because of agency costs of debt, managerial compensation in high‐levered firms plays the role of a precommitment mechanism in addition to its conventional role of aligning management incentives with shareholder interest.     

Managerial power theory, tournament theory, and executive pay in China

In this paper, we test two models of executive pay that have not received much attention in research on Chinese listed companies: managerial power theory and tournament theory. We find that structural power (executive share ownership) and prestige power (executive education) are significantly positively related to executive remuneration, and political power (Executive/Party Secretary duality) positively and weakly related to executive remuneration. We also find that executive directors' organization level (as reflected in executive pay level for each of the three highest paid executives) is positively related to executive remuneration and the relationship is convex, and negatively related to the interaction between executive directors' organization level and government ownership. Tournament prize (executive pay) is not related to the number of contestants in the tournament and is negatively related to the interaction term between number of contestants and government ownership. Finally, earnings per share (EPS) as a measure of firm performance is positively related to the pay gap between contestants and negatively related to the interaction term between pay gap and government ownership. We explore the implications of these findings for reforming corporate governance in China.     

Reputation penalties for poor monitoring of executive pay: Evidence from option backdating

We study whether outside directors are held accountable for poor monitoring of executive compensation by examining the reputation penalties to directors of firms involved in the option backdating (BD) scandal of 2006–2007. We find that, at firms involved in BD, significant penalties accrued to compensation committee members (particularly those who served during the BD period) both in terms of votes withheld when up for election and in terms of turnover, especially in more severe cases of BD. However, directors of BD firms did not suffer similar penalties at non-BD firms, raising the question of whether reputation penalties for poor oversight of executive pay are large enough to affect the ex ante incentives of directors.     

The best-laid incentive plans

Hiram Phillips couldn't have been in better spirits. The CFO and chief administrative officer of Rainbarrel Products, a diversified consumer-durables manufacturer, Phillips felt he'd single-handedly turned the company's performance around. He'd only been at Rainbarrel a year, but the company's numbers had, according to his measures, already improved by leaps and bounds. Now the day had come for Hiram to share the positive results of his new performance management system with his colleagues. The corporate executive council was meeting, and even CEO Keith Randall was applauding the CFO's work: "Hiram's going to give us some very good news about cost reductions and operating efficiencies, all due to the changes he's designed and implemented this year." Everything looked positively rosy--until some questionable information began to trickle in from other meeting participants. It came to light, for instance, that R&D had developed a breakthrough product that was not being brought to market as quickly as it should have been--thanks to Hiram's inflexible budgeting process. Then, too, an employee survey showed that workers were demoralized. And customers were complaining about Rainbarrel's service. The general message? The new performance metrics and incentives had indeed been affecting overall performance--but not for the better. Should Rainbarrel revisit its approach to performance management? Commentators Stephen Kaufman, a senior lecturer at Harvard Business School; compensation consultant Steven Gross; retired U.S. Navy vice admiral and management consultant Diego Hernandez; and Barry Leskin, a consultant and former chief learning officer for Chevron Texaco, offer their advice in this fictional case study.     

Restricting CEO pay

We analyze several proposals to restrict CEO compensation and calibrate two models of executive compensation that describe how firms would react to different types of restrictions. We find that many restrictions would have unintended consequences. Restrictions on total realized (ex-post) payouts lead to higher average compensation, higher rewards for mediocre performance, lower risk-taking incentives, and the fact that some CEOs would be better off with a restriction than without it. Restrictions on total ex-ante pay lead to a reduction in the firm's demand for CEO talent and effort. Restrictions on particular pay components, and especially on cash payouts, can be easily circumvented. While restrictions on option pay lead to lower risk-taking incentives, restrictions on incentive pay (stock and options) result in higher risk-taking incentives.     

Nonprofit Lobbying: Museums and Collections Capitalization

This research examines the museum characteristics associated with lobbying on the 1990 FASB Exposure Draft (FASB, 1990) that would have required US museums to capitalize their collections. A sample of 103 museums that lobbied on the Exposure Draft is compared to a matched sample of museums that did not choose to lobby. The results reveal that museums which lobbied are larger, older, and members of or accredited by the American Association of Museums. Also, proportionately more private museums and art museums than exist in the overall US museum population chose to lobby on the proposed requirement.     

非营利组织会计主体初探

会计主体是会计四大假设之一,非营利组织会计主体是非营利组织会计研究的重要内容.因此,必须对非营利组织会计主体的内涵、非营利组织会计主体的分类进行深入研究.     

CEO optimism and incentive compensation

I study the effect of chief executive officer (CEO) optimism on CEO compensation. Using data on compensation in US firms, I provide evidence that CEOs whose option exercise behavior and earnings forecasts are indicative of optimistic beliefs receive smaller stock option grants, fewer bonus payments, and less total compensation than their peers. These findings add to our understanding of the interplay between managerial biases and remuneration and show how sophisticated principals can take advantage of optimistic agents by appropriately adjusting their compensation contracts.     

非营利组织的内部控制研究

非营利组织内部控制的目标包括:保证其目标的充分实现程度;保证其信息的可靠性和完整性;保证其资源运行的经济性、安全性及完整性;保证其产品和服务的质量;保证其公信力.非营利组织内部控制的要素包括控制环境、风险管理、控制活动、信息与沟通、监督与检查.我国应该循序推进内部控制规范的制定;有效发挥内审机构在内控建设中的作用;积极...     

The CEO pay slice

We investigate the relation between the CEO Pay Slice (CPS)—the fraction of the aggregate compensation of the top-five executive team captured by the Chief Executive Officer—and the value, performance, and behavior of public firms. The CPS could reflect the relative importance of the CEO as well as the extent to which the CEO is able to extracts rents. We find that, controlling for all standard controls, CPS is negatively associated with firm value as measured by industry-adjusted Tobin's q. CPS also has a rich set of relations with firms' behavior and performance. In particular, CPS is correlated with lower (industry-adjusted) accounting profitability, lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, higher odds of the CEO receiving a lucky option grant at the lowest price of the month, lower performance sensitivity of CEO turnover, and lower stock market returns accompanying the filing of proxy statements for periods when CPS increases. Taken together, our results are consistent with the hypothesis that higher CPS is associated with agency problems and indicate that CPS can provide a useful tool for studying the performance and behavior of firms.     

Institutional Drivers of Reporting Decisions in Nonprofit Hospitals

We examine the influence of normative and regulative institutional factors on cost shifting by nonprofit hospitals in their publicly reported statements. We explore whether normative constraints imposed by stakeholders, who prefer that nonprofit hospitals allocate their resources toward patient‐related program services, influence the extent to which nonprofit hospitals shift costs toward program services and away from administrative and fundraising categories, thereby appearing more efficient. We also explore whether regulative factors, such as oversight, influence cost shifting behaviors. Results indicate that nonprofit hospitals facing higher normative pressures to demonstrate efficiency shift costs to a greater extent, and hospitals facing higher regulatory oversight shift costs to a lesser extent. Consistent with prior research, we also find that hospitals that obtain higher donations revenue shift costs to a greater extent. Our results show that, in addition to economic factors documented by prior literature, institutional factors also influence nonprofit hospitals’ cost shifting behaviors.     

CEO incentive compensation and stock liquidity

Review of Quantitative Finance and Accounting - We document that the CEO pay-for-performance incentive positively predicts firm’s stock liquidity. The evidence is consistent with the...