Executive Compensation Plans Research Articles

Antecedents of Executive Compensation: The Use of Covariance Structure Modeling

The use of covariance structure modeling is explored as a means of moving toward a resolution of the debate over the antecedents of executive compensation. The major strength of this methodology is that it enables researchers to measure the effects of unobserved factors on measured variables. It is suggested that covariance structure modeling is a promising way of studying the effect of institutional isomorphism on executive compensation. The popular business press has questioned repeatedly the justification for and the performance effects of prevailing executive compensation systems (Crystal, 1988; Loomis, 1982; Patton, 1985). These articles argue that executives are more interested in creating wealth for themselves than for stockholders. They also underscore the absence of an obvious link between executive compensation and firm performance. Recent academic research on executive compensation adopts an agency perspective that emphasizes potential conflicts of interest between managers and stockholders. It contends that, in the absence of effective disciplining and monitoring systems, executive compensation plans may direct managers' efforts toward personal wealth enhancement to the detriment of firm value (Baumol, 1958; Berle & Means, 1932). In response, scholars have urged that executive compensation plans contain monetary incentives that only accrue to executives when shareholder wealth is maximized (Kerr, 1985; Rappaport, 1983; Tehranian & Waegelein, 1985). However, designing compensation systems that effectively align the interests of managers and stockholders requires a knowledge of the role and effect of relevant driving forces on compensation. Statistical research on executive compensation has been guided predominantly by a search for tangible, observable determinants (Ciscel & Carroll, 1980), examples of which have been firm size or growth rate (Baumol, 1967; Marris, 1963), inter‐firm and inter‐in‐dustry differences (Coughlan & Schmidt, 1985), and performance (Murphy, 1986). The emphasis on such tangible explanations is not surprising given the overwhelming use of econometric techniques, such as ordinary least squares regression (Ciscel & Carroll, 1980; Finkelstein & Hambrick, 1988), logistic regression (Walking & Long, 1984), time series analysis (Murphy, 1985), and event studies (Brickley, Bhagat & Lease, 1985; Coughlan & Schmidt, 1985; Tehranian & Waegelein, 1985). This paper argues that the focus on tangible, observable variables by compensation researchers is a methodologically ‐ driven practice that constrains theory building and testing. As a result, we may have ignored interesting and relevant theoretical frameworks for the study of executive compensation. We also have overlooked the use of analytical techniques that allow us to examine the role of potentially relevant latent constructs. In this paper, we will describe and illustrate the use of covariance structure modeling for the study of institutional pressures on executive compensation.

The Relationship between Corporate Compensation Policies and Investment Opportunities: Empirical Evidence for Large Bank Holding Companies

This paper investigates whether the firm's set of investment opportunities drives the amount and type of executive compensation by conducting a detailed empirical analysis of the executive compensation plans of large bank holding companies. We examine intra-industry changes in compensation policy over a period of significant change in the investment-opportunity set, 1979 to 1985. Our empirical findings reveal that total real compensation and the ratio of incentive compensation-to-total compensation increased substantially at regional bank holding companies but remained stable at money-center bank holding companies. These results are consistent with the hypothesis that during the early 1980s financial innovation and deregulation created greater growth opportunities for regional bank holding companies than for money-center bank holding companies.

What's wrong with FASB's exposure draft on stock compensation?

AbstractThere has been a lot of controversy about accounting for stock‐based executive compensation plans. But the authors feel there are too many problems with the FASB 's proposal on the topic. They discuss the problems, the probable impact, and what you should do about it.

Currency Exchange Rates: Perspective on Executive Compensation

The currency exchange rate should be taken into consideration when foreign-owned companies formulate executive compensation plan designs.

The association between the adoption of short-term bonus plans and corporate expenditures

This study investigates whether the introduction of a short-term executive compensation plan is associated with a change in corporate decision-making. The results of this study provide evidence that the introduction of a short-term compensation scheme is associated with changes in the decisions of managers. Specifically, companies adopting bonus plans showed significant relative increases in capital expenditures. Testing for advertising and research and development gave results that were not significant. The study also found that the adoption of a short-term bonus plan is associated with a positive stock market reaction. The results provide some evidence that short-term bonus plans may be an effective mechanism to help better align managers' and stockholders' interests.

