When I set out to write this book, my topic was stock options.
Specifically, my intent was to explore the much debated issue of
expensing stock options. While that remains an essential theme of
this book, it is impossible to address stock options without looking
at the broader picture. Put another way, stock options are the trees;
executive compensation and effective corporate governance are the
“This is an excellent book for anyone interested in the important
discussion of stock option expensing and, more significantly, the
optimal use of stock options in compensation plans. It is written
from the point of view of an experienced and knowledgeable com-
pensation consultant who has advised board compensation com-
mittees and talked with many people outside the field considering
the economic and incentive effects of the overuse of stock options in
the 90s.”—John M. Biggs, former Chairman & CEO of TIAA-
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It is hard to imagine a time when law was more important to
managers. The rapid growth of unregulated subprime mortgages
and financial derivatives fueled a real estate bubble from
2001 through 2006, during which time executive compensation
in the financial services companies soared. When the bubble
burst in 2007, many executives of these companies walked
away unscathed, leaving employees, stockholders, and taxpayers
holding the bag.
Internal Revenue Code section 162(m) limits tax deductibility of
executive compensation to $1 million per covered executive, with an
exception for performance-based compensation. Both stock options and
annual bonuses can qualify as performance-based, but they vary in the
difﬁculty of qualiﬁcation and the degree of additional compensation risk
that qualiﬁcation imposes on the executive. Most stock-option grants
easily qualify with little change in risk, but qualiﬁcation increases the risk
associated with annual bonus compensation relative to what it was prior.
Bertrand and Mullainathan (1998) illustrate the potential
power of designs that consider interactions across governance
mechanisms. They examine the impact on executive
compensation of changes in states’ anti-takeover legislation.
Adoption of anti-takeover legislation presumably reduces
pressure on top managers. They attempt to distinguish
between optimal contracting and skimming theories in
explaining observed contracting arrangements.
An individual’s benefit payment is reduced dollar for dollar by the amount of their “countable
income”—income less all applicable exclusions—in a given month. Income in the SSI program
includes “earned income” such as wages and net earnings from self-employment; and “unearned
income” such as Social Security benefits, unemployment compensation, deemed income from a
spouse or parent, and the value of in-kind support and maintenance such as food and shelter.
Different exclusion rules apply for different types of income. ...
Bushman, Chen, Engel, and Smith (2000) extend this
research to consider a larger range of governance mechanisms.
The governance mechanisms considered include board
composition, stockholdings of inside and outside directors,
ownership concentration, and the structure of executive
compensation. They conjecture that to the extent that current
earnings fail to incorporate current value-relevant
information, the accounting numbers are less effective in the
We show that the group of firms with a strong sustainability culture is significantly more likely to
assign responsibility to the board of directors for sustainability and to form a separate board committee
for sustainability. Moreover, High Sustainability companies are more likely to make executive
compensation a function of environmental, social, and external perception (e.g., customer satisfaction)
Coinciding with the option explosion, a large academic literature has emerged (See Murphy,
1999, for a summary) that examines the way in which executive compensation, and stock options
in particular, has affected the agency relationship. The evidence suggests that the low pay-to-
performance relationship estimated by Jensen and Murphy (1991) has been dramatically
strengthened by the stock option explosion since executives now generally have very large holdings
of company stock and stock options in their portfolios (Hall and Liebman, 1998).
The issue of compensation for executives of firms that have received government support during
the financial crisis. The American Recovery and Reinvestment Act of 2009 (Title VII of P.L. 111-
5) restricts the compensation of executives of companies during the period in which any
obligation arising from financial assistance provided under the Troubled Assets Relief Program
(TARP) remains outstanding and requires the Secretary of the Treasury to develop appropriate
standards for executive compensation.
For more than two decades, the workers’ compensation courts increasingly have been perceived as a weak link in the California workers’ compensation system. The courts have been criticized for being slow, expensive, and procedurally inconsistent. In response to these concerns, the California Commission on Health and Safety and
Chapter 6 introduce the managerial function of corporate governance; understand the roles, responsibilities, and duties of corporate senior executives, including the CEO and CFO; identify the components of executive compensation and illustrate how each of these components relates to effective corporate governance; identify the financial reporting requirements of public companies and SOX provisions that pertain to management certifications of financial reports and internal controls;...
Chapter 14 - Stockholder rights and corporate governance. The goals of this chapter are: Identifying different kinds of stockholders and understanding their objectives and legal rights, knowing how corporations are governed and explaining the role of the board of directors in protecting the interests of owners, analyzing the function of executive compensation and debating if top managers are paid too much,...
On October 1, 20X4, River Woods purchased land by giving $200,000 in cash and executing a $800,000 note payable to the former owner. The note bears interest at 8% per annum, with interest being payable annually on September 30 of each year. Rojas is also required to make a $200,000 payment toward the note’s principal on every September 30.
a) Prepare the appropriate journal entry to record the land purchase on October 1, 20X4.
b) Prepare the appropriate journal entry to record the year-end interest accrual on December 31, 20X4.
588 Making Key Strategic Decisions
must be budgeted as they can have a significant impact on postmerger cash f lows. The detailed plan must start at the highest levels of the organization. If executives from the two firms are going to lead the transition, they must be confident of their future roles and comfortable with their compensation plans.
At the same time, by comparing over time, case studies document that well-executed investments can
provide benefits. These accrue through four main channels, namely (i) social infrastructure, often
supported by community development funds using land compensation; (ii) employment and jobs; (iii)
access to markets and technology for local producers; and (iv) local or national tax revenue. In all cases,
economic viability of investment is a necessary condition for positive social outcomes to materialize,
including food security.
Governance research in accounting exploits the role of
accounting information as a source of credible information
variables that support the existence of enforceable contracts,
such as compensation contracts with payoffs to managers
contingent on realized measures of performance, the
monitoring of managers by boards of directors and outside
investors and regulators, and the exercise of investor rights
granted by existing securities laws. The remainder of Section 3
is organized as follows. Section 3.
Businesses that have gone "public" are subject to extremely detailed and complicated regulation about their internal governance (such as how executive officers' compensation is determined) and when and how information is disclosed to the public and their shareholders. In the United States, these regulations are primarily implemented and enforced by the United States Securities and Exchange Commission (SEC). Other Western nations have comparable regulatory bodies. The regulations are implemented and enforced by the China Securities Regulation Commission (CSRC), in China.