The effect of corporate restructuring charges on employer contributions to profit sharing plans

Abstract

In this study, we empirically examine whether firms remove restructuring charges from earnings for purposes of determining employer contributions to profit sharing plans. Understanding firms' non-executive compensation practices is important because compensation policies influence employee behavior and ultimately affect employees' incentives to increase shareholder value. We find that profit sharing contributions decrease as restructuring charges increase, indicating that firms do not shield profit sharing contributions from restructuring charges. Further, we find that firms are more likely to completely omit profit sharing contributions during restructuring charge years than during other years. In contrast to these results, but consistent with prior research, we find that cash compensation paid to the top executives of our sample firms is unaffected by restructuring charges. Finally, we construct several compensation asymmetry measures and find that firms treat the restructuring charge component of earnings asymmetrically for purposes of compensating different employee groups.