An Introduction to Executive Compensation

An Introduction to Executive Compensation

1st Edition - February 28, 2002

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  • Author: Steven Balsam
  • eBook ISBN: 9780080490427

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Description

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.

Key Features

@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

Readership

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.

Table of Contents

  • 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
    4.1 Introduction
    4.2 Incentives
    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 Compensation

    7.1 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 Corporation

    8.1 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 Governance

    9.1 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

    Part IV:

    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 compensation

    13.1 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

Product details

  • No. of pages: 387
  • Language: English
  • Copyright: © Academic Press 2002
  • Published: February 28, 2002
  • Imprint: Academic Press
  • eBook ISBN: 9780080490427

About the Author

Steven Balsam

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.

Affiliations and Expertise

Temple University, Philadelphia, Pennsylvania, U.S.A.

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  • Takuya I. Mon Mar 12 2018

    Great book!

    Great book!