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S O C I A L S C I E N C E R E S E A R C H N E T W O R K
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. 7, No. 8: April 06, 2006
Editor: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Executive Compensation
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T A B L E O F C O N T E N T S
"Tax Incentives for Inefficient Executive Pay and Reward for
Luck"
ROBERT F. GÖX, University of Fribourg (Switzerland) -
Faculty of Economics and Social Science
"Is There a Dark Side to Incentive Compensation?"
DAVID J. DENIS, Purdue University - Department of Management
PAUL HANOUNA, Purdue University - Krannert School of
Management
ATULYA SARIN, Santa Clara University - Department of Finance
"Performance Pay and Risk Aversion"
CHRISTIAN GRUND, University of Bonn, Institute for the
Study of Labor (IZA)
DIRK SLIWKA, University of Cologne - Seminar für ABWL und
Personalwirtschaftslehre, Institute for the
Study of Labor (IZA)
"Executive Compensation: Is Disclosure Enough?"
RASHID BAHAR, University of Geneva
"Executive Compensation, Firm Performance and Corporate
Governance: An Empirical Analysis"
ADITYA PARTHASARATHY, Indian Institute of Management
Calcutta
DEBASHISH BHATTACHERJEE, Indian Institute of Management
Calcutta - Human Resource Management
KRISHNAKUMAR MENON, Indian Institute of Management Calcutta
"Vesting of Deferred Compensation: When Words are More Taxing
Than Deeds"
KEVIN P. O'BRIEN, Ivins, Phillips & Barker
ROSINA B. BARKER, Ivins, Phillips & Barker
"Regulating Executive Remuneration: International Developments
in the Post-Scandal Era"
JENNIFER G. HILL, University of Sydney Law School,
Vanderbilt University - School of Law
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"Tax Incentives for Inefficient Executive Pay and Reward for
Luck"
Contact: ROBERT F. GÖX
University of Fribourg (Switzerland)
- Faculty of Economics and Social Science
Email: robert.goex@unifr.ch
Auth-Page: http://ssrn.com/author=40320
Full Text: http://ssrn.com/abstract=823884
I study the economic consequences of tax deductibility limits on
salaries for the design of incentive contracts. The analysis is
based on a simple agency model in which the firm's cash flow is a
function of the agent's effort and an observable random factor
beyond the agent's control. According to my analysis, limiting
the tax deductibility of fixed wages has two consequences. The
principal rewards the agent on the basis of the observable random
factor and offers him a contract with weaker work incentives than
without the tax. The theoretical findings have some interesting
implications for empirical compensation research. First, the
analysis shows that reward for luck can be the optimal response
to recent tax law changes, whereas earlier empirical literature
has attributed this phenomenon to managerial entrenchment.
Second, I demonstrate that a simple regression analysis that
fails to control for separable measures of luck is likely to find
an increased pay for performance sensitivity as a response to the
introduction of tax deductibility limits on salaries although the
pay for performance sensitivity has actually declined.
______________________________
"Is There a Dark Side to Incentive Compensation?"
Author: DAVID J. DENIS
Purdue University - Department of
Management
Email: DAVIDDENIS@MGMT.PURDUE.EDU
Auth-Page: http://ssrn.com/author=17040
Co-Author: PAUL HANOUNA
Purdue University - Krannert School
of Management
Email: HANOUNA@MGMT.PURDUE.EDU
Auth-Page: http://ssrn.com/author=287064
Contact: ATULYA SARIN
Santa Clara University - Department
of Finance
Email: asarin@scu.edu
Auth-Page: http://ssrn.com/author=17940
Full Text: http://ssrn.com/abstract=695583
We report a significant positive association between the
likelihood of securities fraud allegations and a measure of
executive stock option incentives. This relation is robust to the
inclusion of other components of the compensation structure and
to other possible determinants of fraud allegations. In addition,
we find that the positive relation between the likelihood of
fraud allegations and option intensity is stronger in firms with
higher outside blockholder and higher institutional ownership.
These findings support the view that stock options increase the
incentive to engage in fraudulent activity, and that this
incentive is exacerbated by institutional and block ownership.
______________________________
"Performance Pay and Risk Aversion"
IZA Discussion Paper No. 2012
Author: CHRISTIAN GRUND
University of Bonn, Institute for the
Study of Labor (IZA)
Email: Christian.Grund@uni-bonn.de
Auth-Page: http://ssrn.com/author=257573
Contact: DIRK SLIWKA
University of Cologne - Seminar für
ABWL und Personalwirtschaftslehre, Institute for
the Study of Labor (IZA)
Email: pwl-sek@uni-koeln.de
Auth-Page: http://ssrn.com/author=276772
Full Text: http://ssrn.com/abstract=890296
A main prediction of agency theory is the well known
risk-incentive trade-off. Incentive contracts should be found in
environments with little uncertainty and for agents with low
degrees of risk aversion. There is an ongoing debate in the
literature about the first trade-off. Due to lack of data, there
has so far been hardly any empirical evidence about the second.
Making use of a unique representative data set, we find clear
evidence that risk aversion has a highly significant and
substantial negative impact on the probability that an employee's
pay is performance contingent.