SHORT‐TERM BONUS PLAN ADOPTION AND STOCK MARKET PERFORMANCE—PROXY AND INDUSTRY EFFECTS: A NOTE

ABSTRACTThis note extends previous studies and further examines the market reaction to short‐term executive compensation plan introduction by using a larger sample and controling for proxy and industry effects. Results indicate significantly positive abnormal returns not due to proxy or industry effects in the four months before adoption and the month of adoption. The price adjustment is not instantaneous. Firms adopting short‐term compensation plans also experience significantly positive abnormal returns ten months after announcement, associated with positive unexpected earnings in that month.

Implementing value‐based strategic management

Most top executives of major public corporations insist that they manage their firms in the best interests of their share‐holders. In fact, during the carefree Fifties and the go‐go Sixties most of them did indeed concentrate on earnings growth, and the stock market rewarded them accordingly. Executive compensation and bonus plans were designed to be driven by growth in earnings per share (EPS). Not surprisingly, corporate executives became more and more convinced that growth in earnings was the name of the game.

Management compensation and the managerial labor market

The papers in this volume and briefly summarized in this introduction document that: (1) executive compensation is positively related to share price performance: (2) poor firm performance is associated with increased executive turnover; (3) managers choose accounting accruals in ways that increase the value of their bonus awards; (4) the adoption of new short- and long-term executive compensation plans and golden parachutes are associated with positive share price reactions; (5) the death of a firm's founder is associated with positive share price reactions; and (6) managers are less likely to make merger bids that lower their stock prices when they hold more stock in their firm. These findings are interpreted as generally supporting the view that executive compensation packages help align managers' and shareholders' interests.

Market reaction to short-term executive compensation plan adoption

Our evidence on the stock price reaction to the announcement of short-term executive compensation plan adoption indicates that: (1) significantly positive abnormal returns occur in the month of announcement and in the four months before the bonus plan adoption, and (2) significantly positive abnormal returns occur 10 months after the adoption announcement, returns that are associated with positive unexpected earnings. This result conflicts with semi-strong market efficiency and indicates the existence of a trading rule based on the news of bonus plan adoption.

Stock market reaction to management incentive plan adoption: An overview

The papers by Brickley, Bhagat and Lease ('The Impact of Long-Range Managerial Compensation Plans on Shareholder Wealth') and by Tehranian and Waegelein ('Market Reaction to Short-Term Executive Compensation Plan Adoption') examine stock price performance around the time firms adopt management incentive plans. Each paper finds positive stock price performance. In this overview, I integrate the evidence presented in these two stimulating papers, and suggest additional tests of important economic hypotheses. Before discussing the details of the two papers, I have some observations on the overall picture that emerges from the studies. First, the general conclusion of positive stock price performance around the time of incentive plan adoption is strongly supported by the evidence in the two papers, and is not due to some methodological quirk. In light of these two papers (with different samples yet similar results) and of Larcker's (1983) findings along the same lines, it is difficult to argue that incentive plans are merely an 'excessive perk' whose adoption hurts shareholders. Second, there is evidence on reasons for the positive stock price performance. The evidence supports two views. One is that plan adoption leads to higher stock prices, via, for example, incentive effects. An alternative view is that higher stock prices lead to plan adoption: some of the data suggest the possibility that firms adopt plans after a period of favorable performance, and the data are consistent with the notion that plan adoption takes place in expectation of future stock price increases, that is, when management has favorable inside information about the firm's future prospects. As I shall

THE GROWTH OPTIMAL CAPITAL STRUCTURE: MANAGER VERSUS SHAREHOLDER OBJECTIVES

AbstractUtilizing a geometric mean wealth maximization approach, this paper shows potential differences between the capital structure preferred by stockholders and the one preferred by managers. In general, managers may prefer more conservative, equity‐oriented financing, while stockholders desire greater financial leverage. The problem arises because of differences in the degree of portfolio diversification achieved by managers and stockholders. Stockholders tend to have reasonably well‐diversified portfolios, causing them to be concerned with systematic risk. Managers' portfolios are apt to be more concentrated and directly tied to the financial success of an employer, causing managers to be concerned with total risk. Thus, for a given capital structure, each party views the firm as having a different level of risk. Several executive compensation plans are considered that might more closely align the interests of managers and stockholders.

