_________________________________________________________________
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 4, No. 18: September 25, 2003
_________________________________________________________________
Publisher: LSN Employment, Labor, Compensation & Pension Journals
a division of
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Editor: PAMELA PERUN
Urban Institute
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Topic of This Issue:
Executive Compensation
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES
"The Relation Between Insider-Trading Restrictions and Executive
Compensation"
Journal of Accounting Research, Vol. 41, No. 3, June 2003
DARREN T. ROULSTONE
University of Chicago
Graduate School of Business
"Stock Options for Tax-Exempt Organization Managers?"
Tax Notes, Vol. 100, No. 12, September 22, 2003
DAVID I. WALKER
Boston University School of Law
"Taxing Compensatory Partnership Options"
Tax Notes, Vol. 100, No. 12, September 22, 2003
KAREN C. BURKE
University of San Diego School of Law
WORKING PAPERS
"Executive Compensation and Analyst Guidance: The Link Between
CEO Compensation and Expectations Management"
GUIDO BOLLIGER
University of Neuchatel - Institut de l'Entreprise
International Center FAME
MANUEL KAST
University of Lausanne - HEC
International Center FAME
"Executive Remuneration in the EU: Comparative Law and Practice"
GUIDO ALESSANDRO FERRARINI
University of Genoa
Law School
European Corporate Governance Institute (ECGI)
NIAMH MOLONEY
Stockholm University
School of Law
European Corporate Governance Institute (ECGI)
CRISTINA VESPRO
ECARES, Université Libre de Bruxelles
European Corporate Governance Institute (ECGI)
"Incentive Compensation for Bank Directors: The Impact of
Deregulation"
DAVID A. BECHER
Drexel University
Department of Finance
TERRY L. CAMPBELL
University of Delaware
Department of Finance
MELISSA FRYE
University of Central Florida
College of Business Administration
"UK Executive Compensation Practices: New Economy vs. Old
Economy"
KONSTANTINOS STATHOPOULOS
University of Manchester
Manchester School of Accounting Finance
SUSANNE K. ESPENLAUB
University of Manchester
MARTIN WALKER
University of Manchester
Manchester School of Accounting Finance
"Executive Compensation, Political Economy, and Managerial
Control: The Transformation of Managerial Incentive Structures
and Ideology, 1950-2000"
ERNIE ENGLANDER
George Washington University
Department of Strategic Management & Public Policy
ALLEN KAUFMAN
University of New Hampshire
Whittemore School of Business and Economics
S S R N I N F O R M A T I O N
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EDITORIAL POLICIES
To provide the broadest coverage of research in Employee
Benefits, Compensation & Pension Law we do not referee working
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N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"The Relation Between Insider-Trading Restrictions and Executive
Compensation"
Journal of Accounting Research, Vol. 41, No. 3, June 2003
BY: DARREN T. ROULSTONE
University of Chicago
Graduate School of Business
Contact: DARREN T. ROULSTONE
Email: Mailto:DARREN.ROULSTONE@GSB.UCHICAGO.EDU
Postal: University of Chicago
Graduate School of Business
1101 East 58th Street
Chicago, IL 60637 UNITED STATES
Phone: 773-834-5966
ABSTRACT:
In this study I investigate the relation between firm-level
insider-trading restrictions and executive compensation. Using a
trading-window proxy for the existence of such restrictions, I
test predictions that insiders will demand compensation for
these restrictions and that firms will need to increase
incentives to restricted insiders. I find that firms that
restrict insider trading pay a premium in total compensation
relative to firms not restricting insider trading, after
controlling for economic determinants of pay. Furthermore, these
firms use more incentive-based compensation and their insiders
hold larger equity incentives relative to firms that do not
restrict insider trading. These results hold after controlling
for the endogenous decision to restrict insiders and are
consistent with the notion that insider trading plays a role in
rewarding and motivating executives.
