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SOCIAL SCIENCE RESEARCH NETWORK
EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 7: February 22, 2007
Editor: PAMELA J. PERUN
Urban Institute
PAMELA@PLANETNOW.COM
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Topic of This Issue:
Compensation
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T A B L E O F C O N T E N T S
"A Quantitative Analysis of the Evolution of the U.S. Wage
Distribution: 1970-2000"
FATIH GUVENEN
University of Texas at Austin - Department of Economics
BURHANETTIN KURUSCU
University of Texas at Austin
"Wages, Productivity and Aging"
BENOIT DOSTIE
HEC Montreal - Institute of Applied Economics, Institute
for the Study of Labor (IZA)
"Executive Compensation, Interlocked Compensation Committees, and
the 162(M) Cap on Tax Deductibility"
JOHN R. GRAHAM
Duke University - Fuqua School of Business, National
Bureau of Economic Research (NBER)
YONGHAN WU
Barclays Global Investors
"Backdated Options are Unreasonable Compensation"
EDWARD A. ZELINSKY
Cardozo Law School
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"A Quantitative Analysis of the Evolution of the U.S. Wage
Distribution: 1970-2000"
Contact: FATIH GUVENEN
University of Texas at Austin - Department of
Economics
Email: guvenen@eco.utexas.edu
Auth-Page: http://ssrn.com/author=328957
Co-Author: BURHANETTIN KURUSCU
University of Texas at Austin
Email: kuruscu@econ.utexas.edu
Auth-Page: http://ssrn.com/author=369164
Full Text: http://ssrn.com/abstract=958649
ABSTRACT: In this paper we construct a parsimonious
overlapping-generations model of human capital accumulation, and
study its quantitative implications for the evolution of the U.S.
wage distribution from 1970 to 2000. One of the key features of
the model is that individuals differ in their ability to
accumulate human capital, which is the main source of wage
inequality in this model. We examine the response of this model
to skill-biased technical change (SBTC), which is modeled as an
increase in the trend growth rate of the price of human capital
starting in the early 1970's. Due to the heterogeneity in ability
and age, the responses of different individuals to SBTC are
systematically different from each other, generating rich
behavior in the evolution of relative wages. We consider
different scenarios regarding how individuals' expectations
evolve during SBTC. Specifically, we study the case where
individuals immediately realize the advent of SBTC (perfect
foresight); and the case where they initially underestimate the
future growth of the price of human capital (pessimistic priors),
but learn the truth in a Bayesian fashion over time. Lack of
perfect foresight appears to have little effect on the main
results of the paper. The model is quantitatively consistent with
several trends including the rise in overall wage inequality; the
fall and rise in the college premium; the rise in within-group
inequality; the stagnation in median wage growth, and the small
rise in consumption inequality despite the large rise in wage
inequality. Overall, the model shows promise for explaining
disparate trends in the evolution of the wage distribution in a
unifying human capital framework.
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"Wages, Productivity and Aging"
IZA Discussion Paper No. 2496
Contact: BENOIT DOSTIE
HEC Montreal - Institute of Applied Economics,
Institute for the Study of Labor (IZA)
Email: benoit.dostie@hec.ca
Auth-Page: http://ssrn.com/author=346766
Full Text: http://ssrn.com/abstract=955811
ABSTRACT: In this article, we estimate age based wage and
productivity differentials using linked employer-employee
Canadian data from the Workplace and Employee Survey 1999-2003.
Data on the firm side is used to estimate production functions
taking into account the age profile of the firm's workforce. Data
on the workers' side is used to estimate wage equations that also
depend on age. Results show concave age-wage and age-productivity
profiles. Wage-productivity comparisons show that the
productivity of workers aged 55 and more with at least an
undergraduate degree is lower than their wages. For other groups,
we find that wages do not deviate significantly from productivity
estimates.
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"Executive Compensation, Interlocked Compensation Committees, and
the 162(M) Cap on Tax Deductibility"
Contact: JOHN R. GRAHAM
Duke University - Fuqua School of Business,
National Bureau of Economic Research (NBER)
Email: john.graham@duke.edu
Auth-Page: http://ssrn.com/author=17209
Co-Author: YONGHAN WU
Barclays Global Investors
Email: julia.wu@barclaysglobal.com
Auth-Page: http://ssrn.com/author=709354
Full Text: http://ssrn.com/abstract=959686
ABSTRACT: Tax code IRS Section 162(m) effective prohibits
corporate tax deductibility of non-performance based compensation
expenses over $1 million for any one of its top 5 employees. This
$1 million cap also applies to all forms of compensation if a
firm has an insider on its compensation committee, thus imposing
differing cost of compensation on firms with differing
compensation committee structures. Using the introduction as a
natural experiment, we provide evidence of agency problems and
private benefit seeking behaviors that increases with managerial
entrenchment and interlocked compensation committee. We find a
significant salary reduction for executives dropping their
interlock statuses as a result of 162(m). More broadly, we
examine 162(m)'s effect on compensation and describe where it is
ineffective or has unintended consequences.
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"Backdated Options are Unreasonable Compensation"
Tax Notes, Vol. 115, No. 7, February 19, 2007
Contact: EDWARD A. ZELINSKY
Cardozo Law School
Email: ZELINSKY@PRODIGY.NET
Auth-Page: http://ssrn.com/author=239302
Abstract: http://ssrn.com/abstract=963554
ABSTRACT: In this article, Prof. Zelinsky observes that, in its
enforcement of section 162(a)(1) and its rule of reasonable
compensation, the IRS has focused its enforcement efforts
exclusively on the compensation granted by successful closely
held C corporations to their shareholder-employees. The IRS has
ignored the enormous compensation packages that the nation's
publicly traded corporations now routinely pay to their CEOs and
other top executives.
Judging from its response to the option backdating scandal,
Zelinsky believes the IRS will either begin to rectify the
anomaly that is the law of reasonable compensation or will
compound the incoherence and unfairness of current law.
Backdated options are in-the-money options disguised to look like
at-the-money options by means of falsely reported issuance dates.
Under section 162(m) and its regulations, gain from the exercise
of in-the-money options is not performance-based income and
therefore is typically nondeductible with respect to
corporations' covered employees. Moreover, compensation earned by
other executives from the exercise of backdated options is
unreasonable and hence nondeductible to the corporations
employing those executives.
Zelinsky hopes the IRS will bring to bear on the publicly traded
corporations issuing backdated options the same zeal with which
it has enforced reasonable compensation limits against closely
held corporations. In the final analysis, backdated options are
unreasonable compensation.