Executive Compensation and Financial Accounting

Paper Name Executive equity compensation and incentives: A survey
Author(s) Core, J.E., W. Guay and D.F. Larcker
Source Economic Policy Review, pp 27-50 (2003)
Research Question / Objectives
  • Objective is to bring together the literature on equity compensation and executive incentives. In addition, this is to bring down the unsupported academic discussions and thoughts; it also is to highlight questions that are yet to be answered by research.
Motivation / Contribution
  • Motivation; in recent years a number of academic literature has come up along with supported and unsupported material. This needs to be organized.
  • Contribution; out of the large number of unanswered questions that abound in this sphere of research, the paper tries to answer them by assimilating the information taken from the academic work already in place.
Theory Development
  • Compensation and incentives have been given in different forms to executives and has been analyzed by researchers.
  • Value of stock options decrease with decrease in dividends paid
  • Stock options do retain people and the data connected with it is also analyzed.
Research Design
  • A number of academic papers connected to the topic are taken up for analysis.
  • Valuation of Equity and the Efficiency of Equity Compensation is also done based on information that has been collected from these papers.
  • Relative evaluation of performance.
  • Effect of repricing of stock options.
Results
  • The research concludes that ‘repricings’ and ‘more ownership by executives is better’ are not valid statements.
  • The research also throws up new questions that need to be answered in the future. This includes such questions as: Do employees and executives really understand the working of the stock options?
  • Clear metrics for identifying the incentives for the executives has been indicated.
  • The convexity in the compensation by using equity has been highlighted.
Implications for my research
  • An indication of the equity based compensation patterns in the research and academic studies has been brought to focus in this paper.
Paper Name Financial accounting information and corporate governance
Author(s) Bushman, R.M. and A.J. Smith
Source Journal of Accounting and Economics Vol. 32, pp 237-333 (2001)
Research Question / Objectives
  • The paper presents a framework for understanding operation of the accounting system in an economy.
  • The financial accounting information and its usage in corporate governance are to be identified.
  • To identify the link between financial sector and economic outcome.
  • To present a framework that would help in measuring corporate transparency.
Motivation / Contribution
  • Motivation: Lack of such frameworks to understand accounting system and economy relationships and to identify metrics relating to transparency; lack of clear data on usage of financial accounting information in corporate governance and to find out the link between this and the economy of the country.
  • Contribution: Channels through which the economy is affected by the financial sectors are identified and a framework to identify the impact is presented; a corporate transparency measuring framework is also proposed.
Theory Development
  • Accounting usage in investment decisions, compensation and incentive schemes of the executives is more wide spread and this has been supported in the paper.
  • Develops further use of CIFAR index in creating metrics for the impact of economy by financial indices and in measuring the transparency of corporate governance.
  • Sets scope for further research in the corporate governance transparency measurement.
Research Design
  • A comprehensive literature review has been present.
  • Makes use of theoretical concepts based on Economic performance and the financial accounting system impact. It also uses the CIFAR index for establishing metrics.
Results
  • Presents the frameworks for the relationship between the accounting system and the economy of the country and for the transparency of the corporate governance. However, the second framework needs to be improved upon as the authors suggest ways and means to improve the metrics suggested.
  • Usage of the financial accounting information in corporate governance is also identified and noted; particularly, usage in executive contracting is also laid out.
Implications for my research
  • The usage of the financial accounting information in laying down corporate governance and its principles would aid in understanding the impact of these in the executive compensation and incentive structuring.
Paper Name The structure and performance consequences of equity grants to employees of new economy firms
Author(s) Ittner, C.D., R.A. Lambert and D.F. Larcker
Source Journal of Accounting and Economics, Vol. 34, pp 89-127 (2003)
Research Question / Objectives
  • To identify whether the employee stock option has a positive impact or a negative impact on the value created.
  • To ascertain whether these stock options motivate people to stay back with the company.
Motivation / Contribution
  • Motivation: With the fall in the new technology companies after year 2000, the stock options were felt to have lost out and were thought to be ineffective to provide compensation. Since there was a difference of opinion on the issue, it was needed to do this research.
  • Contribution: The research identifies the problem and also survey results attempt at solving the issues left open in the objectives.
Theory Development
  • There was a long felt opinion that the stock options could turn out to be volatile when the share prices fall. The employees who are taking the stock should be prepared for a slow down. A bear as much as for a bull. This concept has been developed further and the approach of the executives in taking such compensation has been analyzed.
  • The effect of such dilution of shares with institutional investors is also studied and developed in the paper.
Research Design
  • A survey has been conducted which would help in arriving at appropriate conclusion for the issues raised in the objectives of this paper.
  • The survey was conducted when there was a bull run and the reaction of the people whose shares are not up and moving, are also taken into consideration by employing suitable repricing. Effect of such re-pricing is also monitored. Instead of taking into account the short term gains and benefits, the analysis takes into account the long term price movement.
Results
  • This paper presents two major results. One, it concludes, that providing stock options to the key value creators like the employees and executives of the company does not negatively affect the performance of the company nor the stock value. The dilution that is caused is only a myth and the value creation is beneficial to all parties concerned.
  • Second, the performance of the equity grants is more related to the total value of a firm’s grants rather than on the type of employees or groups of employees who received them. But between the tech employees and non tech employees there existed a difference in grant value increase.
Implications for my research
  • Compensation to the executives in terms of stock option, as per this research is supported. And it also concludes that the impact of such options on the value created is directly related to the amount of options granted rather than on to whom it is granted.