Keywords: insider trading, executive compensation, contracting
JEL Classification: G30, J33
______________________________
"Stock Options for Tax-Exempt Organization Managers?"
Tax Notes, Vol. 100, No. 12, September 22, 2003
BY: DAVID I. WALKER
Boston University School of Law
Contact: DAVID I. WALKER
Email: Mailto:diwalker@bu.edu
Postal: Boston University School of Law
765 Commonwealth Avenue
Boston, MA 02215 UNITED STATES
ABSTRACT:
Recently promulgated regulations under section 457 (Deferred
Compensation Plans of State and Local Governments and Tax-Exempt
Organizations) will put an end to tax-exempt organizations' use
of options on third-party stock or mutual funds as an executive
compensation device. These regulations have sparked protests
from exempt organizations and option plan promoters, and a bill
has been introduced in Congress that would overturn the
regulations. In this article, Professor Walker argues in favor
of the new regulations as a matter of tax policy and good
corporate governance. Professor Walker argues that (1) exempt
organization options are only superficially similar to public
company stock options and have been provided solely as a means
of avoiding the dollar limitation on qualified deferred
compensation under section 457, (2) the limitation under section
457 is justified and should be protected because, unlike public
company stock options, exempt organization deferred
compensation, including options, results in a fairly certain
drain on the public fisc, and (3) option compensation raises
very troubling governance issues for exempt organizations:
Options are much less transparent than cash, are susceptible to
being undervalued, and are difficult and costly to hedge. For
all of these reasons, Professor Walker argues that the Treasury
was justified in effectively eradicating exempt organization
options, and that Congress should refrain from resuscitating
them.
______________________________
"Taxing Compensatory Partnership Options"
Tax Notes, Vol. 100, No. 12, September 22, 2003
BY: KAREN C. BURKE
University of San Diego School of Law
Contact: KAREN C. BURKE
Email: Mailto:BURKEK@SANDIEGO.EDU
Postal: University of San Diego School of Law
5998 Alcala Park
San Diego, CA 92110-2492 UNITED STATES
Phone: 619-260-7717
Fax: 619-260-2218
ABSTRACT:
In this article, Burke considers the tax treatment of
partnership options issued in connection with performance of
services (compensatory option). In particular, Burke discusses
whether compensatory options should be taxed by analogy to a
vesting partnership profits interest or a transfer of property
under section 83. Recently issued proposed regulations treat
exercise of a noncompensatory option as generally tax-free to
both the option holder and the partnership and provide rules for
adjusting the partners' capital accounts to reflect a
noncompensatory capital shift. In light of the proposed
regulations, Burke discusses the contentious issue of whether
exercise of a compensatory option should be treated, under
section 721, as a taxable capital shift, triggering recognition
of gain to the historic partners. By contrast, the
circle-of-cash theory would permit the historic partners to
avoid gain recognition, by analogy to the treatment of corporate
options under section 1032. Although the circle-of-cash theory
has numerous adherents, Burke suggests that a recognition rule
may be warranted to prevent the historic partners from investing
in services with unrealized appreciation and suggests a
deemed-sale approach based on section 704(c) principles.
Ultimately, the proper treatment of compensatory options cannot
be divorced from the overarching problem of service-related
transfers of partnership interests.
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Executive Compensation and Analyst Guidance: The Link Between
CEO Compensation and Expectations Management"
BY: GUIDO BOLLIGER
University of Neuchatel - Institut de l'Entreprise
International Center FAME
MANUEL KAST
University of Lausanne - HEC
International Center FAME
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=424026
Paper ID: EFA 2003 Annual Conference Paper No. 861
Date: June 2003
Contact: GUIDO BOLLIGER
Email: Mailto:Guido.Bolliger@unine.ch
Postal: University of Neuchatel - Institut de l'Entreprise
Fbg de l'Hopital 77
Neuchatel 2000, SWITZERLAND
Phone: ++41 32 718 13 60
Fax: ++41 32 718 13 61
Co-Auth: MANUEL KAST
Email: Mailto:Manuel.Kast@hec.unil.ch
Postal: University of Lausanne - HEC
CH-1015 Lausanne, SWITZERLAND
ABSTRACT:
During the last decade, a surprisingly high percentage of U.S.
