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SOCIAL SCIENCE RESEARCH NETWORK
EMPLOYEE BENEFITS, COMPENSATION & PENSION LAW ABSTRACTS
Sponsored by Pension Governance, LLC
Vol. 8, No. 42: November 29, 2007
Editor: PAMELA J. PERUN
Policy Director, Aspen Institute - Initiative on
Financial Security
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
"Controlling Executive Compensation Through the Tax Code"
GREGG D. POLSKY
Florida State University - College of Law
"Shareholders' Say on Pay: Does it Create Value?"
JIE CAI
Drexel University
RALPH A. WALKLING
Drexel University - Lebow College of Business
"Changes in Bonus Contracts in the Post-Sarbanes-Oxley Era"
MARY ELLEN CARTER
University of Pennsylvania - The Wharton School
LUANN J. LYNCH
University of Virginia - Darden Graduate School of
Business Administration
SARAH L. CENTER ZECHMAN
University of Pennsylvania - The Wharton School
"Employee Capitalism or Corporate Socialism? Broad-Based Employee
Stock Ownership"
E. HAN KIM
University of Michigan - Stephen M. Ross School of
Business
PAIGE PARKER OUIMET
University of Michigan at Ann Arbor - Stephen M. Ross
School of Business
"Stock-Based Pay: An Incentive for Performance or a Compensation
for Competence? How to Compensate a Manager When He is
Competent?"
PASCAL LOUVET
University of Grenoble 2 - School of Business
Administration (IAE Grenoble)
OLLIVIER TARAMASCO
CERAG - INPG
"The Impact of Tax Status on the Relation between Employee Stock
Options and Debt"
JAGADISON K. AIER
Arizona State University, W.P. Carey School of Business
JARED A. MOORE
Oregon State University - College of Business
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"Controlling Executive Compensation Through the Tax Code"
Washington and Lee Law Review, Vol. 64, No. 2007
FSU College of Law, Public Law Research Paper No. 291
FSU College of Law, Law and Economics Paper No. 07-26
Contact: GREGG D. POLSKY
Florida State University - College of Law
Email: polsk001@tc.umn.edu
Auth-Page: http://ssrn.com/author=249434
Full Text: http://ssrn.com/abstract=1029993
ABSTRACT: This article analyzes Internal Revenue Code § 162(m),
which in general denies public companies a deduction for annual
non-performance-based compensation in excess of $1,000,000 paid
to senior executive officers. Congress enacted § 162(m) with the
intent to reduce the overall level of executive compensation and
to influence the composition of executive compensation in favor
of components that are more sensitive to firm performance.
Notably, § 162(m) represents the most direct Congressional effort
to influence executive compensation design. In light of recent
events, Congress is being called upon to once again address the
perceived problem of overgenerous executive pay packages.
Accordingly, it is an opportune time to study the impact of §
162(m).
This article predicts the likely effects of § 162(m) under the
two currently prevailing (but opposing) views of how executive
compensation arrangements are negotiated in the public company
context, ultimately concluding that the provision is likely
ineffective under either view. In addition to predicting the
likely effect of § 162(m), the article discusses the empirical
studies of its impact since its enactment almost fifteen years
ago. Finally, the article describes some of the unintended
incidental effects of the provision, such as its discouragement
of certain compensation components that are arguably more
efficient than the components typically used by public companies.
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"Shareholders' Say on Pay: Does it Create Value?"
Contact: JIE CAI
Drexel University
Email: jc468@drexel.edu
Auth-Page: http://ssrn.com/author=97695
Co-Author: RALPH A. WALKLING
Drexel University - Lebow College of Business
Email: rw@Drexel.edu
Auth-Page: http://ssrn.com/author=20178
Full Text: http://ssrn.com/abstract=1030925
ABSTRACT: The post Sarbanes-Oxley Act period is associated with
several initiatives designed to give shareholders a greater voice
in the boardroom. The latest of these initiatives is the
Say-on-Pay Bill (H.R. 1257) which passed the House of
Representatives on April 20, 2007 by a 2 to 1 margin. This bill
does not limit CEO pay but requires an advisory shareholder vote
on executive compensation packages. Using the abnormal return of
1,245 firms surrounding the House passage of this bill, we
examine whether the market interprets shareholders' say on
executive pay as adding or subtracting firm value. Stocks of
firms with positive abnormal CEO compensation react in a
significant, positive manner to the Say-on-Pay Bill. The positive
market reaction is stronger among the firms with weaker, but not
the weakest governance. In addition, abnormal returns are higher
in the subset of firms more likely to receive higher disapproval
votes from shareholders and firms more likely to implement
changes under the pressure of shareholder votes. Thus, the bill
has the greatest impact among the subset of firms most likely to
benefit and implement changes. Given the uncertainty surrounding
passage, implementation and efficacy of this proposed advisory
vote, the results are likely to understate the actual impact of
Say on Pay legislation. Our findings suggest that the market
views this legislation as value-creating for the companies where
it is likely to have the most impact. These results provide
important evidence for the current debate regarding the Say - on
- Pay legislation in Congress and shareholder access to proxy.
Our results also shed light on the role of activist investors.
