Compensation Expense Research Articles

The predictive ability of share-based compensation expense

This paper examines the ability of share-based compensation expense (SBCE) to predict future firm performance relative to other employee compensation expenses. It also examines whether cash settled-based compensation expense has greater predictive ability for future performance than equity settled expense. Using a sample of 443 firms listed in the UK between 2005 and 2018, we find that the predictive ability of SBCE is statistically significantly higher than that of other employee compensation expenses. Furthermore, the results show that the predictive ability of SBCE classified as cash settled is statistically significantly higher than that of equity settled SBCE. Overall, our findings suggest that recognised SBCE, particularly cash settled SBCE (i.e. fair value-adjusted expense), is useful for predicting future firm performance.

Estimating the sensitivity of CEO compensation to gross versus net accounting performance

AbstractIn empirically estimating the relation between CEO compensation and accounting‐based firm and peer performance, researchers often define the performance variables net of CEO compensation expense. We analytically show that a researcher's use of CEO compensation as a regression's dependent variable and as an expense in defining a regression's independent variables representing accounting‐based firm and peer performance will bias the researcher's pay‐for‐performance and relative performance evaluation (RPE) regression coefficients. In a panel estimation of CEO compensation, we document an attenuation bias in the coefficients on net firm and net peer performance. This evidence may partially explain inferences of weak CEO incentives and limited usage of RPE in prior work. Our results imply that in CEO compensation regressions, a researcher can remove biases in inferring CEO incentives and RPE usage by using gross rather than net accounting performance variables—that is, by adding back CEO compensation expense to net accounting measures.

Fairness analysis and compensation strategy in the Triangle of Central China driven by water-carbon-ecological footprints.

This study proposes water-carbon-ecological footprints to form footprint family indicators for identifying the ecological compensation and regional development equilibrium in the Triangle of Central China (TOCC). The occupation of natural capital stock and flow consumption can be illustrated using a three-dimensional ecological footprint model, and Gini coefficient is integrated into the evaluation framework for fairness measurement from various aspects. Quantificational ecological compensation standards can be given with considering indicators associated with ecological resource conversion efficiency and willingness to pay. Results reveal that ecological and carbon footprints in the TOCC demonstrate rising trends from 2000 to 2015, while its water footprint presents a fluctuating trend. The majority of average Gini coefficients exceed the threshold value of 0.4 under different footprints, thereby indicating poor overall fairness of regional development. Water footprint in Jingmen, Xiangtan, and Yichun show relatively higher compensation expenses, while Yichang, Zhuzhou, and Fuzhou exhibit higher received compensation values compared with other cities. Carbon footprint in Wuhan, Loudi, and Xinyu indicate high compensation expenses due to their overuse of biological resources. Maximum amounts of compensation expense appear in Nanchang and Wuhan from the perspective of ecological footprint. This study can provide a theoretical reference for sustainable development in the TOCC by performing a comparative analysis with Beijing-Tianjin-Hebei urban agglomeration and developed countries.

Insider trading and the public enforcement of private prohibitions: some complications in enforcing simple rules for a complex world

Accepting the argument made by Manne, Epstein and others that firms wishing to allow their employees to insider trade should be permitted to do so, this article shows that there is still a crucial role for government in regulating insider trading. In particular, allowing employees to profit by insider trading is a form of employee compensation that, in contradistinction from conventional forms of equity compensation, results in unknowable and effectively unlimited costs to the company. Since providing employee compensation in this form causes the company to lose control of its compensation expense, even if insider trading were legal, virtually every company would rely on conventional forms of employee compensation and prohibit its employees from insider trading. But, pace Epstein, companies lack the means to detect insider trading by their employees, and even when they do catch employees insider trading, companies can impose only mild contractual sanctions, generally not exceeding disgorgement of profits and dismissal. As a result, although an efficient agreement between a company and its employee would prohibit the employee from insider trading, this prohibition cannot be effectively enforced by the company. Government, with its usual law enforcement powers, is better able to detect insider trading and can impose more severe sanctions on violators, including criminal penalties. Government should thus enforce a ban on insider trading in those instances, which will be virtually all instances, in which a company prohibits its employees from insider trading. The efficient solution is thus a hybrid system of private prohibition and public enforcement. Such a system is not unusual but the norm. Employers prohibit employees from embezzling their money and stealing their property, and employees are subject to contractual sanctions and dismissal for violating these prohibitions, but we still need statutes against theft to generate an optimal level of deterrence. This is all the more true when the employee misappropriates information, which is much harder to detect than a theft of money or property.