HOW TO DESIGN VALUE‐CONTRIBUTING EXECUTIVE INCENTIVES

Executive compensation plans have come under increasing criticism. A new approach—value performance plans—offers a promising way to motivate executives to make decisions consistent with the long‐term interests of their companies.

Incentive and Tax Effects of Executive Compensation Plans

The ability of two (non-mutually exclusive) potential explanations for executive compensation plans is examined. One is that the plans reduce the combined tax liability of the corporation and its managers. The other is that the plans encourage the managers to maximize the value of the firm. It is found that the tax effect can explain some of the popularity of compensation plans, some of the variation in their use across firms, and the timing of changes in the provisions of the plans. However, there are variations in the cross-sectional use of the plans which cannot be explained by taxes, which can be explained by incentive effects.

A New Look at Executive Compensation Plans

A New Look at Executive Compensation Plans

Tailoring Incentive Bonus Plans for Special Situations

There's no pat formula for executive incentive compensation plans. Different companies have different needs, and that's why a good program provides for...

A Marginal Analysis of the Benefit-Cost Relationships of Executive Compensation Plans

A Marginal Analysis of the Benefit-Cost Relationships of Executive Compensation Plans

Reviews

Book reviewed in this article: What Happens During Business Cycles Wesley C. Mitchell Business Cycles and National Income. Alvin H. Hansen. Allen and Unwin, London, for W. W. Norton, N.Y.). The Levelling of Incomes Since 1938. Dudley Seers (Oxford, Basil Blackwell).Studies in Income and Wealth. Vol. 8111. Conference on Research in Income and Wealth Income Analysis. R. V. Clemence (Addison‐Wesley Press, Inc.). Income and Wealth (Series I). Erik Lundberg La Recente Inversione Nella Tendenza Della Natalita. Bernardo Colombo Economic Dynamics. William J. Baumol Ralph Turvey Oxford. Studies in the Price Mechanism. T. Wilson and P. W. S. Andrews. Product Equilibrium Under Monopolistic Competition. H. Brems The Role of Measurement in Economics. Richard Stone Psychological Analysis of Economic Behaviour. George Katona Gesellschaftslenkung und Politik. Emile Callot Liberty and Learning: Essays in Honour Sir James Hight. What Do, Economists Know? Benjamin Higgins Marxism, Freedom and the State. Michael Bakunin. An Introduction to Economic Analysis. J. K. Eastham.Proceedings of the Seventh International Conference of Agricultural Economists. Agricultural Co‐operation in the Commonwealth. Margaret Digby With a foreword by C. R. Fay. World Resources and Industries: Revised Edition, 1951. E. W. Zimmermann The International Economics. P. T. Ellsworth Cyclical Movements in the Balance of Payments. T. C. Chang The Commerce of Nations. By J. B. Condiffe (W. W. Norton & Company, Inc., New York, 1950) World Trade and Investment: The Economics of Interdependence. Donald B. MarshPrinciples of Private and Public Planning. A Study in Economic Sociology. By Wilhelm KeilhauThe National Income of Malaya, 1947–1949 (with a note on 1950) By Frederic BenhamEconomic Consequences of Divided India: A Study of the Economy of India and Pakistan. By C. N. Vakil (Vora & Co., Bombay).First Report of the National Income Committee, April 1951.British Economic History Since 1760. By S. G. E. LytheThe Works and Correspondence of David Bicardo. Edited by Piero Sraffa, with the collaboration of M. H. Dobb. Vol. III. L'Homme Agent Du Developpement Economique. By Adrien Tay mans William Godwin—A Study, in Liberalism. By David Fleisher Palace of Industry, 1851. A Study of the Great Exhibition and its Fruits. By C. R. Fay Some Accounting Terms and Concepts. A Report of a Joint Exploratory Committee appointed by the Institute of Chartered Accountans in England and Wales and by the National Institute of Economic and Social Research A Course in Applied Economics. By E. H. Phelps Brown Work and Welfare in Australia. Studies in Social Economics. By Marjorie Tew The Transportation Industries, 1889–1946. By Harold BargerReview of Economic Conditions in the Middle East; Supplement to World Economic Report, 1949–50.Review of Economic Conditions in Africa.Payment by Results. Collective Bargaining. By Neil W. Chamberlain Effects of Taxation. Corporate Mergers. By J. Keith Butters, John Lintner and William L. Cary, assisted by Powell Niland Kentucky Taxes Affecting Life Insurance. By C. R. Lockyer The Corporation Income Tax. By Richard Goode Finance of the Government of India. By R. N. Poduval (Premier Publishing Co., Delhi). Pp. 322 War Finance in Canada (Les Finances de Guerre du Canada). By Jean‐Pierre Martin Effects of Taxation on Executives. By Thomas H. Sanders Effects of Taxation: Executive Compensation and Retirement Plans. By Challis H. Hall Labour and Industrial Relations: A General Analysis. By Richard A. Lester Imperialism and Social Classes. By Joseph A. Schumpeter. Translated by Heinz Norden. Edited and with an Introduction by Paul M. Sweezy Ausgleichsgesetze der Amerikanischen Zahlungsbilanz (Laws of Adjustment of the American Balance of Payments). By Jürg Niehans

