The Economics of Corporate Executive Pay

[Excerpt] In the past ten years, the pay of chief executive officers (CEOs) has more than doubled, and the ratio of median CEO to worker pay has risen to 179 to 1. High and rising executive pay could be an issue of public concern on two different grounds. First, it is contributing to widening income inequality that may be of concern from an equity perspective. Second, it could be the result of economically inefficient labor markets. It is difficult to determine whether executive pay is excessive across the board since executives’ marginal product cannot be directly observed. An upward trend in pay over time is not sufficient proof that the market is not efficient since factors determining supply and demand, such as the skills required of the position, can change over time. To show that pay is excessive from an economic perspective, one must first demonstrate that there is a market failure that is preventing the market from functioning efficiently. The market failure could originate in the division in large modern firms between management and ownership, which is typically dispersed among millions of shareholders. Shareholders’ interests are represented by a board of directors. Critics of executive pay have argued that boards have all too often been “captured” by the executive and are no longer negotiating pay packages that are in the shareholders’ best interests. They point to a number of common practices that they call “stealth compensation” which are inconsistent with arm’s length contracting. These include “golden parachutes,” generous severance packages, company-provided perks, and bonuses that are unrelated to firm performance. Stock options have been the fastest growing portion of executive pay since the 1990s, and critics believe this pattern can also be explained through the prism of stealth compensation. Rewarding executives with employee stock options was often justified in terms of the “pay for performance” mantra, but options are usually designed to reward absolute, not relative, performance. This means that in the bull market of the 1990s, when virtually all stock prices were rising, a company could fall behind its competitors and its executives could still receive handsome options payouts. Indeed, a sizeable portion of the increase in executive pay in the 1990s was likely due to options that turned out to be much more valuable than expected because of the unprecedented price increases of the bull market. Many of the recent corporate scandals appear consistent with stealth compensation as well. Stock options backdating, earnings manipulation, and accounting fraud might have been motivated by attempts to covertly increase executive pay. If short-term fluctuations in the stock price are not good proxies of firm performance, then tying compensation to the stock price can create incentives for executives to engage in activities that are detrimental to shareholders. Policy proposals mostly focus on improving transparency, increasing board independence, and strengthening shareholder control rather than attempting to curb pay directly. S. 1181 (Obama) and H.R. 1257 (Frank), which the House approved on April 19, 2007, would give shareholders a non-binding vote on executive pay. Another proposal would modify the limit on deductibility of executive pay from corporate taxation. More broadly, income inequality could be reduced by increasing the progressivity of the tax system. For current developments and legislation, see CRS Report RS22604, Excessive CEO Pay: Background and Policy Approaches

Stock Options: The Backdating Issue

[Excerpt] Employee stock options are contracts giving employees the right to buy the company’s common stock at a specified exercise price, at a specified time or during a specified period, and after a specified vesting period. The value of the option when granted lies in the prospect that the market price of the company’s stock will increase by the time the option is exercised (used to purchase stock). At the grant date for the options, rather than selecting an exercise price based on the current market price for the stock, officials at some companies have selected a prior date with a lower market price; that is, they backdated stock options to an earlier grant date. If this backdating occurred without public disclosure, the recipient of the stock options received increased compensation in violation of Securities and Exchange Commission (SEC) regulations, generally accepted accounting rules, and tax laws. Some backdating is said to involve “sloppiness,” not fraud. The backdating of stock options has imposed costs on shareholders, employees, bondholders, and taxpayers. A corporate official who has profited from undisclosed backdating of stock options may not be responsible or even knowledgeable of the backdating. “Nonqualified” stock options, which have no special tax criteria to meet, are the focus of the backdating controversy primarily because they can be granted in unlimited amounts. The magnitude of stock option grants grew dramatically in the 1990s, subsequent to passage of the Omnibus Budget Reconciliation Act of 1993, a stock market boom, and revised accounting rules. Recent corporate disclosure changes have reduced the opportunities and rewards for backdating stock options. Empirical studies about backdating have been done by academics and investigative journalists. Four recent regulatory actions may have reduced the backdating of stock options, but problems persist. On December 16, 2004, the Financial Accounting Standards Board issued new rules requiring companies to subtract the expense of options from their earnings. After August 29, 2002, the Sarbanes-Oxley Act required that companies notify the SEC within two business days after granting stock options. In 2003, the SEC required increased disclosure of stock option plans. The SEC issued enhanced option grant disclosure rules effective December 15, 2006. Policy options to further reduce backdating and other timing manipulation include changes in SEC regulations and a change in the tax law. The SEC, various state prosecutorial, and Department of Justice (DOJ) probes into backdating abuses are ongoing. In addition, many firms have mounted their own internal probes into possible abuses. By November 2007, the SEC’s investigation caseload had fallen from a peak of 160 to about 80, and the SEC had brought civil enforcement actions against seven companies and 26 former executives associated with 15 firms. And according to reports from the DOJ, there were at least 10 criminal filings against defendants for backdating. As of January 2, 2008, the only CEO to be convicted of charges related to backdating was Greg Reyes, former Brocade CEO. This report will be updated as issues develop or new legislation is introduced

Rating the Suitability of Responsible Gambling Features for Specific Game Types: A Resource for Optimizing Responsible Gambling Strategy

A Delphi based study, rated the perceived effectiveness of 45 responsible gambling (RG) features in relation to 20 distinct gambling type games. Participants were 61 raters from seven countries,including responsible gambling experts (n = 22), treatment providers (n = 19) and recovered problem gamblers (n = 20). The most highly recommended RG features could be divided into three groups 1) Player initiated tools focused on aiding player’s behaviour 2) RG features related to informed-player-choice 3) RG features focused on gaming company actions. Overall, player control over personal limits were favoured more than gaming company controlled limits, although mandatory use of such features was often recommended. The study found that recommended RG features varied considerably between game types, according to their structural characteristics. Also,online games had the possibility to provide many more RG features than traditional (offline games). The findings draw together knowledge about the effectiveness of RG features for specific game types. This should aid objective, cost-effective, evidence based decisions on which RG features toi nclude in an RG strategy, according to a specific portfolio of games. The findings of this study will be available via a web-based tool, known as the Responsible Gambling Knowledge Centre (RGKC)

Excessive CEO Pay: Background and Policy Approaches

[Excerpt] During the past several decades, average pay for non-management workers has stagnated, after adjustment for inflation, falling slightly since the early 1970s. In contrast, compensation of top corporate executives has risen dramatically. Supporters of current CEO pay levels argue that executive compensation is determined by normal private market bargaining, that rising pay reflects competition for a limited number of qualified candidates, and that even the richest pay packages are a bargain compared with the billions in shareholder wealth that successful CEOs create. Others, however, cite instances in which executive pay appears to be excessive. Some see a social equity problem in which CEO pay is seen to embody a troublesome rise in income and wealth inequality. Others see excessive pay as a form of shareholder abuse made possible by weak corporate governance structures and a lack of clear, comprehensive disclosure of the various components of executive compensation. This report describes the major legislative and regulatory proposals that have sought to remedy these perceived problems. It will be updated as events warrant

A spectrometer for the investigation of backscattering of 10-20 keV electrons

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Fluoride In Drinking Water: A Study Of The Cause And Effects In The Hai District Of Northern Tanzania

The Hai District in Northern Tanzania is one of the many areas along the East African Rift Valley where the groundwater contains high levels of fluoride. This study by sampling fluoride levels from water sources in the 52 villages of the Hai District identified two communities where the fluoride levels were high and presented a risk to human health