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"Executive Compensation: Is Disclosure Enough?"
Contact: RASHID BAHAR
University of Geneva
Email: rashid.bahar@droit.unige.ch
Auth-Page: http://ssrn.com/author=401177
Full Text: http://ssrn.com/abstract=869415
Over the last decade, executive compensation has attracted the
attention from corporate governance specialists and the general
public. After briefly examining the purposes of executive
compensation, this paper focuses on the governance problems posed
by remuneration schemes. It considers the limitations of the
traditional bargaining by the board approach and the weakness of
the traditional means of control by shareholders. It then focuses
on disclosure as the main regulatory answer to this problem.
Analyzing closely the Swiss regulatory framework, it points out
its formal and substantive shortcomings. It also takes a step
back and undertakes a more fundamental critique of disclosure as
a remedy to inappropriate compensation. It stresses the perverse
incentives resulting from a disclosure scheme, ranging from the
use of inefficient but opaque forms of remuneration to the
ratcheting effect and the norm setting effect of disclosure. To
solve these problems and more generally to improve executive
compensation, it suggests putting more focus on shareholders
through a general meeting vote on compensation policy and
explores a few options so that this vote can become an effective
check on executive compensation.
______________________________
"Executive Compensation, Firm Performance and Corporate
Governance: An Empirical Analysis"
Contact: ADITYA PARTHASARATHY
Indian Institute of Management
Calcutta
Email: adityap2006@email.iimcal.ac.in
Auth-Page: http://ssrn.com/author=576756
Co-Author: DEBASHISH BHATTACHERJEE
Indian Institute of Management
Calcutta - Human Resource Management
Email: debashish@iimcal.ac.in
Auth-Page: http://ssrn.com/author=461129
Co-Author: KRISHNAKUMAR MENON
Indian Institute of Management
Calcutta
Email: krishnakumarm2006@email.iimcal.ac.in
Auth-Page: http://ssrn.com/author=582405
Full Text: http://ssrn.com/abstract=881730
This paper investigates the determinants of executive
compensation using the most recent data on firm performance,
corporate governance and managerial compensation for a large
sample of Indian firms. A linear regression model is used to
develop explanations for total CEO compensation and the
proportion of incentive pay that forms a part of the CEO's
compensation. It is found that firm size is a significant
determinant of both these aspects of CEO compensation. The
results also show that CEOs who are promoters of their firms earn
significantly more than ordinary CEOs. Such individuals also earn
a much larger component of their compensation as incentive pay.
In addition, this study also quantifies the significant
divergences in compensation policies that are followed at firms
in the public sector when compared to private sector firms.
______________________________
"Vesting of Deferred Compensation: When Words are More Taxing
Than Deeds"
Tax Notes, Vol. 110, No. 5, February 6, 2006
Contact: KEVIN P. O'BRIEN
Ivins, Phillips & Barker
Email: kobrien@ipbtax.com
Auth-Page: http://ssrn.com/author=581110
Co-Author: ROSINA B. BARKER
Ivins, Phillips & Barker
Email: rbarker@ipbtax.com
Auth-Page: http://ssrn.com/author=581111
Abstract: http://ssrn.com/abstract=880985
In this article the authors explore the sweeping consequences of
the narrow vesting concept under the deferred compensation rules
of Internal Revenue Code section 409A. Their goal is both
theoretical and practical. They compare vesting under section
409A with that under section 83 and conclude that, paradoxically,
the naked promise is often taxed before the funded one. The new
vesting concept thus unsettles longstanding principles of income
receipt and even of tax accounting. The practical result,
according to the authors, is that employers might prefer to run
their promises through section 83 instead of section 409A for its
more favorable tax treatment.
______________________________
"Regulating Executive Remuneration: International Developments
in the Post-Scandal Era"
Vanderbilt Law and Economics Research Paper No. 06-06
European Company Law, Vol. 2, 2006
Contact: JENNIFER G. HILL
University of Sydney Law School,
Vanderbilt University - School of Law
Email: j.hill@law.usyd.edu.au
Auth-Page: http://ssrn.com/author=119970
Full Text: http://ssrn.com/abstract=887944
The problem of executive compensation was an underlying theme in
international corporate scandals epitomized by Enron in the US,
Parmalat and Vivendi in Europe, and One.Tel in Australia. There
has been a wide array of regulatory responses to these scandals
across jurisdictions, with varying degrees of attention paid to
the issue of executive pay.
This article examines recent international responses regarding
executive pay through the lens of regulatory and governance
strategies, based on the typology developed in Kraakman et al,
The Anatomy of Corporate Law: A Comparative and Functional
Approach (2004). Specific reforms and developments discussed in
the article include: enhanced compensation disclosure; increased
shareholder participation; and judicial review of board decisions
about executive pay in cases such as the 2005 Disney decision in
the US and the Mannesmann trial in Germany.
These regulatory developments concerning executive pay are also
interesting from the perspective of the convergence/persistence
debate in comparative corporate governance. They show that major
international scandals of this kind may generate new divergence
in laws across jurisdictions.