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"Changes in Bonus Contracts in the Post-Sarbanes-Oxley Era"
Review of Accounting Studies, Forthcoming
Contact: MARY ELLEN CARTER
University of Pennsylvania - The Wharton School
Email: carterme@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=193991
Co-Author: LUANN J. LYNCH
University of Virginia - Darden Graduate School of
Business Administration
Email: lynchl@darden.virginia.edu
Auth-Page: http://ssrn.com/author=174757
Co-Author: SARAH L. CENTER ZECHMAN
University of Pennsylvania - The Wharton School
Email: szechman@wharton.upenn.edu
Auth-Page: http://ssrn.com/author=362692
Abstract: http://ssrn.com/abstract=1031400
ABSTRACT: We examine whether the relation between earnings and
bonuses changes after Sarbanes-Oxley. Theory predicts that, as
the financial reporting system reduces the discretion allowed
managers, firms will put more weight on earnings in compensation
contracts to encourage effort. However, the increased risk
imposed by Sarbanes-Oxley on executives may cause firms to temper
this contracting outcome. We examine and find support for the
joint hypothesis that the implementation of Sarbanes-Oxley and
related reforms led to a decrease in earnings management and that
firms responded by placing more weight on earnings in bonus
contracts. We find no evidence that firms changed compensation
contracts to compensate executives for assuming more risk.
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"Employee Capitalism or Corporate Socialism? Broad-Based Employee
Stock Ownership"
Author: E. HAN KIM
University of Michigan - Stephen M. Ross School of
Business
Email: ehkim@umich.edu
Auth-Page: http://ssrn.com/author=30762
Contact: PAIGE PARKER OUIMET
University of Michigan at Ann Arbor - Stephen M.
Ross School of Business
Email: pshelby@umich.edu
Auth-Page: http://ssrn.com/author=353970
Full Text: http://ssrn.com/abstract=1018552
ABSTRACT: Firms adopting employee share ownership (ESO) plans
tend to enjoy increases in firm value when the plan is small,
representing less than 5% of outstanding shares; however, there
are no value gains when plans are larger. This inverse U-shaped
relation between shareholder value and the ESO size is robust to
firm fixed effects and controls for a possible endogenous
selection bias in the timing of plan implementations. Examination
of employee compensation reveals that large ESOP adoptions are
followed by substantial increases in worker compensation, whereas
small ESOPs show no such increases. Compensation increases
following large ESOPs are smaller when firms have high leverage,
which also seems to counteract the value negating impact of
larger ESOPs. We conclude that the adoption of an ESOP is
generally followed by performance gains and most of the gains
accrue to shareholders (employees) when employees have small
(substantial) control rights.
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"Stock-Based Pay: An Incentive for Performance or a Compensation
for Competence? How to Compensate a Manager When He is
Competent?"
Author: PASCAL LOUVET
University of Grenoble 2 - School of Business
Administration (IAE Grenoble)
Email: pascal.louvet@iae-grenoble.fr
Auth-Page: http://ssrn.com/author=785909
Contact: OLLIVIER TARAMASCO
CERAG - INPG
Email: Ollivier.Taramasco@imag.fr
Auth-Page: http://ssrn.com/author=895646
Full Text: http://ssrn.com/abstract=1028250
ABSTRACT: This article presents a model describing an optimal
compensation contract for the manager. The model is based on an
appropriate balance of power between the shareholder who holds
the right to receive dividends and the right to dismiss the
manager and the manager who holds the right to wages and a
discretionary right to withdrawals. An optimal model is defined
from three viewpoints: that of the shareholder, the manager and
the economy. The model shows that an optimal contract depends on
the competence of the manager and the following elements: threat
of take-overs, severance costs, reputation costs. In all cases,
dismissal acts as an efficient natural protection against
unreasonable discretionary withdrawals. Stock-based pay must be
viewed more as a method for wealth distribution between human
capital and financial capital than as an incentive mechanism for
performance.
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"The Impact of Tax Status on the Relation between Employee Stock
Options and Debt"
Journal of American Taxation Association, Vol. 30, No. 1,
2008
Author: JAGADISON K. AIER
Arizona State University, W.P. Carey School of
Business
Email: jkaier@asu.edu
Auth-Page: http://ssrn.com/author=391012
Contact: JARED A. MOORE
Oregon State University - College of Business
Email: jared.moore@bus.oregonstate.edu
Auth-Page: http://ssrn.com/author=816549
Abstract: http://ssrn.com/abstract=1018978
ABSTRACT: This study extends prior research on the tax motivated
substitution of employee stock options (ESOs) for debt by
providing evidence on the manner in which the tax status of the
firm and ESOs interact to influence debt policy. Using tobit
regression and a sample of 13,345 firm-year observations over the
period 1993-2004, we find that firms whose expected marginal tax
rates are likely to be affected by non-debt tax shields (i.e.,
tax-sensitive firms) substitute ESOs for debt. In contrast, we
find no association between debt and ESOs for firms that are
likely able to fully utilize all available tax shields without
affecting their expected marginal tax rates due to their high
level of profitability for tax purposes (i.e., tax-insatiable
firms). These results suggest that tax status impacts the
association between debt and ESOs such that the two tax shields
are not substitutes for all groups of firms across tax status
categories.