Effects of Taxation, Executive Compensation, and Retirement Plans.

Effects of Taxation, Executive Compensation, and Retirement Plans.

BOOK REVIEWS

Book reviewed in this article:Inventories and Business Cycles. By Moses Abramovitz.Financial Organization and Management of Business. By Charles W. Gerstenberg.Effects of Taxation, Executive Compensation, and Retirement Plans. By Challis A. Hall, Jr.Investment Principles and Practices. By Ralph Eastman Badger and Harry G. Guthmann.Investment Analysis and Management. By Lester V. Plum and Joseph H. Humphrey, Jr.Money in a Maelstrom. By J. W. Beyen.American Monetary Policy. By E. A. Goldenweiser.Business Cycles. By D. Hamberg.Income and Wealth. By Erik Lundberg, ed.American Financial Institutions. By Herbert V. Prochnow.Life Insurance Mathematics. By Robert E. Larson and Erwin A. Gaumnitz.Life Insurance. By John H. Magee.Mathematics of Finance. By Albert E. May.Modern Life Insurance. By Robert I. Mehr and Robert W. Osler.The Nature and Tax Treatment of Capital Gains and Losses. By Lawrence H. Seltzer.Taxable and Business Income. By Dan Throop Smith and J. Keith Butters.Commercial Treaties and Agreements. By Harry C. Hawkins.The Balance of Payments. By J. E. Meade.Urban Real Estate Markets: Characteristics and Financing. By Ernest M. Fisher.Land Planning Law in a Free Society. By Charles M. Haar.The Prefabrication of Houses. By Burnham Kelly.

HALL, CHALLIS A., JR. Effects of Taxation : Executive Compensation and Retirement Plans. Pp. xv, 365. Boston: Graduate School of Business Administration, Harvard University, 1951. $4.25. SANDERS, THOMAS H. Effects of Taxation on Executives. Pp. xiii, 229. Boston: Graduate School of Business Administration, Harvard University, 1951. $3.25

HALL, CHALLIS A., JR. Effects of Taxation : Executive Compensation and Retirement Plans. Pp. xv, 365. Boston: Graduate School of Business Administration, Harvard University, 1951. $4.25. SANDERS, THOMAS H. Effects of Taxation on Executives. Pp. xiii, 229. Boston: Graduate School of Business Administration, Harvard University, 1951. $3.25