companies has fulfilled or beaten analysts' earnings per share
forecasts. One of the most frequently cited reasons for this
growing tendency is a change in the nature of U.S. executive
compensation structure. As stock options have become an
increasingly important part of executive compensation, the
preservation or enhancement of short term stock value around the
earnings announcement has become a priority for managers.
Besides earnings management, a widespread way to meet analyst
expectations is to inject pessimism into their forecasts by
providing analysts with negative clues, or so-called downward
guidance. This paper is the first to investigate the
relationship between the practice of analyst guidance and
executive compensation packages. We document a strong link
between expectations management and the relevant options
component of CEO compensation, bonus plans, and the percentage
of the company's shares owned by the CEO who manages it. In a
second set of tests, we show that firms which meet or beat
analyst forecasts at the earnings announcement generate positive
abnormal returns, which are significantly lower for firms
suspected of managing expectations.
Keywords: Analyst guidance, Earnings surprise, Executive
compensation, Stock options
______________________________
"Executive Remuneration in the EU: Comparative Law and Practice"
BY: GUIDO ALESSANDRO FERRARINI
University of Genoa
Law School
European Corporate Governance Institute (ECGI)
NIAMH MOLONEY
Stockholm University
School of Law
European Corporate Governance Institute (ECGI)
CRISTINA VESPRO
ECARES, Université Libre de Bruxelles
European Corporate Governance Institute (ECGI)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=419120
Paper ID: ECGI - Law Working Paper No. 09/2003
Date: June 2003
Contact: GUIDO ALESSANDRO FERRARINI
Email: Mailto:guido.ferrarini@cedif.org
Postal: University of Genoa
Law School
Via Balbi, 22
Genoa 16126, ITALY
Phone: +39-010-2099894
Fax: +39-010-2099890
Co-Auth: NIAMH MOLONEY
Email: Mailto:niamhmoloney@eircom.net
Postal: Stockholm University
School of Law
28 University Square
Belfast BT7 1NN, IRELAND
Co-Auth: CRISTINA VESPRO
Email: Mailto:cvespro@ulb.ac.be
Postal: ECARES, Université Libre de Bruxelles
Ave. Franklin D Roosevelt, 50 - C.P. 114
B-1050 Brussels, BELGIUM
Paper Requests:
Contact Christine Miller, Administrator, European Corporate
Governance Institute at Mailto:wp-hardcopyrequest@ecgi.org.
ABSTRACT:
Executive pay practices are currently a "cause celebre" of
corporate governance in the media, among regulators, in the
marketplace, and in academia, in the US, the UK, and Europe. The
purpose of this paper is to examine the approaches taken across
Europe to the regulation of executive pay practices in listed
companies. The outstanding feature of the regulation of
executive pay across Europe is the extent to which it reflects
the interconnection between pay and corporate governance. This
link is expanded on in Part B with respect to the different
rules found across European legal systems and how they
address/prioritize the concerns which executive pay potentially
raises. The role of public regulation is relatively important
for disclosure of executive pay, while best practices and
private codes generally have some impact on the way in which
executive compensation is set for listed companies. On the
whole, there is some convergence in continental Europe towards
the Anglo-American model. The merits of full disclosure of
executive remuneration are increasingly acknowledged in
corporate governance codes and reports, while the use of
remuneration committees is on the rise in the Continent. The
research data on reported pay practices for 2001 among FTSE
Eurotop300 companies reveal a reliance on performance-based pay
generally and a somewhat variable adoption of share options
programmes and other equity-based incentive contracts, which are
generating difficulties in dispersed ownership systems. The
executive pay problem may therefore be a particular cost of
dispersed ownership, and the particular legal and policy
responses, which are widely debated a specific feature of
Anglo-American corporate governance. Nonetheless, the faultline
between both systems, which is evident from the different
approaches European states have taken, calls for particular care
in the adoption of pan-European reforms but also in the
transplanting of reforms based on the Anglo-American
experience.