Insider Trading and the Public Enforcement of Private Prohibitions: Some Complications in Enforcing Simple Rules for a Complex World

Accepting the argument made by Manne, Epstein and others that firms wishing to allow their employees to insider trade should be permitted to do so, this article shows that there is still a crucial role for government in regulating insider trading. In particular, allowing employees to profit by insider trading is a form of employee compensation that, in contradistinction from conventional forms of equity compensation, results in unknowable and effectively unlimited costs to the company. Since providing employee compensation in this form causes the company to lose control of its compensation expense, even if insider trading were legal, virtually every company would rely on conventional forms of employee compensation and prohibit its employees from insider trading. But, pace Epstein, companies lack the means to detect insider trading by their employees, and even when they do catch employees insider trading, companies can impose only mild contractual sanctions, generally not exceeding disgorgement of profits and dismissal. As a result, although an efficient agreement between a company and its employee would prohibit the employee from insider trading, this prohibition cannot be effectively enforced by the company. Government, with its usual law enforcement powers, is better able to detect insider trading and can impose more severe sanctions on violators, including criminal penalties. Government should thus enforce a ban on insider trading in those instances, which will be virtually all instances, in which a company prohibits its employees from insider trading. The efficient solution is thus a hybrid system of private prohibition and public enforcement. Such a system is not unusual but the norm. Employers prohibit employees from embezzling their money and stealing their property, and employees are subject to contractual sanctions and dismissal for violating these prohibitions, but we still need statutes against theft to generate an optimal level of deterrence. This is all the more true when the employee misappropriates information, which is much harder to detect than a theft of money or property.

The Effect of Innovation Box Regimes on Investment and Employment Activity

We study whether innovation box tax incentives, which reduce tax rates on innovation-related income, are associated with increased fixed asset investment and employment. Using a stacked cohort difference-in-differences design on an entropy-balanced sample of European multinationals, we find innovation box regimes are associated with higher levels of capital expenditures but lower levels of compensation expense and number of employees relative to companies in countries without such regimes. However, additional tests suggest patent-owning observations in innovation box countries have a more highly-compensated workforce following innovation box implementation. Our study contributes to the literature on, and policy evaluation of, innovation box regimes by examining the extent to which these incentives result in tangible investment and employment and by identifying how different characteristics of innovation box regimes impact these outcomes.

The Economics and Effectiveness of Advanced Practice Providers Are Decidedly Local Phenomena.

The growth and promulgation of Advanced Practice Providers (APPs) across the entire spectrum of healthcare delivery has been profound, and APPs are increasingly common members of emergency department (ED) care teams. Emergency APP workforce growth is outpacing that of emergency physicians with little to suggest that this trend will subside. The evolution of the deployment of APPs in emergency care has been dramatic; initially, emergency APPs were deployed to lower acuity patients or environments-minor injury and illness and in conjunction with an emergency physician-hence the now antiquated description of APPs as "physician extenders."

In the Nick of Time: Performance-Based Compensation and Proactive Responses to the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced two major changes that may influence the structure of executive compensation: (1) reducing corporate tax rates from 35 to 21 percent and (2) eliminating the performance-based pay exception in Section 162(m). These changes provide incentives to maximize deductible compensation expense in 2017, before the TCJA goes into effect. Therefore, we predict performance-based compensation to increase more in 2017 relative to prior years. Consistent with our expectation, we find that the increase in CEO bonus and stock option compensation is significantly greater in 2017. Our difference-in-difference results are consistent with the tax rate reduction driving the bonus increase and the repeal of the performance-based exception leading to the increase in CEO stock options. The TCJA also changed the definition of covered employees to include the CFO. We find weak evidence for abnormal increases in CFO performance-based compensation. Additional analyses indicate firms facing stronger tax incentives drive our results. Overall, our findings suggest that firms’ responded to the TCJA in the period before it was effective.

In the Nick of Time: Performance-Based Compensation and Proactive Responses to the Tax Cuts and Jobs Act

ABSTRACT The Tax Cuts and Jobs Act of 2017 (TCJA) introduced two major changes that may influence executive compensation: (1) reducing corporate tax rates from 35 to 21 percent, and (2) eliminating the performance-based pay exception in Section 162(m). These changes provide incentives to maximize deductible compensation expense in 2017, before the TCJA goes into effect. Consistent with our expectation, we find that the increase in CEO bonus and stock option compensation is significantly greater in 2017 relative to prior years. Our difference-in-differences results are consistent with the tax rate reduction driving the bonus increase and the repeal of the performance-based exception leading to the increase in CEO stock options. The TCJA also changed the definition of covered employees to include the CFO. We find weak evidence for abnormal increases in CFO performance-based compensation. Overall, our findings suggest that firms responded to the TCJA in the period before it was effective.

