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General readers have no idea why people should care about what executives are paid and why they are paid the way they are. That's the reason that The Wall Street Journal, Fortune, Forbes, and other popular and practitioner publications have regular coverage on them. This book not only proposes a reason--executives need incentives in order to maximize firm value (economists call this "agency theory")--it also describes the nature and design of executive compensation practices. Those incentives can take the form of benefits (salary, stock options), perquisites (reflecting the status of the executive within the organizational culture. This book is important because it takes the elements of an executive compensation package apart, analyzing them in the contexts of both economic theory and corporate practice and then explains how, under varying conditions, one might construct a compensation package that optimizes an executive's and a corporation's performance.
@introbul:Key Features @bul:* Presents an objective analysis of current executive compensation practices
- Comprehensively reviews of academic literature and extant practice
- Explains and illustrates the various components of the compensation package
- Discusses the incentive, financial reporting, tax, political, equity, and firm value effects of those components
Management associations which provide general information, give seminars, and sell books, journals, and research in this area; a broad corporate audience comprising executives, human resources departments, accountants, attorneys, compensation committees, and stakeholders interested in issues surrounding executive compensation; upper-division undergraduates and graduate students in business and finance.
Part I: An Introduction Chapter 1: Introduction 1.1 Introduction/Overview 1.2 Owner-Manager Conflict: Agency Theory 1.3 Other theories explaining/influencing executive compensation 1.4 External influences on the compensation package 1.5 Sources of Data on Executive Compensation Appendix 1.1: Item 402, of SEC Regulation S-K
Chapter 2: Overview of the Compensation Package 2.1 Introduction 2.2 Compensation Package Salary Bonus Stock Options Stock Grants Other Stock-based forms of compensation Pensions Other Compensation 2.3 Usage of Major Components of Compensation 2.4 Relative Importance of Components of Compensation Package 2.5 Magnitude of Compensation Package 2.6 Relative pay of CEO to other top executives 2.7 Summary
Chapter 3: An introduction to designing the executive compensation contract
3.1 Introduction 3.2 Making the Offer Attractive 3.3 Providing the Proper Incentives 3.4 Designing the contract to retain the executive 3.5 Minimize Costs to the corporation 3.6 Summary Part II: The Components of the Compensation Package
Chapter 4: Salary
4.3 Affect on Willingness to take Risk
4.4 How Much?
4.5 Equity Issues
4.6 Political Costs 4.7 Financial Consequences Cash Flows Tax deductibility Financial Reporting 4.8 Summary
Chapter 5: Bonus (Short and Long Term) 5.1 Introduction 5.2 Incentives Affect of lower and upper bounds Adherence to plan 5.3 Effectiveness of bonus plans 5.4 Political Costs 5.5 Financial Consequences Cash Flows Tax deductibility Examples of Corporations Forfeiting Deductions Examples of Executives Deferring Compensation to Preserve Deductions Examples of Corporations Qualifying Their Plans to Preserve Deductions Financial Reporting 5.6 Summary Appendix 5.1: Bonus Formula From Contract between David A Stonecipher and JeffersonPilot Corporation dated September 15, 1997 Appendix 5.2: Lucent Technologies Inc. 1996 Long Term Incentive Program
Chapter 6. Stock Grants and Options 6.1 Introduction Stock Options/Stock Appreciation Rights Stock Grants Incentive Effects Use of options and grants in the compensation package 6.2 Incentives Affect on incentives to take risk Effect of stock compensation on ownership Choices the corporation must make in granting stock compensation 6.3 Costs Dilution Cash Outflow 6.4 Incentive effect versus dilutive effect. 6.5 Effectiveness of Stock-based compensation 6.6 Macro/Market Effects 6.7 Alternatives? Adjusted Options Premium Options 6.8 Financial Consequences Cash Flow Taxes Financial Reporting 6.9 Political Costs 6.10 Summary Appendix 6.1: Nonqualified Stock Option Award Agreement Under the 1989 Stock Incentive Plan, between Delta Airlines and Leo F. Mullin President & Chief Executive Officer Appendix 6.2: Restricted Stock Award Agreement Under the 1989 Stock Incentive Plan, between Delta Airlines and Leo F. Mullin President & Chief Executive Officer
Chapter 7: Deferred Compensation7.1 Introduction Pensions Defined Benefit Plans Defined Contribution Plans Supplemental Executive Retirement Plans Deferred Compensation Plans
7.2 Funding Limitations 7.3 Incentives Vesting Pension Backloading Affect on Risk Preferences Bond on Performance Resolving Horizon Problem 7.4 Political Costs 7.5 Financial Consequences Cash Flows and Taxes Financial Reporting Consequences 7.6 Summary Appendix 7.1: Executive Pension Benefits, from General Motors Proxy Statement filed April 20, 1999 Appendix 7.2: Senior Officer Excess Benefit Agreement, between Delta Airlines and Leo F. Mullin President & Chief Executive Officer
Part III: Related Issues
Chapter 8: Ownership of the Corporation8.1 Introduction 8.2 The affect of ownership on incentives Affect of ownership on executive risk preferences
Affect of ownership on corporate performance Executive ownership requirements 8.3 The effect of executive ownership on executive compensation Affect of executive ownership on the level of compensation Affect of executive ownership on the composition of the compensation package 8.4 The effect of director's ownership on executive compensation 8.5 The effect of large shareholders and institutional ownership on executive compensation Affect of large and institutional shareholders on the level of compensation Affect of large and institutional shareholders on the composition of the compensation package Affect of shareholder proposals on executive pay 8.6 Summary
Chapter 9: Corporate Governance9.1 Introduction Statutory Regulations
Categories of Directors 9.2 Director compensation Determinants of Director Compensation Effect of Director Compensation on Director Independence 9.3 The effect of the Board of Directors on CEO compensation 9.4 The effect of the Board of Directors on CEO turnover 9.5 Examples of strong and weak boards 9.6 An interesting response 9.7 Summary Appendix 9.1: Excerpt on Board of Directors from General Electric proxy statement filed with the Securities and Exchange Commission March 13, 2000 Appendix 9.2: Excerpt on Board of Directors from Walt Disney proxy statement filed with the Securities and Exchange Commission January 5, 2000
Chapter 10: Is executive compensation really that high?