Keywords: Executive pay, Corporate governance, Ownership
structure, Company disclosure, Remuneration Committee
JEL Classification: G3, G38, J33, K22
______________________________
"Incentive Compensation for Bank Directors: The Impact of
Deregulation"
BY: DAVID A. BECHER
Drexel University
Department of Finance
TERRY L. CAMPBELL
University of Delaware
Department of Finance
MELISSA FRYE
University of Central Florida
College of Business Administration
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=425441
Paper ID: Weinberg Center for Corporate Governance Working Paper
No. 2003-2
Date: July 17, 2003
Contact: MELISSA FRYE
Email: Mailto:melissa.frye@bus.ucf.edu
Postal: University of Central Florida
College of Business Administration
Department of Finance
PO Box 161400
Orlando, FL 32816 UNITED STATES
Phone: 407-823-3097
Co-Auth: DAVID A. BECHER
Email: Mailto:becher@drexel.edu
Postal: Drexel University
Department of Finance
218 Academic Bldg.
Philadelphia, PA 19104 UNITED STATES
Co-Auth: TERRY L. CAMPBELL
Email: Mailto:campbelt@be.udel.edu
Postal: University of Delaware
Department of Finance
College of Business and Economics
Alfred Lerner College of Business and Economics
Newark, DE 19716 UNITED STATES
ABSTRACT:
Although industry deregulation leads to changes in the scale and
scope of the duties of the board of directors, little is known
about the changes in incentives for directors surrounding such
events. The deregulation of the U.S. banking industry and
associated technological and regulatory changes during the 1990s
lends itself to a natural experiment. These industry shocks
forced bank boards of directors to face expanded opportunity
sets, increased competition, and a rapidly expanding market for
corporate control. While bank directors receive significantly
less equity-based compensation throughout most of our sample
period, by the end of the decade their use of equity-based
compensation is indistinguishable from a matched sample of
industrial firms. Moreover, banks utilizing a high degree
equity-based compensation for directors are associated with
higher performance and higher growth without a similar increase
in risk. The increase in the use of equity-based compensation
for bank directors is not due to a fundamental shift in bank
boards, as board size and independence have remained static.
Overall, our results suggest that firms respond to deregulation
by improving internal monitoring through aligning directors'
incentives with those of shareholders.
Keywords: Boards of Directors, Director Compensation,
Equity-based Compensation, Banking, Deregulation
JEL Classification: G30, G34, G21
______________________________
"UK Executive Compensation Practices: New Economy vs. Old
Economy"
BY: KONSTANTINOS STATHOPOULOS
University of Manchester
Manchester School of Accounting Finance
SUSANNE K. ESPENLAUB
University of Manchester
MARTIN WALKER
University of Manchester
Manchester School of Accounting Finance
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=422761
Paper ID: University of Manchester, MSAF, Working Paper
Date: June 2003
Contact: KONSTANTINOS STATHOPOULOS
Email: Mailto:k.stathopoulos@stud.man.ac.uk
Postal: University of Manchester
Manchester School of Accounting Finance
Crawford House
Oxford Road
Manchester M13 9PL, UNITED KINGDOM
Phone: +44 161 275 4010
Fax: +44 161 275 4023
Co-Auth: SUSANNE K. ESPENLAUB
Email: Mailto:susanne.espenlaub@man.ac.uk
Postal: University of Manchester
Manchester School of Accounting and Finance
Manchester M13 9PL, UNITED KINGDOM
Co-Auth: MARTIN WALKER
Email: Mailto:martin.walker@man.ac.uk
Postal: University of Manchester
Manchester School of Accounting Finance
Crawford House
Oxford Road
Manchester M13 9PL, UNITED KINGDOM
ABSTRACT:
This paper examines the executive compensation practices of
listed UK retailing companies. We compare New Economy retailers
(e-commerce and dot.coms) to more traditional retailers
operating in the "Old Economy". We also discriminate between
recently floated retailers and their more seasoned counterparts.