Stock compensation expense, cash flows, and inflated valuations

This paper reviews the statement of cash flow implications of stock compensation expense and the effect it can have on valuations. The paper suggests that treating stock compensation as a noncash item in the statement of cash flows can be misleading from internal decision-making and external valuation perspectives. This is important, given the increasing role of non-GAAP cash flow disclosures in financial reporting as well as their use internally by managers. The paper quantifies the potential size of the problem and suggests potential solutions, including treating stock compensation expense as an operating cash outflow and a financing cash inflow, adding further descriptive disclosures to the financial statements, or both. Finally, the paper also highlights a similar issue that occurs with the cash flow implications of finance leases.

How Do Accounting Practices Spread? An Examination of Law Firm Networks and Stock Option Backdating

ABSTRACTWe hypothesize that one way accounting practices spread is through law firm connections. We investigate this prediction by examining companies that avoided reporting compensation expense by engaging in stock option backdating. We hypothesize that executives engaged in backdating because they were desensitized to its inappropriateness when they learned through their legal counsel that other companies were engaging in this practice. We identify backdating companies through backdating-related restatements of earnings. Using network analysis, we find that backdating companies are highly connected with other backdating companies via shared law firms. Logistic regressions reveal that the odds of a company backdating are 53 to 88 percent higher when its law firm has another client that backdates, and that law firm connections are incremental to board interlocks and geographic location. Finally, law firms with backdating clients have more other clients with “lucky” grants, suggesting that backdating spread to other companies, but only some restated.JEL Classifications: J33; K22; K42; L14; M41; M43; M45.

Stock Compensation Expense, Cash Flows and Inflated Valuations

This paper reviews the statement of cash flow implications of stock compensation expense and the effect it can have on valuations. The paper suggests that treating stock compensation as a non-cash item in the statement of cash flows can be misleading from internal decision making and external valuation perspectives. This is important given the increasing role of non-GAAP cash flow disclosures in financial reporting as well as their use internally by managers. It quantifies the potential size of the problem and suggests potential solutions including treating stock compensation expense as an operating cash outflow and a financing cash inflow and/or adding further descriptive disclosures to the financial statements. Finally, the paper also highlights a similar issue that occurs with the cash flow implications of finance leases.

Compensation Disclosures and Corporate Governance through Shareholder Voting

ABSTRACTThere are several measures of equity compensation that may provide shareholders with distinct and useful information for evaluating CEO pay. We examine whether shareholders consider additional disclosures of equity compensation measures beyond the grant date fair value when participating in corporate governance. We find that CEO equity compensation expense, a distinct measure of equity compensation, is a determinant of shareholder voting for management sponsored equity plans and voting for directors that serve on the compensation committee. After controlling for ISS recommendations, we find that voting outcomes remain significantly related to abnormal equity compensation expense. Consistent with shareholders considering the equity compensation expense, we document that firms shorten equity compensation vesting periods when they are no longer required to disclose the equity compensation expense. Our findings suggest that shareholders rely on multiple, distinct measures of equity compensation when participating in corporate governance.JEL Classifications: M12; M52; G34.Data Availability: Data are available from the public sources cited in the text.

Share-option based compensation expense, shareholder returns and financial crisis

This paper contributes to the literature that analyses the relationship between Share-Option Based Compensation (SOBC) expense and shareholder returns. It utilises a sample of financial firms listed in the European Economic Area and Switzerland between 2005 and 2016 to make inferences about the impact of the financial crisis on the above-mentioned relationship. The paper also assesses the extent to which the relationship between SOBC expense and shareholder returns during the financial crisis varies with ownership concentration. We find evidence that the positive relationship between SOBC expense and shareholder returns is significantly more apparent during the financial crisis. This suggests that investors place more emphasis on the unrecognised intangible features of SOBC contracts during the crisis, even though their associated expenses are subject to managerial discretion and measurement errors. We also find that the positive relationship between SOBC expense and shareholder returns over the financial crisis is more pronounced when ownership is more concentrated. The results of our study are robust after controlling for firm size, potential investment growth opportunities, traditional banking activities and firm self-selection bias.

Achieving sustainable ese of environment: a framework for payment for protected forest ecosystem service

Over the last decade, deforestation in Indonesia has reduced the forest area down to more than 6 million hectares. There is conflict that the protected forest ecosystem service is still often perceived as public goods. Many of them went unrecognized in planning process and continue to be undervalued. The challenge lies in maintaining socioeconomic development and ecosystem services sustainability without overlooking the people’s opportunities and improving their livelihoods over the long term. An integrated approach is required to understand the comprehensive concept of protected forest ecosystem service. This research aims to formulate a scheme of payment for ecosystem service (PES) in a protected forest. It is a first step towards the attempt for the value of ecosystem services to be reflected in decision-making. Literatures, previous researches and secondary data are reviewed thoroughly to analyze the interrelated components by looking at the environment as a whole and recognize their linkages that have consequences to one another both positive and negative. The framework of implementation of PES schemes outlines the complexity of human-environment interconnecting relationships. It evaluates the contributing actors of different interest i.e. long term use and short term use. The concept of PES accommodates the fulfillment of both conservation and exploitation with an incentive scheme to the contributing parties who are willing to implement conservation and issuance of compensation expense for any exploitation means. The most crucial part in this concept is to have a good and effective communication between every policy makers concerning the forest ecosystem and local communities.