10.1 Introduction CEO compensation relative to corporate profits CEO compensation relative to dividends paid CEO compensation relative to change in shareholder wealth CEO worth Well-compensated disappointments 10.2 The relationship between executive compensation and firm performance 10.3 The politics of executive compensation 10.4 The effect of the political process on executive compensation 10.5 International comparisons International Politics of Executive Compensation Britain Canada Germany Japan Why do these differences exist? Can these differences continue to exist? 10.6 Comparisons to other occupations Wall Street Lawyers Sports and Entertainment One Big Difference 10.7 Summary Appendix 10.1: Selection of bills introduced, but not passed, with the potential to affect amounts, deductibility or disclosure of compensation Appendix 10.2: Resolutions Introduced to Limit Executive Compensation Appendix 10.3: Laws That Restrict Executive Compensation Chapter 11: The effect of corporate and executive characteristics on designing an optimal compensation contract
11.1 Introduction 11.2 Goals 11.3 The effect of corporate characteristics on the optimal contract Size Political Costs Risk Growth and Liquidity Labor Intensity Ownership & Board Composition Regulated Industries Financial Distress 11.4 The effect of executive characteristics on the optimal contract Opportunity Cost Risk Aversion Horizon/Age Ownership 11.5 The effect of joint characteristics on the optimal contract Tax Status Tax Qualified Options Deferred Compensation Fringe Benefits Corporate tax status 11.6 Summary
Chapter 12. Designing the executive compensation contract
12.1 Introduction 12.2 Salary Impact of Executive Characteristics Opportunity Cost Risk Aversion Executive Ownership Horizon Impact of Corporate Characteristics Size Growth Financial Considerations Ownership/Board Composition 12.3 Bonus Targeted Bonus Amount Affect of executive characteristics on targeted bonus amount Affect of corporate characteristics on targeted bonus amount Performance Period Affect of executive characteristics on choice of performance period Affect of corporate characteristics on choice of performance period Performance Measure(s) Affect of executive characteristics on the choice of performance measures Affect of corporate characteristics on choice of performance measures Performance Targets Affect of corporate characteristics on choice of performance targets Method of Payment 12.4 Stock Compensation Amount of stock compensation Affect of executive characteristics on amount of stock compensation Affect of corporate characteristics on amount of stock compensation Share versus option grants Impact of executive characteristics on choice between option and share grants Impact of corporate characteristics on choice between option and share grants Restrictions/Vesting Affect of executive characteristics on restrictions Affect of corporate characteristics on restrictions Grant frequency Exercise price 12.5 Deferred Compensation Amount Deferred Length of Deferral Deferral Vehicle Restrictions 12.6 Benefits 12.7 Summary
Chapter 13: Conclusion: Recent trends and the future of executive compensation13.1 Recent trends 13.2 The future Use of compensation surveys Performance Increased demand for executives Increased use of stock compensation Increased risk Can these trends continue? Bull Market Resumes
Market becomes stagnant or declines 13.3 Conclusions
- No. of pages:
- © Academic Press 2002
- 13th April 2002
- Academic Press
- eBook ISBN:
Steven Balsam, Director of the Ph.D. Program in Business, Associate Professor of Accounting and Merves Research Fellow at the Fox School of Business at Temple University, obtained his Ph.D. from the City University of New York (Baruch College) in 1991. His research interests are in the areas of executive compensation and capital markets. He has published articles in academic journals including the Journal of Accounting and Economics, Contemporary Accounting Research, Journal of the American Taxation Association, Journal of Accounting and Public Policy, Journal of Accounting, Auditing and Finance, and Accounting Horizons. Prior to coming to Temple University he taught at Baruch College and the University of Rochester. Before entering academia he was a Certified Public Accountant working for the international accounting firm of Ernst & Young.
Temple University, Philadelphia, Pennsylvania, U.S.A.
@qu:"Professor Balsam has written an outstanding introduction to this important and complex field. Both beginners and experienced managers will learn more about the structure and design of executive compensation programs." @source:--Ira T. Kay, Watson Wyatt Worldwide @qu:"This book is a timely, comprehensive, and well-researched synthesis of what's happening in the world of executive compensation today. The book is sophisticated in its content, but presented in such a way that a novice can understand it. The book links compensation theory to the real world, illustrates concepts with real life examples, and is a practical guide to understanding and designing compensation packages for today's executives. This book is a 'must read' for Board members, CEOs, and Human Resource and Compensation professionals alike." @source:--Robin A. Ferracone, Worldwide Partner, Mercer Consulting