Paper Name CEO incentives – it’s not how much you pay, but how
Author(s) Jenson MC and Murphy KJ
Source Harvard Business Review, Vol: 68, pp 138 – 153. (1990)
Research Question / Objectives
  • To identify whether the CEOs are receiving salaries that are related to the size of the company.
  • To identify whether the CEO compensation, includes salary and bonus, is rising with the company’s rise in its earnings.
  • To identify the change in the CEO compensation compared to that of 1984 and beyond.
Motivation / Contribution
  • Motivation: There is a general expression of awe when the annual CEO salaries are noted by the magazines and newspapers. The researchers wanted to identify whether this is real or fictional.
  • Contribution: The research identifies that the compensation received by the CEOs has not risen as it should have. As a matter of fact, they ascertained, their share in the company stock has fallen down.
Theory Development
  • The researchers have employed appropriate collection of data and regression analysis to bring out the relationship between parameters marked out.
  • Parameters identified for relationship monitoring include Change in salary and bonus and the impact of the same on current cash compensation and impact of change in the share holder value and the impact of the same on the CEO compensation.
Research Design
  • A survey has been conducted spanning 5 decades and 2,505 CEOs in 1,400 publicly held companies. The results were subjected to regression analysis to identify and bring out the relationships between various metrics that have been taken.
Results
  • The following results have been drawn out by the research. One, top executives are not receiving records salaries and benefits. Two, executive compensation does not reflect change in corporate performance. Three, compensation to CEOs is not very different from what it is for salaried and hourly wages people in the companies. Four, with respect to pay for performance, the CEO salary has only become worse.
Implications for my research
  • Compensation to the CEOs is taken into account for the last five decades. This provides the information that there is no huge difference between the way executives are paid and the other employees of the company are paid.
  • The impact of such a system is causing more concern for lack of salary and bonus rather than for paying the executives highly.
Paper Name An analysis of the use of accounting and market measures of performance in executive compensation contract
Author(s) Lambert, R.A. and D.F. Larcker
Source Journal of Accounting Research, Vol. 25, supplement, pp 85-129. (1987)
Research Question / Objectives
  • Objective is to find out whether the principal – agent theory would work for the executive compensation.
Motivation / Contribution
  • Motivation: There is no clear modeling of the executive compensation and tie up with the principal – agent theory is unverified.
  • Contribution: This paper aims at bringing out using empirical analysis risk aversion, principal – agent relationship and performance evaluation with respect to noise in the market. (signal – to – noise ratio).
Theory Development
  • Relative weights on performance measures are to be placed and used.
  • Such relative weights would reduce the effect of disutility of efforts, their outside opportunities and risk aversion.
Research Design
  • Information from various papers has been picked up and the same is laid out for the purpose of identifying the relationship between compensation as a function of firm performance.
  • Empirical analysis has been carried out to do the same after collecting the needed information.
  • Regression analysis is performed on the CEO compensation and the firm performance based on the information surveyed and obtained.
Results
  • There is a relationship between compensation and firm performance.
  • An empirically determined performance has been indicated to show the relationship between the two.
  • Impact of the confounding factors of risk aversion and others will go down if the cross sectional analysis done on the various parameters and attributes that make up the contracts of compensation for the senior executives, is more effective with a relative weight added to every one of the performance measures.
  • Finally, the authors substantiate that the pay-performance relationship is clearly established. The compensation is brought out as a function of a firm performance.
Implications for my research
  • Compensation is a function of firm performance as per the authors. This will be a part of the performance in the performance contracts and therefore will be affecting the contract and the research in the topic.
Paper Name Executive compensation.
Author(s) Orley Ashenfelter and David Card, eds. Paper by Murphy K
Source Handbook of labor economics, Vol 3B, pp 2485 – 2563
Research Question / Objectives
  • Objective is to study about the executive compensation, collect information on it and use regressive analysis to find out relationships between them.
Motivation / Contribution
  • Motivation: There has been an increase in the executive compensation in the 1980s as much as there was one in the early 1990s. But the reason behind these large spurts in executive compensation has not been fully analyzed. This has been the reason behind taking into account the shown research and paper.
  • Contribution: This effect has been studied based on the data collected from various sources. Finally, the paper establishes the relationship between the executive compensation and the composition of the board members.
Theory Development
  • Compensation for CEOs has been dependent on the independence of the boards. Larger independence meant lesser compensation and incentives to the CEOs and senior executives.
  • Much more important than how much is paid is the question of how the compensation is paid.
  • There is a clear relationship between bonuses and the performance related pays that are provided to the CEOs.
Research Design
  • Statistics from 1980 to 2000 was picked up to ascertain whether the factors indicated have had any relationship change from the observed relationships as they were presented in the case of literature reviewed.
  • Regression analyses on various attributes are carried out to establish relationships between them.
  • Firm turnover and CEO performance was one of the many analyzed.
Results
  • Correlation between the firm performance and the CEO turnover was quite low and went down in the 1990s. It was so low during this period that it became statistically insignificant.
  • The research also indicates that the total compensation for outsiders when hired is higher compared to the compensation received by an insider when he is promoted or used internally by shifting job focus.
  • Stock options are paid out when there is an increase in the price of stock and there is a positive return to the executive. When this is not the case, these kinds of options are not used extensively.
  • Performance of the executives need to be taken into consideration along with the application of law of diminishing returns since the share holders might feel the effect once the maximum returns have been reached.
Implications for my research
  • Performance has to be viewed in line with the perspectives shown by the author.
  • Though the performance related attributes need to be considered, there are also cases where it has to be viewed along with the earlier performance of the firm if there had been any marked increase.
Executive Compensation and Financial Accounting
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