Compensation Disclosures and Corporate Governance through Shareholder Voting

Proxy statements have reported two measures of annual equity compensation: the grant date fair value and the ASC 718 expense. We examine how investors use equity compensation disclosures in proxy statements to evaluate CEO equity compensation schemes, and the contracting consequences of disclosure regulation changes. We find that both the grant date fair value and ASC 718 expense provide unique information that investors use to evaluate executive compensation schemes. We also find that investors do not change their use of the grant date fair value after the Proxy Disclosure Enhancements rule adopted in 2009 removed equity compensation expense disclosures from proxy statements. However, we find that firms change contracting schemes in response to changes in required disclosures. Our results provide insights into how shareholders incorporate compensation disclosures when participating in corporate governance, and informs current deliberations by the SEC regarding a proposal to require additional equity compensation disclosures.

Citing Responsibility for Enforcement Despite Contractual Liability in Compensation Expense, Injured in Jurisprudence and Iranian Law

<p>Civil liability, contractual liability, and unconventional have two branches. If there is a contract between two or more persons and one of them committed a breach of contract (failure to perform, delay in performing the obligation) to and to harm the other party is incomplete and should the contract have contractual liability for damages cope. Where does harm to another person without a contract exists between them or if there is a contract, Inflict losses not related to the contract, the talk of non-contractual liability.</p><p>About whether contractual and non-contractual obligations is two different legal system or single legal system form, there is disagreement among the lawyers: Some distinguish these two systems from each other. But others believe that because the purpose of civil liability is to compensate for losses, these two are the single legal system.</p>By examining the different opinions, we see that both contractual and non-contractual liability system distinct from each other. And despite the contract, the victim can rely on the rules of non-contractual liability.

Reconsidering Realization-Based Accounting for Equity Compensation

The U.S. equity compensation landscape continues to evolve. Recent innovations have improved the linkage between pay and firm-specific performance, but have added complexity. Against that backdrop, this Article urges reconsideration of the accounting rules for equity pay. Under current rules, most equity pay awards are expensed based on grant date valuation with no updating for changes in value post grant. This Article advocates the adoption of a mark-to-market or realization-based approach under which the expense recorded for all equity pay awards would ultimately be trued to the value received by employees. Increasingly, equity pay awards are more analogous to commissions than to arm’s length investments, and the tighter link between pay and firm-specific performance suggests that including post-grant changes in equity pay award values in compensation expense tends to improve accuracy, not just add noise. In addition, increased complexity leads to greater ex ante valuation uncertainty and gaming opportunities, suggesting de-emphasizing reliance on ex ante measurement to the extent possible. Realization-based accounting also produces book/tax conformity for equity pay, which further combats gaming, and it levels the accounting playing field for equity instruments, minimizing accounting-induced distortions in pay design. The Article also argues that concerns that realization-based accounting will add an unacceptable level of uncertainty or volatility into compensation expense can be mitigated.

Valuation of an Equity Interest

The equity cash flow approach to valuing an equity interest is intuitive, rigorous, and practical, and is easily implemented using historical and forecasted statements of cash flows. This method is compared with popular alternatives. The equity cash flow equation for valuing equity is derived taking into account employee compensation expense in the form of equity participation (stock options and stock grants). This is of particular interest in light of the importance of options and grants as a form of compensation.

How Do Accounting Practices Spread? An Examination of Law Firm Networks and Stock Option Backdating

We hypothesize that one way accounting practices spread is through law firm connections. We investigate this prediction by examining companies that avoided reporting compensation expense by engaging in stock option backdating. We hypothesize that executives engaged in backdating because they were desensitized to its inappropriateness when they learned through their legal counsel that other companies were engaging in this practice. Using network analysis we find that backdating companies are highly connected to one another via shared law firms. In addition, we find that backdating spread first to the more highly connected companies and then to less well connected companies. Further, the likelihood that a company backdates is 1.4 to 3.3 times higher when its law firm has had another backdating company as a client. We find that sharing a law firm is incremental to and more economically significant than the impact of board interlocks and geographical location for explaining backdating. Our evidence is consistent with law firms acting as “observers” or “system supporters” in enabling executives to engage in backdating.