Stock Options and Chief Executive Compensation

Although stock options are commonly observed in chief executive officer (CEO) com- pensation contracts, there is theoretical controversy about whether stock options are part of the optimal contract. Using a sample of Fortune 500 companies, we solve an agency model calibrated to the company-specifc data and we find that stock options are almost always part of the optimal contract. This result is robust to alternative assumptions about the level of CEO risk-aversion and the disutility associated with their effort. In a supplementary analysis, we solve for the optimal contract when there are no restrictions on the contract space. We find that the optimal contract (which is characterized as a state-contingent payoff to the CEO) typically has option-like features over the most probable range of outcomes.Stock Options, Incentives, Agency Model

Executive equity compensation and incentives: a survey

Stock and option compensation and the level of managerial equity incentives are aspects of corporate governance that are especially controversial to shareholders, institutional activists, and government regulators. Similar to much of the corporate finance and corporate governance literature, research on stock-based compensation and incentives has not only generated useful insights, but also produced many contradictory findings. Not surprisingly, many fundamental questions remain unanswered. In this study, the authors synthesize the broad literature on equity-based compensation and executive incentives and highlight topics that seem especially appropriate for future research.Executives ; Stockholders ; Corporate governance

Performance Consequences of Mandatory Increases in Executive Stock Ownership

We examine a sample of firms that adopt “target ownership plans”, under which managers are required to own a minimum amount of stock. We find that prior to plan adoption, such firms exhibit low managerial equity ownership and low stock price performance. Managerial equity ownership increases significantly in the two years following plan adoption. We also observe that excess accounting returns and stock returns are higher after the plan is adopted. Thus, for our sample of firms, the required increases in the level of managerial equity ownership result in improvements in firm performance

Assessing Empirical Research in Managerial Accounting: A Value-Based Management Perspective

This paper applies a value-based management framework to critically review empirical research in managerial accounting. This framework enables us to place the exceptionally diverse set of managerial accounting studies from the past several decades into an integrated structure. Our synthesis highlights the many consistent results in prior research, identifies remaining gaps and inconsistencies, discusses common methodological and econometric problems, and suggests fruitful avenues for future managerial accounting research

Determinants of Performance Measure Choices in Worker Incentive Plans

This study examines the determinants of performance measure choices in worker incentive plans. The results indicate that inform- ativeness issues such as those addressed in economic theories have a significant effect on measurement choices. However, other reasons for adopting the plans, such as upgrading the workforce and linking bonuses to the firm’s ability to pay, also influence measurement choices, as do union representation and management participation in plan design. Moreover, the factors influencing the use of specific measures vary, suggesting that the aggregate performance measure classifications commonly used in compensation research provide somewhat misleading inferences regarding performance measurement choices

Performance-Based Compensation in Member-Owned Firms: An Examination of Medical Group Practices

We examine the importance of agency considerations for the mix of salary and performance-based compensation in member-owned medical practices. Performance-based pay increases with the informativeness of clinical productivity measures, and declines with greater reimbursement from capitation contracts. Inexperienced physicians receive more compensation from salary, but compensation mix does not change as physicians near retirement. Larger practices and practices using outside management companies place more weight on performance-based compensation. However, when more physicians in the group practice the same specialty, less emphasis is placed on performance-based compensation. Finally, the presence of an executive partner has no influence on compensation mix

Performance Implications of Strategic Performance Measurement in Financial Services Firms

This study examines the relation between measurement system satisfaction, economic performance, and two general approaches to strategic performance measurement: greater measurement diversity and improved alignment with firm strategy and value drivers. We find consistent evidence that firms making more extensive use of a broad set of financial and (particularly) non-financial measures than firms with similar strategies or value drivers have higher measurement system satisfaction and stock market returns. However, we find little support for the alignment hypothesis that more or less extensive measurement than predicted by the firm\u27s strategy or value drivers adversely affect performance. Instead, our results indicate that greater measurement emphasis and diversity than predicted by our benchmark model is associated with higher satisfaction and stock market performance. Our results also suggest that greater measurement diversity relative to firms with similar value drivers has a stronger relationship with stock market performance than greater measurement on an absolute scale. Finally, the balanced scorecard process, economic value measurement, and causal business modeling are associated with higher measurement system satisfaction, but exhibit almost no association with economic performance

Chief Executive Officer Equity Incentives and Accounting Irregularities

This study examines whether Chief Executive Officer (CEO) equity-based holdings and compensation provide incentives to manipulate accounting reports. While several prior studies have examined this important question, the empirical evidence is mixed and the existence of a link between CEO equity incentives and accounting irregularities remains an open question. Because inferences from prior studies may be confounded by assumptions inherent in research design choices, we use propensity-score matching and assess hidden (omitted variable) bias within a broader sample. In contrast to most prior research, we do not find evidence of a positive association between CEO equity incentives and accounting irregularities after matching CEOs on the observable characteristics of their contracting environments. Instead, we find some evidence that accounting irregularities occur less frequently at firms where CEOs have relatively higher levels of equity incentives

Commentary—The Stock Market\u27s Pricing of Customer Satisfaction

A number of recent marketing studies examine the stock market\u27s response to the release of American Customer Satisfaction Index (ACSI) scores. The broad purpose of these studies is to investigate the stock market\u27s valuation of customer satisfaction. However, a key focus is on whether customer satisfaction information predicts long-run returns. We provide evidence on the market\u27s pricing of ACSI information using a more comprehensive set of well-established tests from the accounting and finance literatures. We find that ACSI scores provide some incremental information on future operating income and that the market quickly responds to the release of information on large increases in satisfaction. However, we find no evidence that ACSI predicts long-run returns. These results suggest that customer satisfaction information is value relevant, but they are also consistent with Jacobson and Mizik\u27s conclusion [Jacobson, R., N. Mizik. 2009. The financial markets and customer satisfaction: Reexamining possible financial market mispricing of customer satisfaction. Marketing Sci. 28(5) 810–819] that mispricing of ACSI information, if present at all, is limited

The Efficacy of Shareholder Voting: Evidence From Equity Compensation Plans

This study examines the effects of shareholder support for equity compensation plans on subsequent CEO compensation. Using cross-sectional regression, instrumental variable, and regression discontinuity research designs, we find little evidence that either lower shareholder voting support for, or outright rejection of, proposed equity compensation plans leads to decreases in the level or composition of future CEO incentive compensation. We also find that, in cases where the equity compensation plan is rejected by shareholders, firms are more likely to propose, and shareholders are more likely to approve, a plan the following year. Our results suggest that shareholder votes for equity pay plans have little substantive impact on firms’ incentive compensation policies. Thus, recent regulatory efforts aimed at strengthening shareholder voting rights, particularly in the context of executive compensation, may have limited effect on firms’ compensation policies