Using a sample of remuneration contracts for 552 CEOs, other
executives and non-executives in 72 listed UK companies in the
New and Old Economy, we investigate the structure and level of
executive (and non-executive) compensation defined as the sum of
salary, annual bonus, and the values of executive stock options
and long-term incentive plans (LTIPs). We investigate the extent
to which the contract features are determined by firm
characteristics, economic sector and the composition of the
remuneration committee. The contract features we examine are the
time to maturity of the executive stock options, whether options
were granted in-, at- or out of the money, and the leverage of
the compensation package (in terms of the director's wealth
gains through increases in the value of stock options and LTIPs
relative to the director's cash pay). In stark contrast to US
findings and to UK corporate governance guidelines, we find
evidence that a large proportion of sample firms, particularly
in the New Economy, issue executive stock options in-the-money,
and that the composition of the remuneration committee has a
significant impact on the moneyness of stock options.
Keywords: Managerial Compensation, Remuneration Committee,
Executive Stock Options, New Economy
JEL Classification: G30, G35, J33
______________________________
"Executive Compensation, Political Economy, and Managerial
Control: The Transformation of Managerial Incentive Structures
and Ideology, 1950-2000"
BY: ERNIE ENGLANDER
George Washington University
Department of Strategic Management & Public Policy
ALLEN KAUFMAN
University of New Hampshire
Whittemore School of Business and Economics
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=408820
Paper ID: George Washington University SMPP Working Paper No.
03-01
Date: January 2003
Contact: ERNIE ENGLANDER
Email: Mailto:ejeeje@gwu.edu
Postal: George Washington University
Department of Strategic Management & Public
Policy
203 Monroe Hall
Washington, DC 20052 UNITED STATES
Phone: 202-994-8203
Fax: 202-994-8113
Co-Auth: ALLEN KAUFMAN
Email: Mailto:allenkaufman@attbi.com
Postal: University of New Hampshire
Whittemore School of Business and Economics
15 College Road
Durham, NH 03824 UNITED STATES
ABSTRACT:
We characterize the period from the end of World War Two to the
early 1980s as technocratic and the period since as proprietary.
During the technocratic period, compensation differences between
CEOs and senior management were "marginal" in that they
reflected their economic contributions to the firm. This
facilitated team cohesion among the senior managers, who, like
the CEO, had membership "rights" to the board over which they,
as a team, controlled. Though constrained by antitrust
regulations, managers shared knowhow across industries and built
a corporate-wide identity through a system of interlocking
directorates. While this network educated its participants in
corporate-wide issues, those within it still identified first
and foremost with their firm, where they spent most of their
career. Finally, managers continued to conceive of their
profession as one that served a larger social good. First, they
accepted a legal duty of care to further the interests of the
corporation as a whole. An secondly, they a second fiduciary
duty to advance democracy. In contrast, the coalesced
proprietary system has encouraged managers to think of
themselves as a special class of shareholders. The extensive use
of stock options to supplement their base salary has contributed
heavily to this shareholder (as opposed to technocratic)
managerial self-definition. This occurred as managers weighted
their compensation packages with stock options to take advantage
of an explosive equities market and alterations in the tax code.
As "insider shareholders" who aimed merely to enhance their
personal fortunes, managers turned their internal labor market
into a contest for the prized CEO position. The compensation
differential between the one who wins and those who lose have
become substantial. Indeed, winners receive packages so large
that they enter into the truly privileged sector of the very
rich - the top 1 percent of the general population.
Keywords: Corporate Governance, Executive Compensation,
Business History